441-02435 (Environment)

Canada, along with other G7 countries, has committed to transitioning to a net-zero electricity grid as a foundational measure to help achieve a net-zero economy by 2050. A clean, reliable, and affordable electricity grid is key to building a strong, clean economy and a competitive advantage that makes Canada an attractive place for businesses from around the world to invest. The federal government is building on Canada’s advantages to deliver clean, reliable power to Canadians, grow our economy and fight climate change.

As the demand for electricity increases over the coming decades, it will be important not only to lower emissions, but enable the expanding supply to remain clean, affordable, and reliable. A suite of funding measures have been announced by the federal government to support this clean energy transition. Budget 2023 and the 2022 Fall Economic Statement included approximately $40 Billion in investments over the next 10 years through investment tax credits, low-cost financing through the Canada Infrastructure Bank, and other funding. Notably, it announced a 15% tax credit for non-emitting electricity generation and transmission, in addition to the investment tax credits that were previously announced for clean technologies, clean technology manufacturing, clean hydrogen, and carbon capture and storage in the 2022 Fall Economic Statement.  

Developing the Clean Electricity Regulations (CER) now sends strong signals to avoid investment in new unabated natural gas-powered electricity generation and will help drive forward the development of emerging clean energy technologies. As electricity projects can take years to develop, predictable regulations help reduce risk by providing substantial lead time to electricity providers.

Following the publication of the draft CER in August 2023, Environment and Climate Change Canada has undertaken an unprecedented level of consultations with a wide range of partners to take into account regional considerations as we work towards finalizing the regulations this year. The Regulations will include flexibilities that recognize regional differences, including the continued use of some natural gas-powered electricity generation to support grid reliability while the system transitions to net-zero. This flexible approach is designed to enable provincial utilities and system operators to plan and manage their systems in accordance with relevant provincial circumstances and all legal requirements.

On February 16, 2024, the Government of Canada released an update on the consultations and on the design options being considered for the final CER. These options address the feedback received during the previous six months of extensive consultations and aim to enhance the flexibility for electricity operators to continue to deliver reliable and affordable power while maintaining Canada’s ability to achieve its emissions reduction goals.

Economy-wide carbon-pricing systems are designed to incentivize emissions reductions at the lowest overall cost while allowing for maximum flexibility. The flexibility afforded by these systems will result in different segments of the economy reducing emissions along different pathways, depending on the availability and cost of emissions reduction opportunities.

Currently, fossil fuel-fired electricity generated is covered by carbon pricing in all provinces across Canada either by the federal Output-Based Pricing System or the applicable provincial or territorial carbon pricing system that aligns with the carbon pricing benchmark. All output-based pricing systems (OBPS) must have a rising compliance price that aligns with the minimum national carbon price which is increasing by $15/year reaching $170/t CO2e in 2030.

At present, most industrial emissions are subject to provincial OBPS, rather than the federal system, including in Ontario, where fossil fuel-fired electricity generation is covered by its Emissions Performance System Regulations. Provincial systems vary in size, context, and composition, and Canada’s approach allows provinces and territories to adjust their systems to meet local circumstances, as long as they meet national minimum stringency requirements.

Canada strengthened the minimum national stringency criteria for carbon pricing systems (the “benchmark”) in 2021 for the 2023-2030 period to ensure all carbon pollution pricing systems are comparable and effective across the country. New requirements mean that all OBPS must maintain a marginal price signal in line with Canada’s minimum national carbon price thereby ensuring that facilities regulated under output-based pricing systems are subject to the same incentives to reduce emissions as the fuel charge.

The federal approach to electricity generation under the federal OBPS balances three goals:

• Incentivize greenhouse gas emissions reductions by applying a carbon pollution price signal to emitting electricity generation;
• Mitigate risks of carbon leakage and competitiveness impacts on emission-intensive and trade exposed industry;
• Introduce a system that is affordable for households and businesses, especially where energy choices are currently limited.

The approach balances these goals by setting emissions standards based on fuel type. The standards for gaseous fuels like natural gas are 370 tonnes per gigawatt hours (t/GWh) for existing generation, and for new generation, standards started at 370 t/GWh in 2021, and decline linearly to 0 t/GWh in 2030 – meaning under the federal system, new facilities will be paying the full price on every tonne of carbon pollution they emit by 2030.

Increasing the stringency of the federal Output-Based Pricing System (OBPS) for industryhas been part of the design of the federal OBPS since its inception in 2019. Strengthening standards over time is consistent with Canadian and global climate goals, which require increasing ambition over time. To this end, Canada will consider the treatment of electricity generation under the OBPS as part of the next review of carbon pricing in Canada. At that time, Canada will take into account other related initiatives, including the Clean Electricity Regulations. 

Concerning the increase in natural gas capacity predicted in Canada Energy Regulator’s Canada’s Energy Future 2021, note that this analysis did not include the Clean Electricity Regulations. The newly released Canada’s Energy Future 2023 does include the CER and finds that the electricity sector reaches net zero emissions by 2035, demonstrating the impact of the CER and other climate policies to substantially impact planning and operations of Canada’s electricity sector.