Proposed Updates to the Clean Electricity Regulations

March 8, 2024
Brady Yauch & Michael Killeavy

The federal government is proposing a number of significant changes to the Clean Electricity Regulations (CER). The CER was initially introduced in the summer of 2023 and included an industry-wide performance standard and a cap of 450 hours annually that a gas-fired generator could operate with unabated emissions, among other features. The new proposals being considered by the federal government would mitigate the impact of the CER and provide greater flexibility to system operators, while introducing uncertainty around how the CER will ultimately be applied when it comes in force.The original draft of the CER proposed a number of stringent obligations on the utilization of gas-fired generation. The main components of the original CER were:

  • An emissions performance threshold for thermal generating units of 30 tonnes of carbon dioxide per GWh of electricity generated (or .03 tonnes per MWh) – the equivalent of a heat rate (MMBTu/MWh) of 0.56 that is well below a standard heat rate of between 7 and 9 for gas-fired generators;
  • A 20-year prescribed operating life for all units that entered into service before 2025;
  • The implementation of the performance standard beginning in 2035 for all units coming into service after January 1, 2025 (i.e. a less than ten-year operating life of unabated emissions from the performance standard for assets entering commercial operation after 2025);
  • An allowance to emit up to 150 kilotonnes of unabated carbon dioxide annually as long as the facility does not operate for more than 450 hours in a given year, which essentially capped the operating hours of a gas-fired plant to 450 hours annually;
  • An exemption to system operators and other crown corporations from the operating limits for “extraordinary, unforeseen and irresistible event”, although the agency must apply to the federal government for approval of the emergency;
  • An exemption for units not connected to an electricity system and not regulated by the North American Electric Reliability Corporation (NERC);
  • The CER would apply to all generating facilities greater than 25 MW.

The federal government received hundreds of submissions from system operators, utilities, asset owners and other parties in response to the proposed CER. The Independent Electricity System Operator (IESO), for example, replied that the CER creates a “resource shortfall by imposing severe restrictions” on gas-fired generation and that the rate of infrastructure buildout required to comply with the regulation would not be possible. The Alberta Electric System Operator (AESO) submitted that the CER would lead to an “unreliable system” and would not support the decarbonization efforts of the broader economy. A number of other grid operators and large utilities and asset operators provided similar comments to the federal government.The federal government noted that while a number of system operators argued for “more flexibility”, most submissions “voiced support” for the overarching goal of a net zero grid and the “basic regulatory architecture” of the CER.In response to comments, the federal government is proposing a number of material changes to the CER. While these proposed changes are significant, the federal government has provided limited details on their implementation and ultimate inclusion in the CER. The proposed changes to the CER include:

  • Removing the 30 tonnes/GWh intensity-based emissions performance standard that would apply to all generating units to a “unit specific” annual limit on total emissions, although there are no indications on what that limit will be;
  • Given the unit-specific performance standard for annual emissions is being proposed, the 450-hour cap on operating hours would be eliminated;
  • “Slightly” extending the end-of-prescribed-life for units from the initial proposal of 20 years;
  • Allow for units that are already under construction an extension to their prescribed life beyond 2035 – i.e. a unit that is under construction, but facing delays, and comes into service in 2026 will be allowed to operate with unabated emissions for 19 years;
  • Allow a company or operator with multiple units in the same jurisdiction to “pool” emissions limits;
  • Allow for offsets to meet CER obligations;
  • Distinguish emissions between “behind the fence” and net exports to the grid for cogeneration units;
  • All units at the same facility that amount to 25 MW would be subject to the CER – eliminating the incentive to install multiple on-site generators that are less than 25 MW to avoid CER obligations;
  • Consider allowing a system operator to declare an emergency where all emissions would be exempt from the emissions limit, although there are currently no details on how long the emergency would be allowed to last.

Impact on of proposed CER update on Ontario

While potentially mitigating the impact of the CER for the IESO and other system operators, the proposed updates to the CER also introduce significant uncertainty. Many of the proposed changes lack clarity and it remains unclear how much leeway these changes will ultimately provide for asset owners and investors as they are asked deploy billions of dollars in new investment across the Ontario electricity grid (and other provinces).In particular, the move to a unit-specific emissions limit may mitigate the impact of the CER on Ontario’s gas-fired generation fleet and provide much more flexibility to the IESO (and other system operators), as it will allow the ongoing operation of less efficient units, which would have been offside of the previous emissions performance standard. Nonetheless, the importance of the performance standard will continue to dictate how impactful the CER will ultimately be for gas-fired generators and the IESO. A stringent the performance factor will lower the total emissions allowed under the CER. The updated emissions limit formula being proposed by the federal government is as follows:

The impact of the new emissions limit on gas-fired generators will continue to be subject to the performance standard, which the federal government suggests it is open to “slightly changing” from 30 tonnes/GWh, but has not provided any further details. If the standard is moved only slightly higher, then it may continue to put a significant operational limit on the current fleet of gas-fired generators in Ontario (discussed below).We provide a simplified example below to highlight the importance of the performance standard in setting the annual emissions limit. Using output data from 2023 and high-level estimates of heat rates of four gas-fired facilities (we assume a heat rate of 8 for all of the facilities, recognizing there is a range between them), we calculate the total emissions (tonnes) for each facility. We then calculate what the total emission limit for each facility would be using a performance standard of 30 tonnes/GWh and the updated emissions limit methodology proposed by federal government. If the performance standard is 30 tonnes/GWh, these four gas-fired generators would be well offside of the total emissions limit. If that’s the case, these facilities would have to reduce their output and the IESO would, potentially, have to run less efficient gas-fired generators – up to their emissions limit – to make up the difference. It is not clear whether facilities that are below their emissions limit are able to “sell” or “trade” this allowance to other facilities, although “pooling” of limits (discussed below) will be allowed.  

The ability to pool emissions may blunt the impact of the CER, but again, there is limited clarity around how the pooling mechanism will work. In Ontario, for example, one would have to consider whether Ontario Power Generation (OPG) and Atura Power are able to pool emissions limits between the two companies. The pooling regulation may also result in greater concentration of gas-fired assets by a small group of owners – raising potential competitive concerns as gas-fired units will continue to be one of the predominant price-setting resources in the IESO-Administered Market (IAM).And the introduction of offsets as a tool to comply with the CER is not clearly defined or explained. At this point it is not clear what impact the offsets could play in allowing resources to mitigate their CER obligations or whether the federal government intends to create an entirely new market for CER obligations. Furthermore, it is unclear how would this would work on a regional basis where each province has different supply mixes and proportions of non-emitting generation.Overall, the CER may mitigate the impact of the CER on the IAM, but by how much and for how long remains largely unknown. As noted in recent figures from the Annual Planning Outlook (APO) released by the IESO and the launch of the Long-Term 2 energy procurement, Ontario is quickly moving towards a significant supply need – both in terms of capacity and energy. Greater uncertainty around the CER may continue to negatively impact investment across the IAM at a time when decarbonization policies and efforts require significant investment.Regulatory)