Awaiting the Signal

Big decisions are being made in Ottawa today by a relatively small group of people that will affect the future of energy in Canada. The group of stakeholders has come together at the behest of Environment and Climate Change Canada to shape regulations for the Clean Fuel Standard, with grand ambitions to achieve 30 megatons of annual greenhouse gas (GHG) emissions reductions by 2030.

“There’s maybe 40 or so on this technical committee made up of about one-third government, and the other two thirds is weighted heavily to the fossil fuel guys,” says Gordon Murray, executive director of the Wood Pellet Association of Canada. “It’s David and Goliath, with the government as referee. The fossil fuel guys dig their heels in, but they’ll get dragged along.” 

Murray says invitations were extended this winter requesting stakeholder participation to work collectively through spring, with the intent to have draft regulations established by June. Following this, a process of public consultations and legislative procedures will ensue. “This is the first time I’ve seen government coming to trade associations asking to help draft regulations,” he says. “I’m quite shocked—and encouraged. Government seems sincere and genuine in its attempt to solicit input. I have a pipeline, a direct chance to be heard.”

Ian Thomson, president of Advanced Biofuels Canada, says his organization has been at the very center of this effort before it was even announced, and remains very active in it. “We’re part of a slightly more formal, broad group of nongovernmental organizations and clean fuels associations pressing for a stringent standard by 2030,” Thomson says. “Through various working groups, the government is flushing out components of the CFS regulations, an overview of which is expected to be published later this year with formal regulations to come in 2019.”

The CFS is one of many “support mechanisms,” as Thomson calls them, under the broader Pan-Canadian Framework for Clean Growth and Climate Change, announced by Prime Minister Justin Trudeau in 2016. Other aspects of this sweeping plan include phasing out traditional coal-fired electricity by 2030, along with new greenhouse gas regulations for natural-gas-fired electricity. As such, coal power plants are exempt from the CFS, since they are covered under alternative regulations. The federal government is also spearheading clean energy for rural and remote communities. Many of Canada’s population centers have access to cheap, abundant natural gas, but an entire subset of the population living off the grid relies on propane and diesel fuel for heat and power.

“I don’t talk about natural gas because the pricing you will never touch,” says Andreas Wintzer, responsible for Canadian biomass boiler sales and technical support for Viessmann Manufacturing Co. Inc. “To develop the Canadian pellet market, we have two choices. First, concentrate on what makes sense—and that is where propane and oil are dominant. If the market is covered, then we can go to the bigger consumption guys and advise if they switch from natural gas to pellets, they will get money from GHG savings. With the efficiencies and convenience of natural gas, you can’t really compare them now unless it’s about GHG savings. However, pellets make sense economically and pricewise compared to propane and oil, and provide local jobs. Oil doesn’t bring any jobs.” 

The plan behind the CFS is to begin reducing GHG emissions in 2020, and ratchet up reductions through 2030. “How this translates to percent reductions remains to be seen,” Thomson says. In fact, most aspects of the CFS remain to be seen. The only sureties thus far seem to be what and who will be regulated, and even that is not completely worked out.

Initially, it appeared as if the CFS would take a sector approach, regulating transportation, buildings and industry. “People assumed it would be structured this way, partly because the only models to follow were in the transportation area,” says Cam Carruthers, executive director of oil, gas and alternative energy at Environment Canada. “It would be logical to build on that, but the industries—the fuels businesses—are not organized that way. They are more organized by fuel type, so it seemed quite clear that it would be more efficient to break it up by fuel type.”

Fuel streams, rather than sectors, will be regulated under the CFS, three broad categories of which are liquid, solid and gaseous. Carruthers notes 75 to 80 percent of Canada’s liquid fuels are used in transportation. “For those concerned about how to set up this structure, this should send a strong market signal for transportation,” Carruthers says.

For liquid and solid fuels, producers and importers will be the regulated parties. For gaseous fuels distributed through pipelines, distributors will be obligated. For other gaseous fuels such as biogas distributed to end users outside of pipelines, the regulated parties have yet to be determined.

“We’re still at the stage of gathering information about fuels and pathways for compliance,” Carruthers says. “We haven’t set carbon intensity levels yet. We want to gather all the data that will help us set baselines and targets.”

Carbon Pricing
The CFS is intended to complement the pan-Canadian approach to pricing carbon pollution. “Similar to the British Columbia, California and Oregon low carbon fuel standards, we expect that renewable and alternative fuels will be measured against baseline fossil fuels on a comparable life cycle assessment (LCA) basis,” says Doug Hooper, director of policy and regulation for Advanced Biofuels Canada. “The CFS market signal will incentivize use of lower carbon-intensity fuels,” by either blending biofuels or fuel switching. “As experienced in existing LCFS markets,” Hooper says, “the economic impacts of the CFS regulation will be dampened by internalizing compliance costs between high carbon fuel suppliers, the debit holders, and low carbon fuel suppliers, or credit holders.”

The federal backstop for carbon pricing will define the amount and application of a carbon tax system for all provinces and territories in Canada, Hooper explains. The provinces or territories may adopt their own carbon pricing system or elect to have the federal system apply in their jurisdiction. “All carbon pricing systems must be at least as stringent as the federal backstop,” he says. “Carbon revenues will devolve to the province of origin.” 

Hooper says it’s expected that existing carbon price jurisdictions—British Columbia, Alberta, Ontario and Quebec—will maintain their own systems. “B.C. and Alberta use a carbon tax system, while Ontario and Quebec have adopted the cap-and-trade design and linked their credit markets with California,” he says.

In 2019, carbon pricing will start at CDN $20 per metric ton, moving up $10 per year to $50 in 2022, Hooper explains. “Each of the existing carbon price systems is unique,” he says, “and the federal backstop system will follow that trend and be unique as well.” The basics of the backstop system are that a carbon tax will be levied on fossil fuels.

The backstop allows industrial facilities to be regulated or “opt in” under an output-based pricing system (OBPS) and avoid paying the carbon tax on fuels consumed in their industrial processes. “The OBPS is meant to prevent carbon leakage where industries may choose to close down in carbon-priced jurisdictions and reopen in markets without comparable taxes,” Hooper says. “Facilities in the OBPS will receive credit allowances to offset the carbon price on energy-intense or trade-exposed production.”

Industrial processes will be benchmarked, and facilities with GHG emissions under the benchmark will earn compliance credits and pay no carbon tax, and those above will be required to pay the carbon price on excess emissions, use banked compliance credits or purchase credits. “As with the cap-and-trade systems, the credit allowances mute the carbon price signal and facilities will opt in if the cost of compliance under the OBPS is below the costs associated with paying the carbon tax on fuels,” Hooper says. “Regardless, the carbon pricing systems do impose a new tax on industrial operations in Canada.”

Hooper says for facilities operating under the federal backstop OBPS system, the CFS and carbon pricing complement each other. “Under the OBPS, industrial facilities will be motivated to reduce emissions below the benchmark level, and utilizing lower-carbon fuels will be a core strategy to achieve this goal,” he says. “As the CFS will require the carbon intensity of fuels in Canada to be reduced, it will diversify the supply of low carbon fuels and improve market competition. Since the CFS regulation will create a market-mediated price signal—the compliance credit value—for reductions in each of the regulated fuel streams, industrial facilities will be able to evaluate the cost-benefit of different compliance strategies to reduce OBPS costs.” These different compliance strategies include efficiency improvements, purchasing lower carbon-intensity fuels and fuel switching, to name a few.

“It gets a bit more complicated for fuel refiners,” Hooper says. Under the OBPS, fuel refiners in Canada will be incentivized to produce lower-carbon fuels by improving refining operations or switching to lower-carbon feedstocks. “Any improvement in fuel refinery emissions would be counted in their compliance obligations to the benchmark under the OBPS,” he says. “However, since gasoline and diesel fuels are to be given a default carbon intensity under the CFS regulations, the CFS doesn’t align strongly with the OBPS design.”

Building a Domestic Market
Roughly 50 Canadian pellet mills produced about 2.8 million tons of wood pellets in 2017, a vast majority of which—2.4 million tons—was exported, according to Murray. For the 400,000 tons of pellets consumed domestically, 100,000 went to the two former Ontario Power Generation coal power stations—Atikokan and Thunder Bay—and an additional 300,000 tons were consumed mostly in Atlantic Canada, Quebec and the Northwest Territories. “Like in the U.S., wood pellet use is greatest in regions where there isn’t a natural gas network and wood pellets are competing against higher-cost oil and electricity,” Murray says. “Most domestic product is sold in 40-pound bags, but there is an increasing proportion now being delivered in bulk as we are continuing to install boiler systems in schools, universities, hospitals, churches, apartment buildings, prisons and so forth.”

It is clear government support through a cascade of what Thomson calls support mechanisms is necessary to help foster growth in Canada’s domestic wood pellet market. “I don’t see biomass market growth in Canada without a carbon tax, without government support,” says Pat Liew, director of business development and senior manager of operations for Ecostrat Inc.’s Biomass Supply Group. “For the past 10 years, natural gas has been super cheap. I’m not a big proponent of government stepping in, but natural gas has been so cheap for so long.” Liew says Ecostrat supplies 10 industrial greenhouses with wood. “And we haven’t seen newcomers in the industry for 10 years,” he says. “It’s easier to flip a switch than to hire a guy and loader.” Wintzer says without government paving the way, wood pellets in Canada will not see the outcome achieved in places like Europe.

Provincial regulations have played a big role in the success or failure of pellets. Liew says in Ontario, where regulations that hadn’t been updated since the 1990s, burning wood pellets was regulated much like waste incineration. Permitting was a difficult, lengthy and expensive process, Liew says, costing upward of $100,000 for engineering studies. He says the regulations were updated recently, but adds it will take time to “get the bad taste” out of people’s mouths.

Another issue as Liew sees it is the lack of a cohesive group of industry leaders advocating the benefits of biomass to lawmakers, resulting in inadequate lobbying efforts. “There’s no real lobby,” he says. “And as a result, the government tends to favor solar and wind. Those are the two renewables that get the most attention.”

Vince Rutter, co-founder of Biothermic, a company launched in 2013 with his brother Mike to distribute wood chips, pellets and Froling biomass boilers, says the biomass industry will see progress with cap-and-trade funding going to subsidize wood heating, but it needs a louder, more effective lobbying voice for forestry and energy. “We need to get the point across that when we talk renewables, we’re talking heat and electricity,” he says. “When you see a picture of renewables, there should be wind, solar, electric cars—and forests and wood. We need to get away from the idea that cutting trees is bad. It’s a necessity for forest health.” Rutter is a professional forester and certified arborist. “I think we’re the only ones in Ontario supplying heating systems and pellets,” he says.

Biothermic has a 60-ton silo in central Ontario with a pneumatic pellet suction system to receive loads from a variety of trucks supplied by a number of mills. The company just bought its second bulk delivery truck, a 15-ton hook loader truck with a silo and blower system made by Austria-based Tropper. Rutter says by adding a trailer he can double capacity. “That’s required,” he says. “Canada is giant, so we need to maximize our load per trip.” The new truck will be based out of Thunder Bay and will service northern Ontario. The older truck will continue to service central Ontario.

Rutter says Canada’s pellet market will change. “It has to,” he says. “But there’s a few big reasons we produce a lot, but use very little. The price of carbon is not high enough. We lack policy that incentivizes wood heating and disincentivizes fossil fuel heating. We don’t have robust funding program specifically for wood heating, similar to Maine, Vermont and the Northeast states. We have very big supply of cheap natural gas, which is piped into all the major cities where all the main policy decisions are made. In Ontario, most politicians live in big population centers connected to natural gas, and it’s cheap enough that wood pellets are not on their radar. In outpost communities, where they use diesel and propane for heating, propane is not as expensive as we need. But the voices feeling pain from high heating costs are not loud enough to make the change we would like to see. In Ontario, solar and wind get all the attention, and not enough of us are talking about heat. We shouldn’t be ignoring the heat market, as it’s a giant part of the energy mix.”

Exactly how the CFS will help shape growth in the Canadian domestic wood pellet market is unclear. The CFS will essentially leave it to fuel producers to figure out how to lower carbon intensity. “What I envision is, let’s say a petroleum refiner needs to reduce their GHG emissions by a certain amount per year,” Murray says. “They need to create heat in their refining process, so if they create process heat from wood pellets, then they can get GHG benefits. That’s one way we can insert ourselves into the supply chain.”

Carruthers says the regulated parties will look at the whole life cycle of their fuels and may make investments in different places. “Some may have more compliance options than others,” he says. “It will be a credit market, and it may drive changes in the building sector. It’s hard to say at this point, for example, what the opportunity is for wood pellets until we know the carbon intensity and cost. We’re getting there, and the approach we’re taking is to make sure the regulations are focused on the right points to drive the most incentive for change.” Thomson says which fuels will get switched for what is one of the big questions. “For transportation, it’s pretty straightforward,” he says. “For solid fuels, much less so.”

Another big question is how much flexibility will there be to trade between fuel streams. “It can’t be so flexible that it sends an ambiguous signal to people who want to develop advanced biofuels projects,” Thomson says. Carruthers says the CFS framework makes limited trading possible among the streams. “How much is going to depend on modeling work we need to do,” he says. “I came in thinking we want to maximize trading, but there are really good reasons to limit this. We need to send a good price signal to each stream. Until we see modeling on costs, it’s hard to say how much trading will be allowed across streams. For those with compliance obligations, they’re very concerned about price and supply. They are looking to us to ease their concerns, but I have to balance that with this requirement that not only gets us to 2030, but to 2050, so we’re looking well beyond the immediate structure.”

The key topics of discussion popular on both sides of the equation, Carruthers says, are the volumes and types of lower carbon-intensity fuels available in the market, and what the prices will be. “For the [biofuels industries], those are the key to understanding the opportunities,” he says.

So, is the Canadian wood pellet industry in a position to supply a growing domestic market should all the right market signals be sent? The large plants currently operating are mostly exporting to overseas markets and are locked in long-term supply contracts, so it’s not just a matter of redirecting supply. “No one is sitting around with millions of tons of pellets to divert, because they’re already committed,” Murray says. “For us to take advantage of this, we need to build up production, handling systems and storage.”

LacWood Pellets is a 15,000-ton mill in Northern Ontario producing residential-grade pellets distributed to customers 10 to 800 kilometers away. “We manufacture premium pellets and there’s a premium attached to the price,” says Steve Lacroix, plant manager. The vast majority of exports are industrial-grade, so even if the large mills weren’t locked into long-term contracts, simply redirecting industrial-grade pellets to a burgeoning domestic market where premium-grade pellets would be demanded is not likely to happen. Therefore, given the right market signals, a strong possibility exists for plant expansions and new builds under the CFS and other pan-Canadian support mechanisms.

“Our point of view is, if there is greater demand, then we’re ready to supply more pellets,” Lacroix says. “These past few years, we didn’t produce to capacity but rather to market demand, in the 10,000 metric ton range.” LacWood Pellets utilizes presses that produce a half-ton per hour. The company started with two, and over the years added a third, fourth and fifth. “We have the option of slowly growing without too big of an investment to increase our capacity,” he says. “We can grow organically as demand increases. That’s what we’ve done and plan to continue doing.”

Most stakeholders recognize the chicken-and-egg scenario with developing the pellet market, but virtually everyone agrees that the CFS and complementary support mechanisms will drive wood pellet demand in Canada. “It’s moving slow, like usual, but there is progress,” Wintzer says. “I just hope the progress gets going faster at some point.”

Of the large, established fossil fuel industries, Murray says their receptivity to change is slower than the renewable fuels sector’s willingness to supply. “It’ll take a lot of conversation and convincing before this comes to fruition,” he says. “The old, established sectors are slow and ponderous, and conservative in output. In using renewable fuels in fossil fuel processes, they’ll put up so much resistance to it that they’ll think of every other idea before they figure out they have to work with us. That’s what I’m anticipating. The regulations will be a powerful incentive, and we’ll force them to change, but they’re so slow and ponderous and committed.”

Author: Ron Kotrba
Senior Editor, Pellet Mill Magazine
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