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Release of Canada’s Energy Future 2018: Energy Supply and Demand Projections to 2040

Speech to the Toronto Board of Trade
Release of Canada’s Energy Future 2018: Energy Supply and Demand Projections to 2040
October 31, 2018
National Energy Board Chair Peter Watson

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Introduction

  • Good morning. Thank you for that kind introduction.
  • I appreciate the opportunity to join you today and acknowledge that we are on the traditional territory of many nations including:
    • the Mississaugas of the New Credit,
    • the Anishinaabeg,
    • the Chippewa,
    • the Haudenosaunee,
    • the Wendat peoples,
    • and it is now home to many diverse First Nations, Inuit and Metis peoples.
  • Over the past few years, you have undoubtedly heard about the National Energy Board and the work we do.
  • From helping ensure pipelines are safe, to climate change, to hearings on contentious pipeline projects, to the relationship Canada has with Indigenous Peoples...
  • ...the NEB is in the middle of it all. Everyday.

Energy Futures

  • Now, as Canada’s national energy regulator, a key aspect of the NEB’s mandate is to study energy matters over which parliament has jurisdiction,
    • And to provide the government with advice on those issues.
  • To give you an example of how seriously we take that responsibility, and how long we’ve been doing it, I want to share with you some historical context.
  • In my hand, I have a copy of the NEB’s original ‘Energy Supply and Demand Forecast Report,’ which was released about 50 years ago in 1967.
  • This document was the first edition of what has become a key reference point for energy experts, governments, and ordinary Canadians.
  • Looking back at the NEB’s Energy Futures report from 1967, what is striking is that the NEB is still working on the same types of issues today that it was working on 50 years ago.
  • During my time at the NEB, the debate around ‘forms of energy’ that power our economy have been perhaps the main focus of public policy formation in Canada.
  • And it was also a focus of the NEB’s 1967 Energy Futures Report, which had a section on what it called ‘the shifts between energy sources.’
  • That chapter deliberated on the shift from wood and coal as energy sources for much of the 20th century, to petroleum.
  • And it contained a discussion on why that shift occurred.
  • That section of the report concluded with the statement that changes in Canadian energy consumption were, “...often due to shifts in emphasis from one fuel to another,” and the report forecast that, “...similar shifts will occur in the next 20 years...”
  • Well, the economist who wrote that report was right...those shifts between energy sources are occurring today...and will continue to occur into the future.

Energy Information

  • So, it’s a continuing story. We are working on issues that have been around for 50 years, and someone will continue to work on those issues for the next 50 years.
  • Because it is essential for someone to take the long view.
  • And today, I am pleased to share with you the National Energy Board’s ‘long view’ – our flagship document, ‘Canada’s Energy Future 2018: Energy Supply and Demand Projections to 2040.’
  • This document comes at a time of significant economic and policy change.
  • Many developments have occurred while this analysis was underway in 2018, including:
    • rising global benchmark oil prices,
    • the return of large price discounts for Canadian oil,
    • and many provincial climate policy decisions.
      • I note that Energy Futures 2018 assumes that the Federal backstop carbon price is binding in the Reference Case – beginning at $20/tonne in 2019 and rising to $50/tonne in 2022.

Three Fundamental Trends

  • So how did the NEB create a long term outlook within this challenging environment?
  • The answer is...we focus on the fundamentals.
  • Energy Futures outlooks are impacted by many factors, but our analysis shows three fundamental trends...and these trends provide the groundwork of the projections:
  • First, Canada’s energy mix is getting more diverse – it is getting greener.
  • Second, the potential for significant energy production in Canada remains strong – especially oil and natural gas development.
  • Third, and most importantly, Canada is becoming more energy efficient.

NEB Outlook Reporting

  • Now Energy Futures 2018 is a key reference point, because it is the ONLY publicly available Canadian long-term energy outlook covering all energy commodities and all provinces and territories.
  • It is also unique because the results in this report rely upon the expertise of not only the Board’s excellent group of economists and technical staff, but it is also done in consultation with provincial partners, energy experts, and several other federal departments, including:
    • Natural Resources Canada,
    • Statistics Canada,
    • And the federal department of Environment and Climate Change.
  • We also talk to international partners, including the International Energy Agency and the US Energy Information Administration.

The Fine Print

  • Now creating an energy supply and demand projection document to the year 2040 is very challenging – especially in the current environment.
    • So let me share with you a bit of the ‘fine print’.
  • It is important to note that the analysis in this Report is not a prediction of future outcomes. It is a PROJECTION of what might occur given a set of assumptions.
  • Energy Futures 2018 includes four projections of energy supply and demand to 2040.
  • There is a baseline Reference Case.
    • This includes current policies, and assumes moderate technology improvement, consensus economic growth and energy prices.
  • Given the uncertainty when it comes to prices, we also include a High Price case and a Low Price case.
  • Finally, we include a Technology Case.
    • This projection includes greater global climate policy ambition and market outcomes aligned with the International Energy Agency’s Sustainable Development Scenario. 
    • It includes a suite of assumptions that sees Canada adopting technologies that are aligned with that type of global context.

The Reference Case

  • So, let me begin by spending some time talking about the NEB’s baseline projection – the Reference Case.
  • Canada’s energy demand growth is slowing. There will be relatively small growth in energy demand of about 5% from 2017 to 2040.
  • This implies energy use per person will be nearly 15% lower in 2040 than current levels.
  • On the supply side, Canada’s green electricity mix becomes even greener – coal is phased out – replaced by renewables and natural gas.
    • This increases the share of renewables – such as hydro, solar, wind and biomass – as well as non-emitting energy – like nuclear – to nearly 84% of the electricity mix in 2040, compared to about 80% today.
  • Crude oil and natural gas production grow from current levels.
    • Crude oil production growth is led by the oil sands, and in the Reference Case grows 58% to nearly 7 million barrels/day by 2040.
    • Natural gas production increases in the longer term, and by 2040 is about 25% higher.

Electricity Outlook

  • Now, let’s take a closer look at the country’s electricity outlook in Energy Futures 2018.
  • Today, hydroelectricity remains the dominant source of electricity in Canada, accounting for 55% of total capacity and about 60% of total generation
  • Natural gas, coal and nuclear are the most common sources of electricity generation after hydroelectricity, with non-hydro renewables such as wind, solar and biomass making up the smallest portion of the capacity mix.
  • In the Reference Case, total Canadian electricity generation increases by about 12% to the year 2040.
  • Hydro, other renewables and natural gas lead this growth, while coal and nuclear generation decline.

Hydro

  • In the projection period to 2040, hydroelectricity remains the dominant source of electricity supply in Canada.
  • Hydroelectric generating capacity increases largely due to a number of large hydro projects either under construction or in the planning and development phase.
  • Over the projection period, hydroelectricity’s share of generation stays steady at about 60%.

Non-hydro Renewables

  • Canada also has considerable non–hydro renewable resources including wind, biomass, solar, tidal, and geothermal.
  • Over the past few years, policy incentives and declining costs have spurred significant growth in the use of these renewable generating technologies.
    • In the period from 2010 to 2016, Canada more than tripled its wind, solar and biomass generating capacity.
  • Non–hydro renewable capacity continues to grow in the Reference Case to 2040.
    • Wind capacity doubles.
    • Solar capacity more than doubles.
  • Under the reference case, generation from non-hydro renewables is projected to increase to over 12% of all electricity generation by 2040.

Nuclear

  • Nuclear power is an important part of Canada and Ontario’s energy mix, and we expect this to continue.
  • In the Reference Case, nuclear generation declines somewhat between now and 2040.
    • This is due to the shutdown of Ontario’s Pickering Nuclear facility in 2024.
  • But we do include planned nuclear refurbishments, and nuclear continues to provide over 10% of Canada’s electricity in 2040.

Natural Gas

  • Natural gas–fired generation capacity increases steadily in the Reference Case to the year 2040.
  • Relatively low fuel prices and capital costs make natural gas a likely option to replace retiring coal units.
  • The increase in natural gas capacity is also linked to the growth of variable renewable energy.
  • The variable nature of renewable electricity requires more reliable generation to complement it, and the ability of natural gas plants to quickly increase or decrease generation make it an attractive option.
    • In the reference case, natural gas capacity nearly doubles.

Oil Prices

  • I would like to spend a few minutes discussing the oil prices that are projected in Energy Futures 2018.
  • Recent developments suggest a rebalancing of global oil markets.
  • Sustained production cuts by OPEC and Russia, combined with unexpected supply outages – particularly in Venezuela – have reduced global oil supply.
  • Global oil demand outpaced supply in 2017 and is doing the same in 2018. Both U.S. and OECD crude and product inventory stocks have been reduced and are currently below their five-year averages.

Brent HIgh/Low Price Case

  • For the long term, our Reference Case oil price assumption for Brent crude approaches US$75/barrel by 2027, where it remains until 2040.
  • The NEB’s analysis includes a Low Price Case where Brent crude declines to US$40 per barrel by the early 2020’s, where it stays for the projection period.
  • The High Price Case for Brent sees a future where supply is not as robust and price keeps rising to about US$120/barrel by 2025 and stays there till 2040.

WCS-WTI Differential

  • An issue facing Canada right now is the deep discount that some of our oil is currently facing.
  • In the first half of the year, the Western Canadian Select-West Texas Intermediate price differential averaged over $20 US. In the first half of October, the discount widened and has averaged over $45 per barrel.
  • It is important to note that there should be some discount between the Canadian heavy price and WTI – based on quality and transportation costs – but this normally ranges between $10 and $15 per barrel. 
  • We expect over the next few years the differential could average anywhere between US$18 and about US$30.
  • This is due to continued constraints in pipeline capacity in the short term, combined with some further downward pricing pressure from the upcoming International Maritime Organization’s Sulphur content regulations.
  • These new regulations – which set a global limit of 0.5% Sulphur content in fuel used by ships – come into force in 2020.
  • This means Canadian heavy crude will have increased competition for coker refinery capacity in the U.S. Gulf Coast resulting in lower prices.
  • In our Reference Case, the combined effect of pipeline constraints and the Sulphur regulations are assumed to push the Western Canadian Select-WTI differential to US$26 in 2020.
  • We expect pressures will then gradually alleviate, with prices converging to a differential of US$14 by 2027, continuing to 2040.

The Technology Case

  • Now, Canada’s energy future is not predetermined – markets, policies, technology and innovation will shape these trends in the longer term.
  • And the time period we are studying in Energy Futures – from now to 2040 – is going to be a remarkable time in energy.
  • The baseline projections from organizations such as the International Energy Agency and the U.S. Energy Information Administration show global energy demand growth of about 1% per year over the next 25 to 30 years, which is about half of the  growth we have averaged from 1970 to now.
  • That’s a big change. And reducing emissions in line with the Paris Climate Agreement will require fossil fuel use to stop growing and begin trending downward.
  • So what does this mean for Canada? Future climate action is obviously an important area for Canada’s energy future. For us, that means it’s important to push past the baseline assumptions of the Reference Case.
  • This is the purpose of the Energy Futures’ Technology Case.
  • This case looks at the impact of a faster transition towards a low carbon economy on energy supply and demand in Canada.
  • Future climate action is obviously an important area for Canada’s energy future.
  • While policy makers grapple with the question of “how do we get there?”
  • We approach the question from a different angle.
  • The key question for us in this report is: “If the globe does get on track to meet its climate goals, what does it mean for Canada’s energy supply and demand?” 
  • As I noted earlier, the Technology Case uses the IEA’s Sustainable Development Scenario as a basis for global assumptions.
  • In that scenario, crude oil and natural gas prices are moderately lower than in our Reference Case.
  • And for global energy and climate policy development, that IEA scenario includes carbon pricing in all OECD countries rising to $100 US per tonne by 2030, and $140 by 2040 in real terms.
  • With that backdrop, we then make a variety of detailed assumptions on technology development in each sector of the Canadian economy.
  • Things like penetration of electric vehicles, falling renewable energy costs, biofuel blending and energy efficiency improvements.
  • So what does this projection convey?

Driven by Fundemental Trends

  • In the Technology Case, Canada’s energy system looks much different than it does today – but is still driven by a few fundamental trends.
  • By 2040, improved energy efficiency, new technologies, and fuel switching reduces Canadian energy use by over 15% from current levels.
  • The fossil fuel portion of the fuel mix declines even faster, and is nearly 30% lower than current levels by 2040.
  • On the other hand, renewable and non-emitting energy grows and their share of the energy mix increases. Canadian electricity generation is 90% from renewable and non-emitting sources by 2040.
  • In other words, the Technology scenario amplifies the fundamental trends of improving energy efficiency and a diversifying fuel mix.
  • By 2040, energy use per capita is 1/3 lower than it is today – under this scenario.
  • In addition, Canada continues to have significant potential to produce oil and natural gas resources.
  • The share of Canadian production in the global mix will depend on how the country can remain competitive in a global context that is shifting away from fossil fuel energy.
  • The NEB does not provide GHG emission projections in Energy Futures, largely to avoid any public confusion with the formal emission projections that Environment and Climate Change Canada releases.
  • That said, there will be emission implications for this scenario.
  • Based on our forecast of declining fossil fuel use in Canada, the Technology Case is in the zone of meeting Canada’s 2030 GHG emissions target, and it sees further reductions continuing to 2040.

Technology Case: Oil & Gas Production

  • In terms of oil and natural gas production, both are lower in the Technology Case than the Reference Case, due to lower prices implied from the global context, as well as higher carbon costs.
  • Those factors are somewhat mitigated by the assumed efficiency improvements, for example, in oil sands’ in situ production, where solvent technology reduces the ‘steam-oil-ratio’ significantly for new production, and helps mitigate the costs of rising carbon prices.
  • Of note, in all the scenarios, the 100 Megatonne limit of GHG emissions in Alberta is not surpassed.  This is either because of increased efficiency gains in production or reduced growth in production levels.
  • In terms of economic growth, the High Price Case is somewhat higher, the Low Price Case lower, while Reference and Technology Cases growth rates are similar.
  • This is an interesting result, implying Canada can continue to prosper even in this global context of a faster transition with aggressive policy options. I do, however, want to point out the key assumptions behind this result.
  • First, we align to the approach of the International Energy Agency of keeping global economic growth the same as our Reference Case, and assume all countries are acting on climate change.
  • Also like the Reference Case, we assume that pipeline constraints ease over time and that resources have access to international markets.
  • Second, another key assumption is that revenues from the higher degree of carbon pricing in the Technology case are recycled back into the economy through personal and corporate tax cuts.
  • Finally, the Technology scenario requires a lot of innovation across the energy system. This ranges from improving end use efficiency to provide cost savings to consumers, maintaining reliability of energy services, and keeping the resources we are exporting competitive in a carbon constrained world.

Conclusion

  • In conclusion, the increasing pace of change in energy markets and climate policy development suggest that the need for up-to-date analysis on energy trends is greater than ever.
  • It will be difficult for a modernized energy system to work really well if policymakers, regulators, stakeholders – and indeed all Canadians – don’t have good energy information.
  • Because Canada’s energy future will not be determined by a single force, but rather the interaction of many.
  • Energy Futures 2018 takes into account many factors, and it shows three fundamental trends:
  • First, Canada’s energy mix is getting more diverse – it is getting greener.
  • Second, the potential for significant energy production in Canada remains strong – especially oil and natural gas development.
    • This depends mainly on to the Canadian energy industry’s ability to adapt to change, and our resources remain competitive in a carbon-constrained world.
  • Third, and most importantly, Canada is becoming more energy efficient.
    • Which causes energy use and economic growth to de-couple.
    • And – the data shows that in a lower carbon Canada, economic growth can continue and standards of living can be maintained.
  • But don’t just take my word for it.
  • I encourage you to look at our data and our analysis...reflect on these critical matters...and consider their impact not just for today, but for the future.
  • Thank you.
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