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Chapter 7: Conclusions: Key Implications for the Canadian Energy System

Conclusions: Key Implications for the Canadian Energy System

Canada's Energy Future highlights challenges and opportunities facing the energy sector and individual Canadians, both today and in the future. The cross-country consultations and subsequent analysis strongly suggests that although energy supplies are adequate and energy markets are currently functioning well, a return to sustained low commodity price levels is not foreseeable. Despite this, Canadians are adjusting to this new energy price paradigm. Canadians continue to witness a changing supply mix as conventional resources mature and new technologies emerge, although fossil fuels will continue to dominate the energy system for the next few decades. The last several years have shown Canadians to be especially interested in the impact of greenhouse gas (GHG) emissions. New policies and programs designed to reduce GHG emissions are in their infancy, and although public concern is high, measurable impact of such initiatives is difficult to predict. Each of these aforementioned issues will impact evolving Canadian energy policy, as governments work to balance market considerations with the ability to be flexible and responsive to the Canadian energy environment.

Following is a summary of these issues, highlighted under five key themes.

1. Energy Markets and Resources

Canadian energy markets are expected to function well with energy prices acting to ensure there is sufficient energy supply to meet energy demand. The analysis in Canada's Energy Future presents a broad range of energy prices resulting from variant demand and supply outcomes. The price of oil and natural gas are determined by continental and global markets. Electricity price is shaped by regional demand and supply and government policies, but are also influenced by inter-provincial and international trade.

Long-term historical prices in North America of approximately $20/barrel for crude oil and US$1.90 to $2.85/GJ (US$2 to $3/MMBtu) for natural gas have been eclipsed in recent years, and there is little expectation of returning to these lower price levels for any sustained period to 2030. Higher oil and gas prices have also resulted in higher coal and electricity prices, to the extent these fuels are used in power generation.  In all three scenarios, energy prices remain at higher levels than those experienced in the last decades. In the Triple E Scenario, the existence of a carbon dioxide (CO2) price results in dual pricing: first, at the wellhead level (commodity price), determined by the global/continental demand and supply forces; and second, at the end-use level (delivered price), established by a combination of the CO2 price and the wellhead price. Overall, it appears that North American and global economies are adjusting to higher prices.

Availability of energy resources in the future is not expected to be an issue. As an element of efficient energy markets, energy prices will provide appropriate market signals for the development of adequate energy resources. The type and mix of energy resources will be determined by the level of energy prices. Overall, Canadian energy supply and the fuel mix is price-sensitive, creating a broad range of outcomes in response to alternative price trajectories modeled in the three scenarios.

2. Energy Supply, Demand and Exports

Fossil fuel energy continues to be the dominant source of supply, although non-conventional and non-fossil fuel supplies begin to play a larger role. Conventional resources that have been the backbone of energy supply throughout the twentieth century are growing increasingly mature, requiring ever greater physical and financial inputs to produce diminishing increments of supply. Future opportunities for significant incremental supply growth are likely to originate from unconventional energy sources such as oil sands, coalbed methane (CBM), oil and gas shales, improved recovery techniques, off-gases from bitumen upgraders, and coal gasification. This is the case in all three scenarios, with the most notable effect on the oil sector, where oil sands contribute in excess of 80 percent to Canadian oil supply.

While some unconventional resources such as oil sands are well established and have a large in-place resource, others such as gas shales are at early stages of experimentation and assessment and may require significant increments in production and involve long lead times and high upfront capital expenditures to make them commercially viable. In addition, alternative and emerging energy sources such as wind generation are increasingly becoming important as technological advancements make them more economic. This is an area of growing importance and continued fuel diversity is expected to be part of the energy balance in Canada. All scenarios depict a fuel mix that is mostly conventional at the base, but varies in terms of additions from emerging and alternative technologies and fuels.

While energy supply is quite price-responsive, energy demand is not. The pattern of energy consumption is largely predetermined by the make-up of the existing stock of energy-using devices such as buildings, appliances, cars, industrial motors and others. Since this stock has long life, the possibilities for demand reductions are limited. Also as long as energy expenditures continue to be a minor proportion of operating budgets, demand reductions in response to higher price will be small.

Despite the inflexibility of established energy consumption patterns, there are some indications that price may be a potentially bigger factor in future scenarios than the historical data and current analysis would suggest. Historical trends and modeling results indicate the influence of personal income (spending power) overrides energy price changes. However, recent qualitative evidence suggests Canadians are responding to increased energy costs by adjusting lifestyles and spending habits. Due to a lack of sufficient quantitative data, this may not be fully reflected in the results of the current analysis. Thus the sustained high energy prices as observed in the Fortified Islands Scenario or the consumer response to dedicated government programs in Triple E could see some further downward pressure on demand.

Total Canadian net energy exports are expected to increase in the future. However, the growth varies by commodity and scenario. While the oil and electricity exports are higher than the historical levels in all scenarios, the net natural gas exports see growth only in Fortified Islands. Growing oil exports are the result of production increases from oil sands and frontier oil off the East Coast. Frontier gas is also a contributing factor in the growth of natural gas exports. Electricity exports increase due to a combination of demand and supply factors.

Expansion of export markets will be directed by market forces and could take the form of growth in existing export markets, displacement of competing volumes from existing export markets, and/or accessing new offshore markets. Each of these has important implications for supporting infrastructure. Ongoing development of oil supply will require significant additions of export pipeline capacity and expansion of export markets to absorb the throughput. Similarly, there will be a need for additional transmission capacity to materialize growing exports of electricity. Depending on the scenario, there may be costs associated with underutilized natural gas infrastructure and new infrastructure to accommodate liquefied natural gas (LNG) imports.

3. Energy Interactions with the Economy and Environment

The state of the economy continues to be an important driver for the energy system, and alternative macroeconomic projections in the three scenarios lead to different energy outcomes, especially in energy demand. Macroeconomic growth in all scenarios is lower than observed in recent history. The common constraint to economic growth is the decelerating population growth, with serious implications for labour force and availability of adequate labour and skill sets to meet the growing demand across all economic sectors. Labour shortages are currently having a dramatic impact on energy sector developments and the situation may worsen in some scenarios.

Labour productivity improvements are assumed in most scenarios to compensate for lower growth in labour force. Alternatively, stabilization in population growth could be assumed with higher immigration levels. Regardless, this is an important area for consideration by decision makers if continued robust growth in the economy is desired.

Canadians are concerned about climate change. Numerous policies and programs are being developed at the federal and provincial levels to reduce GHG emissions. It is challenging to predict the response to these policies and programs, as uncertainty exists over how consumers and technology will react. It is possible that without the implementation of these more stringent policy changes and a further shift in Canadians' behaviours, GHG emissions would increase, as is demonstrated by the Reference Case and Continuing Trends Scenario.

Reducing Canadian GHG emissions will require utilization of all the strategies at our disposal. These options, as explored in Triple E, include the adoption of progressive energy efficiency polices and a market mechanism for the inclusion of emissions from fossil fuel use in consumers decision-making process. Greenhouse gas emission reduction targets announced in recent policies will require strategies beyond those presently considered in the Triple E Scenario.

4. Building Blocks for Canada's Energy Future

Technology can offer solutions to many challenges in the energy system. While technology makes incremental inroads into Canada's energy future, the direction, pace and extent of these changes vary across scenarios. The technology push in Fortified Islands is most evident on the supply side. The drive to expand the boundaries of conventional resource supply as quickly as possible supports very specific high-tech industries, whereas demand technology retreats into more basic, conservation-type measures such as vehicle fuel economy and light bulbs. In Triple E, technology is inextricably tied to efficiency improvements. This scenario suggests fundamental technology goals of the future are not linked to any singular, breakthrough 'clean' technology; rather the holistic evaluation of the energy supply chain from bottom to top. Analysis of energy production, conversion and utilization reveals a wealth of optimization opportunities. These near-term efficiency opportunities provide the platform for advancing long-term, clean energy solutions.

An examination of the current state of technology in Canada confirms that change happens slowly. Promising end-states, such as the 'hydrogen economy' imply a multitude of progressive, integrated steps that affect almost every aspect of energy production and use. Seizing technology opportunities requires a combination of market mechanisms and incentives. It also requires consistent, reliable signals from policy-makers that will direct much-needed, long-term, strategic investments from the private sector.

A 'smart' energy policy is essential to the continued development of the energy sector. Canadian energy policy went through extensive reforms in the last two decades and is currently driven by a market-oriented system. According to the International Energy Agency (IEA), “competition in the Canadian energy markets is well advanced benefiting the consumers of Canadian oil, gas and electricity in Canada, the U.S. and outside North America”[80]. Earlier sections of Canada's Energy Future reflect the significant contribution made by the energy sector to the Canadian economy and support IEA views.

[80] International Energy Agency (IEA). Energy Policies of IEA Countries: Canada, 2004 Review.

Energy development in Canada is reaching new heights. With its enormous reserves of oil sands, Canada is being touted as an energy 'superpower'. Meanwhile, Canada is at an important juncture, where sustained development of the energy sector may conflict with other objectives gaining importance in the minds of Canadians. ‘Smart' policy is required to help optimize multiple objectives of economic growth, environmental sustainability and development of the energy sector. Flexible policy frameworks that extend beyond provincial borders will need to be constructed to consider wide regional differences with respect to energy and emissions, evolving energy supply systems and a changing global environment. In recent years, there have been calls for development of an integrated energy, environment and economic vision[81]. These frameworks will need to include the entire energy chain, all jurisdictions and the various layers of governments to maximize effectiveness.

[81] The Conference Board of Canada. Canada's Energy Future: An Integrated Path, May 2007.

These observations are driven by stakeholder input received during the consultation process and subsequent analysis for Canada's Energy Future. In undertaking the analysis for Canada's Energy Future, it was challenging to stipulate potential policies in areas where none existed, or where intent has been expressed, but programs are yet to be articulated. Clearly expressed policies and programs are a critical element of establishing plausible future energy paths and providing more definite analysis.

Major investments are needed in the next decade to develop new sources of energy and meet the growth in energy demand as well as replace the ageing infrastructure. Many of these are already described with the Reference Case, although there are uncertainties surrounding the timing of larger projects, such as the Mackenzie gas pipeline and specific oil sands proposals.

Common themes in infrastructure development include the competition for skills and rising costs. While some of these issues might be regarded as bottlenecks that can be dealt with by phasing developments and aggressively addressing skills shortages through training, the matter of obtaining approvals for large new pipeline and electric transmission projects and production infrastructure from oil refineries to power plants remains a key source of uncertainty. New approaches are required to resolve differences between developers and local opposition in order to improve the predictability of project completion. In some cases, this may include improving clarity in the regulatory and public engagement processes, while in other cases it may require more use of 'single window' approaches when several jurisdictions are involved.

Over the longer term, 2015 to 2030, the infrastructure requirements and issues are more influenced by circumstances of the scenario, including implications arising from continued diversity of fuel mix. Continuing Trends would tend to have the broadest increases in production and transmission requirements, given that this scenario has the highest level of domestic demand. Project developers and consumers would need to deal with and accommodate the above risks associated with project completion. Triple E would suggest different and possibly higher risks associated with project completion, as this outcome relies on the success of new technologies that may or may not materialize. Additionally, if consumption efficiencies are not realized or demand management measures are not successful in the low-price environment, planned infrastructure may not be adequate and possibilities of diverting export resources to domestic use will need to be explored. Developments in Fortified Islands would face challenges of high and volatile energy prices, putting at risk the completion of high-cost conventional projects that are more prevalent in this scenario, along with those projects requiring technological advancements.

As the requirement to renew and expand our energy infrastructure increases to meet the growing and diverse needs for energy, greater public engagement and acceptance for these initiatives are important. Economic and environmental sustainability are high level precepts that could under-estimate individual concerns. As the 'footprint' of energy extraction, production, and distribution grows, projects face increasing public inquiry. New and emerging technologies, for all their promise, are equally as susceptible. Whether it is CBM gas wells, LNG terminals, or wind farms, future energy developments face an increasingly organized, informed, and committed public. An increased awareness of the major societal benefits and costs to all energy development, will be needed. A balance will need to be established between public acceptance and the need for timely decision making with all stakeholders working towards this objective.

Public buy-in is also required in altering consumer behaviour to achieve the energy and environment objectives. Recent evidence suggests the public is more willing to 'walk the talk'[82].

[82] 61 percent of respondents in Ontario and Alberta are “very concerned” about climate change and 42 percent are willing to pay more to do something about it. Ipsos Reid survey for Direct Energy. May 2007.

High-quality data forms a solid foundation for supply and demand analysis, such as the analysis for Canada's Energy Future. Canada is currently a world leader in the quantity and quality of energy data collected. The breadth and depth of data published by statistical agencies across the country is impressive, and has allowed for the development of advanced analytical tools.

As energy issues become increasingly complex, requiring timely decision- making, there emerges a need for enhancements and improvements to existing statistical databases. Statistics need to be responsive and relevant to emerging energy issues[83]. Ongoing collaboration is needed to address gaps, timeliness, and identify future priorities. One such successful initiative is the effort to standardize the reserve definition and its application at the global level[84].

[83] Additionally, data and definitions need to be consistent between the various collecting and communicating agencies at both the federal and provincial levels.
[84] There has always been some inconsistency on a global basis with respect to oil and gas reserves, in both the actual definitions and the application of the definitions to oil and gas accumulations. In order to resolve some of these inconsistencies and challenges, there have been several international efforts to standardize the reserves definitions and applications of reserves.

Together with data, good information and analyses is also important in fostering good decision making on the part of all stakeholders.

5. Canada's Energy Future

The analysis suggests significant change in several elements of the energy system. Energy prices have moved to a higher platform, and are expected to remain at those levels in the foreseeable future. There is a growing focus on environment issues, notably on greenhouse gas and other emissions. At a global level, energy security and the ability to meet growing energy demand are becoming key. There is a fast approaching need to renew and expand the energy supply infrastructure. Technological breakthroughs in the way we consume and produce energy, and growth in technology development which is unprecedented in scale and speed of deployment may be required.

A long-term energy vision and strategy for Canada is needed to balance multiple objectives. This plan must be well integrated at the regional level, consider environmental issues and economic growth, and be developed with input from Canadians. Only then will we be able to overcome the challenges ahead and take advantage of the opportunities available.

The NEB plans to contribute to this debate by continuing to pursue our vision of being an active, effective and knowledgeable partner engaging Canadians in the discussion of Canada's energy future.

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