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Canada’s $170/Ton Carbon Price Makes Heat Pumps Financial Winners

Canada’s new $170 per ton carbon price will save commercial building owners who switch from natural gas to heat pumps up to $6,000 per year.

As part of my ongoing exploration of heat pumps as a wedge on climate change, I thought I’d assess the fiscal impacts of Canada’s new carbon price of $170 CAD per ton of CO2 on annual heating costs for them compared to gas furnaces.

Recently, I built a province-by-province model which showed that at today’s grid emissions intensities, every province but the two main oil and gas provinces, with their coal and gas heavy grids, would see significant benefits from heat pumps on the worst commercial buildings. Those buildings were defined as median 5,000 square foot (465 square meter) older buildings with both gas furnaces and old air conditioning. The model took into account both the direct emissions from burning natural gas, and indirect emissions from the grid and from leaking high-global warming potential refrigerants in the air conditioning. I’d modeled low-global warming potential refrigerants based on Kigali Amendment targets, and some readers took me to task for this, as well as my specific choice of common refrigerant, but the natural gas was the biggest factor, so I’m comfortable about the orders of magnitude.

The modeling of province-by-province commercial buildings was done in aid of a project I’m doing with frequent collaborator Blair Birdsell. He’s creating a synthetic data set of buildings from data sampled from MLS, and overlaying it over an urban area. That is being used to create geospatial heatmaps of buildings which are higher intensity, per our underlying predictive model. Next steps include inference of high-emissions buildings solely from publicly available data sets using machine-learning approaches. Early days, but expect to see a bit more here on that subject.

After I wrote about the initial model, Canada’s federal government announced that they were going to uncap the federal carbon tax. Introduced a couple of years ago, it was slated to increase from $20 to $50 per ton of CO2 and then hold at that level. The new announcement, part of Canada’s major new climate plan, is to have it rise to $170 per ton of CO2 by 2030, about US$133 per ton. This makes it one of the highest announced carbon prices in the world, but of course the Conservatives in the last federal election ran on defeating even the lower carbon price as their Australian counterparts successfully did a few years ago, and there are two federal elections prior to 2030. What follows has political caveats, ones Canada will hopefully dodge so that we can continue to drive climate action.

The carbon price of $170 per ton of CO2 fundamentally changes the economics of natural gas vs heat pumps. This fiscal case doesn’t pencil out well for heat pumps in the absence of a price on carbon in jurisdictions with often artificially low natural gas prices and high electricity prices. In the early 2000s, natural gas prices per gigajoule were much higher and had seasonal variance with very high costs in the winter time, but fracking drove the cost down and stabilized it over the year, making winter heating with gas much more predictably affordable. That’s an unfortunate and predictable consequence, but is likely to change.

Chart of natural gas prices 2000-2016

Image courtesy eia.gov

As I pointed out in an article with Adam Crozier, my HVAC-expert engineer collaborator, we expect North American natural gas prices to both increase and become more volatile in the coming years. That’s due to a sweeping set of bankruptcies due to debt overextension in the industry, the Saudi Arabian-Russian price war hitting unconventional oil companies in North America and the lingering impacts of COVID-19 on overall oil and gas demand. As I pointed out recently, the cleantech sector is vastly outperforming the oil and gas sector in the markets, indicative that global analysis is in line with our take on the challenges facing the fossil fuel industry.

However, for the purposes of this assessment, I’ve taken the province-by-province cost of natural gas per gigajoule from 2018, before the start of any carbon pricing. I’ve also taken the cost per kWh from each province. Both vary substantially, with very low natural gas prices in BC, Alberta, and Saskatchewan increasing the further east in Canada you go, and retail electricity prices varying from $70 CAD per MWh in Quebec with its massive northern hydropower and 4 GW of wind energy, to $170 and $180 per MWh in Alberta and Saskatchewan. Given the purported cheapness of fossil fuel generation and the preponderance of coal and gas generation in the most expensive provinces, the irony is a bit thick on the ground.

So what are the results?

Canadian province by province cost and CO2 variance of gas vs heat pumps for heating

Chart by author

What this shows is that for every province but Alberta, heat pumps reduce greenhouse gas emissions with today’s grid intensity, and for all provinces except Alberta and Saskatchewan, the 2030 annual benefits of heat pumps over natural gas without any other incentives or subsidies range from a couple of hundred dollars to $6,000 per year. Note that Prince Edward Island and Newfoundland Labrador use oil furnaces for heat at much higher costs, so I’ve excluded them.

In a related article I projected the impact of the carbon price on Alberta electricity over 20 years. Its carbon intensity was already set to drop drastically by 2030 due to the Notley NDP government policy of eliminating coal generation, and the low federal carbon price accelerated that to 2023. But the conservative government and companies that owned the coal plants intended to replace coal with mostly natural gas. As I pointed out in my first general article on the raised carbon price target, $170 per ton CO2 adds $8.50 to a gigajoule of natural gas and $60 per MWh to the wholesale price of natural gas generation. That makes it uneconomic when wind and solar are winning energy auctions for under $50 per MWh already and with still declining costs for those forms of generation. In other words, Alberta and Saskatchewan’s grids will transform to renewables much more rapidly, coal and gas generation will drop drastically, and both provinces will end up benefiting from heat pumps run by electricity.

Renewables are projected to reduce the wholesale price of electricity in high-penetration jurisdictions when the jurisdictions’ markets have adapted to them, something that is lagging somewhat. That’s born out by the examples of Germany and Texas, where large penetrations of wind energy have not increased the wholesale prices, with both remaining among the cheapest jurisdictions. Retail rates have not declined in absolute dollars, but at least in the USA didn’t even keep up to inflation from 1990-2010, meaning that they had a real dollar decline year over year. Meanwhile, Germany keeps its electricity rates high as a matter of policy to drive efficiency. Both Australia and Alberta have seen grid liberalization favor gold-plating transmission, raising the cost of electricity, while Ontario is still paying off tens of billions of nuclear debt and in the last election the Conservatives promised to cut electricity rates. In other words, the retail rate of electricity is subject to a lot more than relief from wholesale costs, so mileage may vary between jurisdictions.

Regardless, by 2040, grid emissions intensities in all Canadian provinces will be lower, vastly so in Alberta and Saskatchewan, and a combination of retail rates of electricity not keeping up to inflation and wholesale cost reductions being passed on to consumers should make all jurisdictions even more viable for heat pumps.

In the short term, however, programs to push heat pumps to take advantage of the GHG dividend need to include direct incentives in the western most provinces, and depend on grid carbon intensity reductions in Alberta and Saskatchewan.

 

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Written By

is Board Observer and Strategist for Agora Energy Technologies a CO2-based redox flow startup, a member of the Advisory Board of ELECTRON Aviation an electric aviation startup, Chief Strategist at TFIE Strategy and co-founder of distnc technologies. He spends his time projecting scenarios for decarbonization 40-80 years into the future, and assisting executives, Boards and investors to pick wisely today. Whether it's refueling aviation, grid storage, vehicle-to-grid, or hydrogen demand, his work is based on fundamentals of physics, economics and human nature, and informed by the decarbonization requirements and innovations of multiple domains. His leadership positions in North America, Asia and Latin America enhanced his global point of view. He publishes regularly in multiple outlets on innovation, business, technology and policy. He is available for Board, strategy advisor and speaking engagements.

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