Author: Steve Sabean

TransCanada Corp. has changed the way natural gas shippers contract for capacity, thus limiting storage access for many producers. Whereas previously TransCanada would scale back service for firm-service shippers to make way for spot shippers, under new guidelines, gas producers with firm-service contracts now have priority over intermittent shippers whose services are being cut.

In addition, TransCanada has been performing pipeline maintenance while continuing work on a very large expansion project on its Nova Gas Transmission (NGTL) system. In NGTL’s most recent update to their daily operating plan, they added new outage events between July and October of 2018, with maintenance possibly continuing into next year.

This has led to massive commodity and transportation price swings. Traditionally, Alberta’s AECO hub prices have moved with other price hubs around North America, including NYMEX and Dawn, but these price relationships have moved further apart in recent months with no sign of getting back to normal.

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On January 16, the Ontario government announced an 80% discount (up to $7,500 each) to employers and commercial building owners who install electric vehicle charging stations.

Five million dollars of this program will come from the cap-and-trade revenues as part of Ontario’s Climate Change Action Plan. There are currently about 1,300 public charging stations and 16,000 electric vehicles in Ontario.

For more information, click here.

Thanks to a bone-chilling Arctic air mass, winter arrived this year with a dramatic temperature drop throughout much of North America. With unusually warm air settling over the North Pole, the decreased temperature gap between north and south caused the Jet Stream to dip, bringing frigid air southwards. As in 2014, the term “polar vortex” re-entered popular discourse.

According to the National Oceanic and Atmospheric Administration, this huge accumulation of frosty air resulted in more than 1,600 daily records for cold being tied or broken in the last week of December. But the weeks-long deep freeze was by no means uniform: while much of the East Coast battled a brutal winter storm, West Coast temperatures were higher than normal.

As climate scientists assess these unpredictable weather patterns, this season’s polar vortex and “bomb cyclone” have affected natural gas markets throughout North America. For starters, the intense cold sent regional U.S. natural gas spot prices higher as demand reached record seasonal highs.

Ontario Prices Spike

In Ontario, natural gas prices had been in a low and stable holding pattern in recent years, with the last price spike occurring during the winter of 2014. Since that spike, the price dropped quickly, remaining relatively stable for the past four years. The December cold blast created price spikes.

Ontario prices have been affected even more so because the province relies on gas delivered via pipeline from other parts of North America and from natural gas storage facilities such as Ontario’s Dawn Hub, which became strained as gas could not be withdrawn fast enough to meet demand.

What is Curtailment?

A reduction of gas deliveries, or curtailment, may occur due to a shortage of supply or because demand exceeds pipeline capacity.

There are two reasons utilities will call a curtailment event. One is storage management. Utilities manage stored gas in a manner that ensures there is enough supply to meet the heating demand for the entire winter. Most large industrial consumers have special interruptible delivery contracts, allowing utilities to curtail supply to their facilities. These large consumers usually have alternate supply options such as oil or propane, which are much more expensive than natural gas and can cause operational issues if they have not been used recently. To incentivise large natural gas consumers to agree to an interruptible contract and occasionally switch to a more expensive alternative fuel, these industrial users pay a discounted delivery rate for their natural gas.

Having different delivery cost tiers also ensures that residential consumers will always have enough natural gas to heat their homes—even in the coldest days.

The other reason for a curtailment is distribution capability. Distribution pipes are sized to meet expected demand throughout the year. But pipelines are not always large enough to move enough gas to where it is needed (e.g. pipes going to Leamington are not large enough to meet the expanding greenhouse industry).

Larger users will typically sign a gas delivery contract—with maximum hourly, daily and annual usage amounts—to allow the utility to manage the flow along the feeder pipes. If there is more demand in a certain area, the utility will expand the pipeline to meet the expected demand. If, however, the pipeline is limited, there will be commercial consumers along the pipeline that will be asked to shut down or curtail their gas usage.

Curtailment Delivery Supply (CDS)  

Natural gas consumers on the Enbridge system with interruptible contracts have been asked to turn off their gas and use alternative fuels (curtailment was called January 3–7). On the first day, consumers were allowed to source incremental gas using Enbridge’s Curtailment Delivery Supply (CDS) but this was not available Jan 4–7. Although Enbridge’s CDS is a valuable service, there is limited pipeline capacity into Toronto and CDS gas has been increasingly difficult to obtain.

Union Gas also recently sent out a notice of limited activity at their Dawn storage facility, stating: “Due to sustained extreme cold weather and high requests for interruptible activity, interruptible storage requests may not be scheduled on the Dawn Storage to Dawn (Withdrawal) path.”

Extremely cold weather also affects a consumer’s balancing position in terms of forecasted usage versus contracted daily quantity. On the Union Gas system, the winter checkpoint is approaching and consumers will most likely be required to buy more gas at balancing time in February. The additional gas usage this winter will also affect year-end gas balancing requirements.

Ontario’s Industrial Conservation Initiative (ICI)

The Ontario ICI program gives larger electricity consumers the option to switch to a different distribution rate called Class A. Although the ICI program began five years ago, many commercial consumers switched to Class A because the minimum demand threshold was reduced in 2017 to allow more customers to participate. The benefit is that consumers pay a lower global adjustment (GA) rate, a charge that has sometimes been over half of the overall electricity bill. To take maximum advantage of the lower GA charge, electricity users must reduce their usage during the five hourly Ontario peaks throughout the year.

Whereas peak usage in Ontario typically occurs in the summer, electricity demand is peaking this winter. For Class A participants that are actively trying to reduce their electricity usage during the five Ontario peaks, management of usage must occur more often than just on hot summer days. Predicting the Ontario demand peaks is challenging and is becoming even more so with extreme temperature occurrences.

Class A electricity consumers (ICI) will be affected if more electricity is being used during these winter peaks. Thus far for this ICI period, Ontario peaks have occurred in June, July and September, with a high likelihood that January will see at least one peak demand hour. The only other time a winter Ontario peak was recorded was 2015.

On January 1st of this year, Ontario’s Cap and Trade program came into effect. Cap and Trade is a government-mandated, market-based mechanism to help mitigate climate change by setting a hard cap on greenhouse gas emissions while allowing businesses flexibility in terms of how they meet their caps. Those companies that reduce greenhouse gas emissions are rewarded through economic incentives.

 

In Ontario, gas utilities are required to administer the program by purchasing emission allowances and billing for the natural gas each business and home consumes. What this means is that for everyone who uses natural gas in the province, there’s a new line item on their bill. For instance, for Union Gas and Enbridge users, a surcharge appears. Electricity bills in Ontario are not affected by cap-and-trade because it is covered in gas bills.

The price of emission allowances is calculated per cubic metre of natural gas used and varies with supply and demand, as reflected in every user’s gas bill.

An Emissions Trading Auction

Under cap and trade, the government issues a limited number of permits (or allowances) specifying the amount of carbon a company can burn while setting an overall carbon emissions cap. If a company wants to burn more than its allowance permits, it must buy extra permits from other companies in Ontario’s cap-and-trade quarterly auctions. There have been three such auctions this year: March, June and September—with a fourth slated for November 29^th.

In regulated industries, companies are assigned a pro-rata cap based on their share of historical emissions and are required to have allowances for all of their emissions. They purchase allowances in the auction and can then buy and sell these amongst themselves. Clean companies can benefit from selling off their credits; more emissions-heavy companies can purchase additional credits to cover their emissions. The system is geared to reduce overall emissions by reducing the cap gradually each year, while incentivizing companies to invest in cleaner processes.

Companies that emit less than 25,000 tonnes of carbon dioxide equivalent a year will be automatically charged by their local natural gas utility.

Mandatory Participants

The following are required, by law, to participate in the Cap and Trade program:

• Electricity importers
• Natural gas distributors
• Facilities emitting 25,000+ tonnes of greenhouse gas per year (equivalent to 13 million m3/year).
• Fuel suppliers selling more than 200 litres of fuel per year

Mandatory participants must purchase an emission allowance for every tonne  of CO2 they produce. Companies that need additional allowances to match their emissions can buy them from the cap-and-trade auctions, through a secondary market broker or via other companies who have a surplus.

The first period of compliance is from 2017 to 2020. At the end of each period, mandatory participants must have enough allowances to equal their emissions.

Voluntary Participants

Businesses generating between 10,000 and 25,000 tonnes (5 million to 13 million m3/year) of greenhouse gas emissions per year do not have to participate in the cap-and-trade program but can choose to opt into the program as a voluntary participant. Voluntary participants may register for the upcoming year if they meet the criteria set out in the cap-and-trade regulation. To be a part of this program you must complete a series of steps and meet key deadlines each year.

Voluntary participants are subject to the same rules as mandatory participants. Depending upon the industry, companies that lower emissions below sector-specific historical benchmarks may be able to obtain allowances that they can then sell to other companies.

Free Allowances Available

Most large emitters will receive most of their required emission allowances for free during the initial compliance period of 2017–2020. Beginning in 2018, that number will decline at a rate of 4.57% per year for combustion emissions. To remain compliant, companies will need to either reduce their emissions or purchase allowances or credits.

Both mandatory and voluntary cap and trade participants can apply for free emission allowances provided they are:

• An electricity generator
• Involved in electricity importation and transmission
• Producing or supplying petroleum
• Distributing natural gas

Companies must apply for free emission allowances by September 1^st of each year.

Cap and Trade and Energy Costs

The cost of emission allowances is now built into the cost of natural gas,  electricity and other fuels.

Almost all carbon emissions from electricity generation in Ontario are related to natural gas-fired generation. Thus there is no separate cap-and-trade charge on electricity bills.

Meanwhile, natural gas generators are paying for the cost of their carbon emissions through the upstream purchasing of credits by distributors who then pass on the additional cost of these credits as a charge for the natural gas consumed. This translates into an increased cost to produce electricity and higher electricity prices.

In theory, cap and trade will continue to put upward pressure on the Hourly Ontario Electricity Price (HOEP) because as the availability of credits decreases, the price of emission allowances will increase. However in actual fact, we’ve seen the cost of HOEP decrease since the beginning of the year.

What Happens to the Proceeds of Cap and Trade?

Proceeds from Cap and Trade are estimated to be around $1.5 billion per year. The province will reinvest into the province’s Greenhouse Gas Reduction Account (GGRA), which will be used to fund eco-friendly projects to further reduce GHG emissions, such as the Ontario Climate Change Action Plan.

Among other plans to reduce emissions, the government intends to create incentives for the purchase of electric vehicles, increase the availability and use of lower carbon fuel, improve public transportation, and provide incentives for apartment building energy retrofits.

The Green Ontario Fund will apportion some of the proceeds into creating incentives to purchase electric vehicles, retrofitting of homes and supporting clean energy technologies.

Beyond Ontario

As part of the Western Climate Initiative, Ontario joined with other jurisdictions to create a cohesive cap and trade program. Since 2014, two other jurisdictions in North America have been active in cap and trade: California and Quebec. Oregon is now considering similar legislation.

Ontario’s program was designed to be aligned with these markets and joint auctions with California and Quebec are staring in 2018. Total revenue from these will be divided amongst the three jurisdictions.

Starting in 2018, the Canadian federal government will impose a national price on carbon to meet its obligations under the Paris Agreement.

For more information about Ontario’s cap and trade program, contact GOenergy today.

 

Big changes are happening in the way Ontario consumers purchase natural gas. Due to increased competition and lower pipeline tolls, natural gas producers from Alberta and the US are competing to provide bargain prices to the Ontario market.

Natural gas production in Alberta has traditionally been transported by way of the TransCanada PipeLines Limited (TCPL). But with shipping options increasing, all Ontario and Quebec utilities are moving towards sourcing natural gas at points in Ontario.

An example of a new competing pipeline is the Rover Pipeline, which is slated to deliver one billion cubic feet per day from Pennsylvania’s Marcellus and Utica shale production areas into the union gas dawn storage hub in Ontario. The Dawn Hub is Canada’s largest integrated underground natural gas storage facility.

Meanwhile, according to TCPL, the Vaughan Mainline Expansion (VME) is under construction and due to come online in November. This project is to serve as an additional connection between the two Ontario utilities, Union Gas in the southwest, and Enbridge in the Toronto area. It will allow Enbridge consumers the ability to source gas at the Dawn Hub.

Many things had to happen to meet the November 1st start date. In order for Enbridge to implement Phase 2 of the Dawn Transportation Services (DTS) for eligible customers in its distribution area, both the VME project as well as TCPL’s King’s North Connection Pipeline Project had to be completed. Enbridge first announced implementation of a contingency plan to cover possible delays, but then quickly retracted to say it was off. The end result is that Dawn Transportation Services will begin on November 1st for all approved Phase 2 and Phase 1 customer renewals.

As a consequence of these developments, local gas distribution companies will be more reliant upon the Dawn Hub during periods of high demand such as winter, instead of from the Western Canadian Sedimentary Basin and Alberta’s benchmark hub, AECO.

In addition, the new competition has already prompted TCPL to reduce tolls for large shippers. However, the drop in natural gas commodity prices could be offset as distribution companies include various riders and charges onto consumer bills.

Nevertheless, Ontario gas consumers will benefit from increased access to a stable supply. Indeed, they appear to be the clear winners in the battle for Ontario market share amongst producers.