Backdoor Carbon Taxation in Saskatchewan

In an interview with Theo Caldwell published in the Daily Caller, Saskatchewan Premier Brad Wall expressed his pride for the carbon capture project at the Boundary Dam coal-fired power station in the southeastern portion of the province. This is most unfortunate, although he might just be trying to make the best political situation out of a bad policy foisted on him by the supposedly “conservative” federal government.

Saskatchewan has a long history of generating low-cost and reliable electricity from coal, and plentiful resources of the cheap fossil fuel exist. But the federal Conservative Party brought forward new regulations over the past few years with the specific intent of “reducing greenhouse gas (GHG) emissions from coal-fired electricity generation.” And in those regulations lay the backdoor carbon taxation now imposed on those living in Saskatchewan.

Some context is needed. The Boundary Dam carbon capture project capital costs are currently estimated at CDN$1.35 billion, about 9 percent over budget. In a province with a population of only 1.1 million, the upfront costs of building this project amount to an astonishing CDN$1,230 for each man, woman, and child in the province. The facility will only remove one million tonnes of carbon dioxide each year, or 1.3 percent of Saskatchewan's annual emissions, 0.14 percent of Canada's annual emissions, and less than 0.003 percent of global emissions.

In an interview with the Financial Post on February 14 of this year, Robert Watson -- the president and chief executive officer of the Crown-incorporated (i.e., government owned and operated) SaskPower which runs the project -- said in no uncertain terms that “the capture facility is completed and it's ready to go” for the April 1 startup deadline. Alas, the latest word is that the project startup has been delayed for an unspecified period of time, but is expected to be operational before the end of 2014. So how do we move from a status of “ready to go” six weeks prior to the startup date to extended delays of up to eight months?

I have yet to see any form of a comprehensive publicly available business plan for the project. Apparently, SaskPower intends to sell the captured carbon dioxide, along with fly ash and sulfuric acid byproducts, to industrial partners. In the mid-February Financial Post report where the SaskPower CEO said the project was “ready to go” (even though it clearly wasn't), we are told that “SaskPower will sell one million tonne [sic] of CO2 a year to Cenovus Inc. under an initial 10-year agreement at an undisclosed price.” This carbon dioxide is intended for use in enhanced oil recovery (EOR) efforts at the nearby oilfields.

But what about this February 2014 “undisclosed price” for the million tonnes of carbon dioxide the project will sell to Cenovus? In its October 2013 application for electricity price rate hikes during 2014, 2015, and 2016, SaskPower claims other revenues of about CDN$20 million per year during 2014-2016 from “CO2 sales.” This suggests the price of carbon from the Boundary Dam facility is CDN$20/tonne. In the MIT CCS Database entry on the project, apparently “revenue from the sale of CO2 is expected to offset the project costs.” In 2011, Rob Norris -- the minister responsible for SaskPower -- made the following statement: “We can demonstrate that this is scientifically sound and economically affordable.”

We need to look deeper into claims that the sale of carbon dioxide from the Boundary Dam carbon capture project can offset the project costs. The CDN$1.35 billion project capital cost involves a retrofit, and “the unit being rebuilt would have been replaced in 2014. Including the carbon capture element adds [CDN]$800 million to the cost.” Consequently, to offset the project's upfront costs, the sale of carbon dioxide over the project's operational period must generate at least CDN$800 million of “profits” in net present value terms.

Economic analyses for CO2-EOR in this region of North America use CO2 cost inputs of $1 to $2 per Mcf. This is broadly consistent with the CO2 cost ranges employed elsewhere when assessing the economics of CO2-EOR. Using a conversion factor of 1 tonne=19 Mcf for CO2, the typical price for CO2 used in CO2-EOR costing analyses is about $20 to $40/tonne. Thus, this represents a potential CO2 revenue stream of only $20 to $40 million per year at Boundary Dam. If the October 2013 electricity rate hike application from SaskPower is to be believed, it appears SaskPower opted for the low end of this range at $20/tonne, equating to $20 million per year in carbon dioxide sales revenue.

Simply dividing the initial capital cost of the project dedicated for the carbon capture component (i.e., likely in the CDN$800 million to CDN$1 billion range) by the annual CO2 gross revenue is -- of course -- insufficient to determine when (more likely, if) this project will achieve cost recovery. To determine the answer we seek, we also need to know the operating and maintenance costs of the project (i.e., to determine the “profit” on the CO2 sold to end users -- which will be some value far less than CDN$20 per tonne [what if the project runs at an operating loss at these CO2 prices?]), the lifetime over which the project is most likely to operate without additional capital cost inputs, and we need to make a number of assumptions regarding the time value of money inputs and outputs (e.g., the capital costs are up-front, whereas the CO2 net revenues are discounted [i.e., CDN$20/tonne revenue in the year 2025 is worth much less in today's monetary value]). Overall, it is difficult -- using the numbers above -- to see how the Boundary Dam project will achieve cost neutrality for the taxpayer. On face, the project appears to be a large monetary loss for the public.

Concerns over finances in Saskatchewan's government-funded carbon capture and storage ventures are nothing new. Aquistore, a carbon storage research project operated by the Petroleum Technology Research Centre (PTRC) and funded by SaskPower, the federal and provincial governments and industry, “became seriously overspent” to the tune of CDN$6 million according to internal SaskPower auditing. The Aquistore project is intended to be backup storage for carbon dioxide produced from the Boundary Dam power station in excess of what Cenovus can take for its EOR work.

In addition, the related government-funded International Performance Assessment Centre for the Geologic Storage of Carbon Dioxide (IPAC-CO2) in Saskatchewan's capital city of Regina -- and actually situated at the University of Regina -- was shut down on March 31, 2013 after being set up in 2008. There were several media reports during 2013 (see, e.g., here, and here, and here, and here) regarding potential waste, conflicts of interest, and other financial and ethical misdeeds at IPAC-CO2, resulting in an investigation by the Canadian national police force. The police probe appears to still be underway. Similar financial concerns were expressed over activities at the PTRC leading to its CEO stepping down in mid-2013. To date, I've seen no clear answers or satisfactory resolutions reported in the media with respect to the massive problems evident at the PTRC or IPAC-CO2, which only justifies the need for more transparency about the related Boundary Dam project itself.

What we can say at this point is that electricity prices in Saskatchewan are going up rapidly (even before Boundary Dam comes online) and that trend is proposed to continue after Boundary Dam becomes operational, that coal-fired power stations offer a low-cost source of much-needed electricity in the province with its growing population and economy, and that the addition of the carbon capture unit at Boundary Dam -- for the sole purpose of reducing greenhouse gas emissions -- significantly increased the cost of electricity produced by this power station over the far lower cost non-carbon capture refit alternative. Consequently, electricity prices in Saskatchewan are increasing more they would be had the Boundary Dam unit been refit without the CDN$800+ million carbon capture device. What do we call this scenario? Carbon taxation.

Premier Wall made headlines only six weeks ago when he was in Washington, DC, drumming up support for the Keystone XL pipeline and the media reported that he said modest carbon taxation in Canada might facilitate the Obama administration's approval of the pipeline. Wall released a statement the next day attempting to clarify his public remarks, and claiming that “he did not call for a carbon tax.” Well, this is all just wasted time and energy, because we -- unfortunately -- already have a carbon tax in Saskatchewan.

Over the past several years, Canadians have seen repeated statements in the media that “the federal [Conservative Party] government has flatly ruled out using carbon pricing as a policy measure to reduce the country's carbon footprint.” This is absolute nonsense. By requiring very expensive carbon capture and sequestration equipment to be installed on coal-fired power plants in Canada, or else risk the plants being shut down, the federal government has already enacted carbon pricing. In other words, the price of coal-derived electricity in Canada will be higher than it would otherwise be because of the federal government's requirement that these plants reduce their greenhouse gas emissions via expensive modifications. Where coal is the cheapest form of electricity, these regulations raise the minimum possible price of electricity in the region. Saskatchewan has also added a substantial quantity of more expensive wind power into the grid, and plans to add more, all with the stated goal of reducing greenhouse gas emissions in the province.

It's time to call a spade a spade. Saskatchewan has effective carbon taxation, and has had it for more than a decade.

In an interview with Theo Caldwell published in the Daily Caller, Saskatchewan Premier Brad Wall expressed his pride for the carbon capture project at the Boundary Dam coal-fired power station in the southeastern portion of the province. This is most unfortunate, although he might just be trying to make the best political situation out of a bad policy foisted on him by the supposedly “conservative” federal government.

Saskatchewan has a long history of generating low-cost and reliable electricity from coal, and plentiful resources of the cheap fossil fuel exist. But the federal Conservative Party brought forward new regulations over the past few years with the specific intent of “reducing greenhouse gas (GHG) emissions from coal-fired electricity generation.” And in those regulations lay the backdoor carbon taxation now imposed on those living in Saskatchewan.

Some context is needed. The Boundary Dam carbon capture project capital costs are currently estimated at CDN$1.35 billion, about 9 percent over budget. In a province with a population of only 1.1 million, the upfront costs of building this project amount to an astonishing CDN$1,230 for each man, woman, and child in the province. The facility will only remove one million tonnes of carbon dioxide each year, or 1.3 percent of Saskatchewan's annual emissions, 0.14 percent of Canada's annual emissions, and less than 0.003 percent of global emissions.

In an interview with the Financial Post on February 14 of this year, Robert Watson -- the president and chief executive officer of the Crown-incorporated (i.e., government owned and operated) SaskPower which runs the project -- said in no uncertain terms that “the capture facility is completed and it's ready to go” for the April 1 startup deadline. Alas, the latest word is that the project startup has been delayed for an unspecified period of time, but is expected to be operational before the end of 2014. So how do we move from a status of “ready to go” six weeks prior to the startup date to extended delays of up to eight months?

I have yet to see any form of a comprehensive publicly available business plan for the project. Apparently, SaskPower intends to sell the captured carbon dioxide, along with fly ash and sulfuric acid byproducts, to industrial partners. In the mid-February Financial Post report where the SaskPower CEO said the project was “ready to go” (even though it clearly wasn't), we are told that “SaskPower will sell one million tonne [sic] of CO2 a year to Cenovus Inc. under an initial 10-year agreement at an undisclosed price.” This carbon dioxide is intended for use in enhanced oil recovery (EOR) efforts at the nearby oilfields.

But what about this February 2014 “undisclosed price” for the million tonnes of carbon dioxide the project will sell to Cenovus? In its October 2013 application for electricity price rate hikes during 2014, 2015, and 2016, SaskPower claims other revenues of about CDN$20 million per year during 2014-2016 from “CO2 sales.” This suggests the price of carbon from the Boundary Dam facility is CDN$20/tonne. In the MIT CCS Database entry on the project, apparently “revenue from the sale of CO2 is expected to offset the project costs.” In 2011, Rob Norris -- the minister responsible for SaskPower -- made the following statement: “We can demonstrate that this is scientifically sound and economically affordable.”

We need to look deeper into claims that the sale of carbon dioxide from the Boundary Dam carbon capture project can offset the project costs. The CDN$1.35 billion project capital cost involves a retrofit, and “the unit being rebuilt would have been replaced in 2014. Including the carbon capture element adds [CDN]$800 million to the cost.” Consequently, to offset the project's upfront costs, the sale of carbon dioxide over the project's operational period must generate at least CDN$800 million of “profits” in net present value terms.

Economic analyses for CO2-EOR in this region of North America use CO2 cost inputs of $1 to $2 per Mcf. This is broadly consistent with the CO2 cost ranges employed elsewhere when assessing the economics of CO2-EOR. Using a conversion factor of 1 tonne=19 Mcf for CO2, the typical price for CO2 used in CO2-EOR costing analyses is about $20 to $40/tonne. Thus, this represents a potential CO2 revenue stream of only $20 to $40 million per year at Boundary Dam. If the October 2013 electricity rate hike application from SaskPower is to be believed, it appears SaskPower opted for the low end of this range at $20/tonne, equating to $20 million per year in carbon dioxide sales revenue.

Simply dividing the initial capital cost of the project dedicated for the carbon capture component (i.e., likely in the CDN$800 million to CDN$1 billion range) by the annual CO2 gross revenue is -- of course -- insufficient to determine when (more likely, if) this project will achieve cost recovery. To determine the answer we seek, we also need to know the operating and maintenance costs of the project (i.e., to determine the “profit” on the CO2 sold to end users -- which will be some value far less than CDN$20 per tonne [what if the project runs at an operating loss at these CO2 prices?]), the lifetime over which the project is most likely to operate without additional capital cost inputs, and we need to make a number of assumptions regarding the time value of money inputs and outputs (e.g., the capital costs are up-front, whereas the CO2 net revenues are discounted [i.e., CDN$20/tonne revenue in the year 2025 is worth much less in today's monetary value]). Overall, it is difficult -- using the numbers above -- to see how the Boundary Dam project will achieve cost neutrality for the taxpayer. On face, the project appears to be a large monetary loss for the public.

Concerns over finances in Saskatchewan's government-funded carbon capture and storage ventures are nothing new. Aquistore, a carbon storage research project operated by the Petroleum Technology Research Centre (PTRC) and funded by SaskPower, the federal and provincial governments and industry, “became seriously overspent” to the tune of CDN$6 million according to internal SaskPower auditing. The Aquistore project is intended to be backup storage for carbon dioxide produced from the Boundary Dam power station in excess of what Cenovus can take for its EOR work.

In addition, the related government-funded International Performance Assessment Centre for the Geologic Storage of Carbon Dioxide (IPAC-CO2) in Saskatchewan's capital city of Regina -- and actually situated at the University of Regina -- was shut down on March 31, 2013 after being set up in 2008. There were several media reports during 2013 (see, e.g., here, and here, and here, and here) regarding potential waste, conflicts of interest, and other financial and ethical misdeeds at IPAC-CO2, resulting in an investigation by the Canadian national police force. The police probe appears to still be underway. Similar financial concerns were expressed over activities at the PTRC leading to its CEO stepping down in mid-2013. To date, I've seen no clear answers or satisfactory resolutions reported in the media with respect to the massive problems evident at the PTRC or IPAC-CO2, which only justifies the need for more transparency about the related Boundary Dam project itself.

What we can say at this point is that electricity prices in Saskatchewan are going up rapidly (even before Boundary Dam comes online) and that trend is proposed to continue after Boundary Dam becomes operational, that coal-fired power stations offer a low-cost source of much-needed electricity in the province with its growing population and economy, and that the addition of the carbon capture unit at Boundary Dam -- for the sole purpose of reducing greenhouse gas emissions -- significantly increased the cost of electricity produced by this power station over the far lower cost non-carbon capture refit alternative. Consequently, electricity prices in Saskatchewan are increasing more they would be had the Boundary Dam unit been refit without the CDN$800+ million carbon capture device. What do we call this scenario? Carbon taxation.

Premier Wall made headlines only six weeks ago when he was in Washington, DC, drumming up support for the Keystone XL pipeline and the media reported that he said modest carbon taxation in Canada might facilitate the Obama administration's approval of the pipeline. Wall released a statement the next day attempting to clarify his public remarks, and claiming that “he did not call for a carbon tax.” Well, this is all just wasted time and energy, because we -- unfortunately -- already have a carbon tax in Saskatchewan.

Over the past several years, Canadians have seen repeated statements in the media that “the federal [Conservative Party] government has flatly ruled out using carbon pricing as a policy measure to reduce the country's carbon footprint.” This is absolute nonsense. By requiring very expensive carbon capture and sequestration equipment to be installed on coal-fired power plants in Canada, or else risk the plants being shut down, the federal government has already enacted carbon pricing. In other words, the price of coal-derived electricity in Canada will be higher than it would otherwise be because of the federal government's requirement that these plants reduce their greenhouse gas emissions via expensive modifications. Where coal is the cheapest form of electricity, these regulations raise the minimum possible price of electricity in the region. Saskatchewan has also added a substantial quantity of more expensive wind power into the grid, and plans to add more, all with the stated goal of reducing greenhouse gas emissions in the province.

It's time to call a spade a spade. Saskatchewan has effective carbon taxation, and has had it for more than a decade.