Case Study on Renewable Grid-Power Electricity

Baseline Study and Economic Report

Submitted by Marbek Resource Consultants in association with Resources for the Future

May 21, 2004

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1. Introduction

The National Round Table on the Environment and the Economy (NRTEE) has initiated a program to examine the role of Ecological Fiscal Reform (EFR) in meeting the challenges of implementing sustainable development in Canada. Results of the first phase of the EFR program, which focused on the agricultural, transportation and chemical sectors, concluded that fiscal policy is one of the most powerful means at the government’s disposal to influence outcomes in the economy; if used in a consistent and strategic manner, EFR can promote objectives that have simultaneous economic and environmental benefits.

In the spring of 2003, the NRTEE launched the second phase of its EFR program with a focus on the potential contribution of EFR to reducing carbon dioxide (CO₂) emissions from energy. The goal of this second phase is to “examine how to reduce energy-based carbon emissions, both in absolute terms and as a ratio of GDP, using fiscal policy without increasing other pollutants.” Consistent with the approach employed in the previous phase, this phase of the EFR program includes the development of case studies on three sectors that can contribute significantly to “decarbonization” of Canada’s energy sector, namely: renewable energy, hydrogen and energy efficiency.

1.1 Objectives and Scope of this Case Study

This case study provides an analysis of the role that fiscal policy can play in promoting the long-term development of Canada’s renewable energy sector, with a view to promoting and, where appropriate, accelerating the use of renewable energy technologies that lead to long-term reductions in energy-based carbon emissions. This case study addresses the renewable energy (RE) sector¹ and explores the “traction” of fiscal instruments to improve the uptake or deployment of grid-power renewable energy technologies (RETs) in Canada. Consistent with the broader goal of the EFR program, the objectives of this case study are twofold:

To deliver pragmatic, policy-relevant recommendations on how fiscal policy can be used to promote sustainable development

To synthesize the lessons learned from each case study into a “State of the Debate” report that will assess the potential use of fiscal policy in promoting long-term decarbonization.

In pursuit of these objectives, the case study follows a step-wise approach that:

Defines a renewable and electrical energy baseline in the years 2010, 2020 and 2030

Defines a greenhouse gas (GHG) emissions baseline for electrical energy

Identifies a set of renewable energy fiscal instrument scenarios

Models a set of fiscal instruments

Assesses the relative environmental and economic implications of the fiscal instruments.

1.2 Data Sources

The development of this case study involved the compilation and analysis of a large amount of data. Many of the data inputs that are required for modelling purposes in this case study are, in fact, the outputs from large and complex studies that themselves are based on numerous assumptions. Throughout this case study, data sources are clearly indicated and detailed references are provided in the attached appendices. In each case, the selection of data sources was guided by three key principles:

Data should be as recent as possible.

Data need to be from credible and impartial sources.

To the extent possible, data used in this case study should be from a consistent set of sources. For example, the estimation of on-margin emissions reductions used herein is based on a large study conducted for Environment Canada. That same study also estimated future electricity generation costs as part of developing the on-margin emission impacts. This case study requires both data sets (i.e., emission reductions and fossil fuel generating costs) and therefore draws both from the same study results.

Completion of this case study also required a number of data inputs (e.g., renewable resource size) where the available information is incomplete. In these cases, the approach was to draw on the best available data and to augment this data with consultations involving selected Canadian experts.

1.3 Presentation of this Report

Following this introductory section, the remainder of this case study is presented as follows:

Section 2 provides the context in which this study is implemented, including a discussion of the policy, fiscal instruments, renewable energy technologies and the modelling context.

Section 3 provides a discussion of the baseline renewable power sector, including an overview of its current technological status as well as forecasts of expected resource availability and costs.

Section 4 identifies the baseline electrical sector parameters, including the price of electricity, the baseline market share of renewables and fossil fuels in overall generation, and the cost of carbon reductions. As well, a number of important baseline analytical assumptions are identified including time frame, geographic coverage, discount rates and dollar years.

Section 5 presents the case study results of the economic modelling as well as sensitivity testing of key variables.
The synthesis of lessons learned, as noted in the objectives above, is provided in a separate report.