Ottawa’s new $15-billion cleantech financing agency has inked its first deal to de-risk investment in carbon capture by removing uncertainty around carbon pricing.
The Canada Growth Fund announced on Wednesday morning that it has reached a deal with Entropy Inc., a subsidiary of the Calgary-based oil and gas company Advantage Energy Ltd., involving a novel investment tool that it calls a carbon-credit offtake agreement.
Under the terms of the agreement, the Growth Fund will purchase up to 185,000 tonnes a year of carbon credits generated under Alberta’s industrial carbon-pricing system by the company’s first carbon-capture project, at Advantage’s Glacier gas plant. It will do so at a rate of $86.50 a tonne for 15 years.
The agreement commits the Growth Fund to purchasing credits from subsequent Entropy carbon-capture projects, on similar terms, up to a total of 600,000 tonnes annually. And it gives the option of further expanding that by another 400,000 tonnes a year, which would bring it to one million annually.
Growth Fund officials said that they were drawn to Entropy partly because it is a Canadian technology purveyor that, with the deal in place, should be able to scale up in this country rather than being drawn to the United States or other jurisdictions that offer larger subsidies than are available here. The idea is that the scale-up will include projects for oil and gas companies other than just Advantage.
The deal also sees the federal agency provide Entropy with $200-million in debt financing, which could be converted to an approximately 20-per-cent equity stake. That component is geared toward the capital costs of the company, which is also backed by Brookfield Renewable Partners LP, which last year invested $300-million.
But the arrangement around carbon credits will likely attract the most interest across the oil and gas sector and other industries that have been awaiting details on how the Growth Fund intends to deliver on its mandate to guarantee value from carbon-capture projects.
And the deal could cause some waves, because the price that Entropy will receive per tonne is considerably lower than what other companies have said is needed to get carbon-capture projects off the ground.
The basic rationale for such deals is that, while in theory the industrial carbon pricing system should make carbon capture financially viable by enabling companies to generate and trade carbon credits, there is too much uncertainty around how the credit market will take shape for that to be a reliable revenue stream.
Although the industrial price is supposed to rise to $170 a tonne by 2030, it’s unclear whether that will in fact happen if there is a change in federal government. It’s also possible that credits will trade for much lower than that headline price – regardless of the government – if the market is saturated with them.
As a result, the Growth Fund, which began operations this past summer, has been tasked by Ottawa with using up to $7-billion – nearly half of its budget – for what are referred to as carbon contracts for difference (CCfDs). That has required the agency to find some way of striking deals to guarantee companies a minimum value per abated tonne, make up the difference if carbon credits are trading for below that level, and possibly itself come out ahead if the credits are trading above it.
The offtake-agreement model that the Growth Fund landed on, at least in this initial deal, involves committing in advance to simply buying credits once they are generated. While the company’s revenues from each abated tonne will now be predictable, the Growth Fund will either earn a return or suffer a loss depending on the market’s trajectory.
While the offtake structure is somewhat different from what advocates of the policy initially envisioned, the negotiated price may be the more surprising aspect.
Proponents of other carbon-capture projects, including larger oil and gas producers and cement and chemical companies, have been seeking per-tonne prices of at least $120. Officials previously told The Globe and Mail that some companies said they needed more than $170 a tonne for projects to work.
The agency was seeking to set a precedent much lower than that, both to minimize its own risk and to maximize the number of agreements it can strike.
“We think that we will find more projects around the same price,” Growth Fund chief executive officer Patrick Charbonneau said in an interview following the announcement, while allowing that some could be slightly higher or even lower. “We will use this as a benchmark.”
Not everyone is quite as confident about the relatively low price being a standard that the agency can maintain.
Michael Bernstein, who heads the think tank Clean Prosperity and is one of the leading advocates for CCfDs, said the Entropy agreement is an important milestone, but may not be widely replicable.
“CGF may be able to secure a few other deals where firms sell them credits below $100 per tonne, but most industrial decarbonization projects will require significantly higher prices to move forward,” Mr. Bernstein said.
Much is hanging on the Growth Fund quickly getting other such agreements reached, which Mr. Charbonneau said he expects in 2024.
Providing greater certainty around carbon pricing is a key component of Ottawa’s effort to remain competitive with massive subsidies being offered in the U.S., via the Inflation Reduction Act, for carbon capture and other emissions-reducing technologies across a range of heavy industries.
And the scale-up of such projects in Alberta is considered essential to meeting decarbonization requirements that Ottawa is proposing to introduce for the oil and gas sector through a new emissions cap, the framework for which was released earlier this month.
Early successes by the Growth Fund, in the form of deals on relatively favourable terms, could also encourage Ottawa to expand its commitment to CCfDs, which the government previously said it would consider.
For now, the Entropy contract leaves the Growth Fund with ample room for further CCfDs. Although the announcement did not specify the liability that the agency is taking onto its books, with the up to 600,000 tonnes of annual emissions reductions that it has committed to backing, that figure appears to be about $800-million.
However, even the remaining bulk of the $7-billion allocation would not be enough to cover all the carbon-capture investments for which CCfDs are being sought, including much larger projects under consideration in the oil sands.
Adam Radwanski