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Proposed CFS regulations overlook solid biofuels: WPAC


August 26, 2019
By Gordon Murray

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Since 2017, the government of Canada has been developing the Clean Fuel Standard (CFS), a low carbon fuel standard-type policy, to reduce the lifecycle carbon intensity of fuels and energy used in Canada. The CFS aims to achieve 30 million tonnes CO2e (carbon dioxide equivalent) of annual reductions in greenhouse gas emissions (GHG) by 2030. Although not as high profile as carbon pricing and certainly more complex, the CFS has the potential to have a much greater impact on the structure and performance of Canada’s energy system.

The CFS regulations will cover all fossil fuels used in Canada, but will set separate requirements for fuels based upon their state of matter: liquid, gaseous, or solid. The CFS is being developed in a phased approach. Regulations for the liquid fossil fuel class are currently under development, with draft regulations planned for publication by early 2020 and final regulations by early 2021. Draft regulations for the gaseous and solid fuel classes are targeted for publication in 2021, with final regulations in 2022.

Proposed regulations for liquid fuels

Together with other energy stakeholders, the Wood Pellet Association of Canada (WPAC) has been providing input to Environment and Climate Change Canada (ECCC) as it works to design and shape the CFS. In June 2019, ECCC released the federal government’s proposed regulatory approach for liquid fuels.

The CFS will set performance standards for liquid fossil fuels based upon their lifecycle carbon intensity (CI). Each liquid fossil fuel will be assigned a target carbon intensity to be expressed in grams of CO2 equivalent per megajoule of fuel energy (g CO2e/MJ). Obligated parties – finished fossil fuel producers and importers – must reduce the carbon intensity of fuel over time. For example, ECCC proposes a heating oil 2016 baseline CI of 84 g CO2e/MJ must be reduced to 80.4 g CO2e/MJ by 2022 and to 74.0 g CO2e/MJ by 2030.

Under the ECCC proposed regulations, obligated parties (think Shell, Suncor, Imperial Oil, Irving) would have three ways to comply with the CFS:

  1. By reducing the carbon intensity of the fossil fuels they supply;
  2. By blending lower CI fuels, such as liquid biofuels, with fossil fuels; or
  3. By fuel switching in the transportation sector (e.g., replacing internal combustion vehicles with electric or hydrogen-powered vehicles).

The CFS would establish a compliance credit trading system whereby obligated parties could purchase compliance credits from credit generators (e.g., electric vehicle manufacturers or biofuel producers) or other obligated parties. At the end of the year, they would need to show that their compliance credits result in a CI of the fuel they supplied equal to or better than the regulatory requirements. If this is not the case, they are subject to a significant fine.

WPAC’s position

Upon review of ECCC’s proposed regulatory approach, WPAC is seriously concerned that the government will not allow end-use fuel switching in the buildings/stationary fuel use sector. We believe that it is unfair for ECCC to recognize fuel switching from gasoline to electricity or hydrogen in transportation, but not to recognize switching from heating oil to solid biofuels (wood pellets or chips). It discriminates against Canada’s second largest renewable energy product – solid biomass heating.

To this end, I wrote to ECCC describing WPAC’s position on the current CFS regulatory design and providing recommendations on how the regulations could be modified to remove the bias against wood pellets and other biomass heating fuels. I, along with technical and policy consultant Dr. Jamie Stephen of TorchLight Bioresources, met with ECCC representatives in Ottawa on Aug. 21, 2019. WPAC made the following arguments:

  • One of the three primary objectives of the CFS is low-cost compliance. By prohibiting recognition of fuel switching for stationary applications, ECCC will actually significantly increase the cost of CFS compliance, exclude the forest sector from participation in the short-term, and inhibit investment in the most proven commercial technology for displacement of heating oil – wood pellet and chip boilers.
  • Canada consumes approximately three billion litres of heating oil per year. The majority of heating oil is consumed by Canadians in rural and Atlantic Canada. The latter accounts for 44 per cent of heating oil consumption in the residential sector and 50 per cent of heating oil consumption in the commercial/institutional sectors. Rural and Atlantic Canada also have among the lowest per capita income. ECCC’s proposed regulatory approach will make CFS compliance for these low-income areas significantly more expensive than for those living in cities.
  • Under ECCC’s proposed regulatory approach, the principal mechanism for ensuring compliance from heating oil primary suppliers will be to blend renewable diesel with heating oil. Since heating oil has low CI relative to other liquid fuels and much of the crude used to produce heating oil is sourced from outside of Canada, there is less opportunity for upstream reductions than with other liquid fuels. The 2030 target of 74 g CO2e/MJ is less than heating oil combustion emissions, meaning upstream efficiency improvements will be insufficient to meet the requirements. The only heating oil-miscible fuel that can also be stored outside in winter, as is often the case with heating oil, is renewable diesel. Renewable diesel is currently trading for $2.00-2.50 CAD per litre in the U.S. An 18 per cent renewable diesel blend rate – the required rate to meet the 74 g CO2e/MJ 2030 CI obligation – would increase heating costs by approximately 33 per cent. This is in addition to a 15 per cent increase in heating costs associated with the carbon levy when applied to the 82 per cent heating oil content, resulting in an approximate 50 per cent increase in real heating costs. Allocation of renewable diesel to heating markets will also put unnecessary pricing pressure on transportation fuel markets, as renewable diesel is produced from feedstocks in relatively short supply.
  • Renewable diesel, at $2.00-2.50 per litre, has a useful heat fuel cost of $65-82 per gigajoule (GJ) ($234-295 per megawatt hour (MWh)). In contrast, wood pellets, at $300-350 per tonne for residential sales, have a useful heat fuel cost of $20-24 per GJ. Wood pellets also have half the of default renewable diesel (29 g CO2e/MJ). Wood chips are half the carbon intensity of wood pellets. This means, on an implied carbon price basis and assuming wholesale $0.75 per litre for heating oil, blending renewable diesel with heating oil has a fuel cost of $630/ per tonne CO2e to 884 per tonne CO2e. Switching from heating oil to wood pellets has a fuel cost of -$7 per tonne CO2e to -$49 per tonne CO2e ­– it actually saves money on a fuel basis, in addition to avoiding taxes on heating oil. But despite the cost savings, pellet boiler penetration of Canada’s heat market is low, largely because pellet boilers have higher capital costs compared to heating oil furnaces/boilers and the long amortization of the equipment. A well-designed CFS, with a provision for end-use fuel switching in liquid class stationary applications, would drive adoption of pellet boilers, thereby lowering ongoing fuel and delivered heat costs for rural and Atlantic Canadians.
  • ECCC argues that increasing the price for heating oil by blending renewable diesel would encourage building owners to switch to wood heat to save money. However, this contradicts the entire premise of the CFS. Simply increasing the price of business-as-usual and limiting compliance to blending a single fuel type would mean the CFS effectively functions as an additional carbon levy on heating oil. In this case, there is little reason to implement a complex policy such as the CFS.
  • Despite the billions of dollars invested in lignocellulosic liquid transportation biofuels, all technologies are still pre-commercial. This is particularly true for forest feedstock-based liquid transportation biofuels due to the recalcitrant structure of wood fibre. Co-processing of pyrolysis oil or biocrude in existing oil refineries at a meaningful volume will not occur before 2030. The forest sector represents over 75 per cent of annually-available biomass resources in Canada and its exclusion from participation in the liquids class, which ECCC seeks to account for over 75 per cent of GHG reductions under the CFS, because of this will dramatically increase the cost of compliance. This means Canadian consumers will be paying more for fuel than necessary. Due to limitations on available domestic lipid and starch supplies, excluding forest feedstocks will lead to more renewable fuel imports to Canada, thus contracting another one of ECCC’s CFS goals: attracting investment in domestic low-carbon fuels.
  • ECCC’s proposed regulatory approach is in apparent conflict with the government’s objective of phasing out diesel and heating oil in rural and remote communities. While grant programs, such as Clean Energy for Rural and Remote Communities (CERRC), are helpful, the government cannot (nor should it) provide sufficient grant funding to cover the billions in capital costs associated with phasing out these fuels. Under CERRC, $55 million of the total $220 million is allocated specifically to bioheat, and biomass CHP projects are eligible for the remaining funding. It is contradictory for the government to support bioheat displacement of heating oil with one policy, using taxpayer funds, only to exclude it from another policy. This contradiction sends mixed messages for investment and means Canadian taxpayers, rather than the private sector, will have to provide capital for boiler purchase and installation.
  • Since the government has made eliminating diesel and heating oil consumption in remote communities a priority, it is difficult to understand why ECCC would decide to exclude these fuels from CFS compliance. While the intention behind the exclusion is well-meaning, it misses two important points.
    • In most remote communities, the electricity generated by diesel fuel is already massively subsidized by other grid-connected electricity rate payers in the province, the provincial/territorial government, and/or the government of Canada. Therefore, excluding remote community diesel under the CFS reinforces the status-quo of energy insecurity and ensures remote community local electricity distribution companies (e.g., BC Hydro NIA, Hydro One Remotes) continue business as usual. This is not in the spirit of the CFS. As showcased by the CERRC program, many remote communities have opportunities for bioheat or biomass combined heat-and-power. The CFS is an opportunity to encourage local distribution companies to engage with residents to pursue these significant opportunities. They will not do so without a policy push.
    • Remote communities are already pursuing bioheat development because of potential cost savings. The CFS could accelerate this switch to renewable, low-carbon wood fuel resources. The Northwest Territories – particularly around Yellowknife – is one of the major bioheat hubs of Canada. Almost all the modern wood heat projects in N.W.T use wood pellets produced in Alberta and B.C., and the territory has more commercial pellet heating projects per capita than any other place in Canada. It is not logical to exclude regions that are ideal for switching to low-carbon fuels under the CFS. Capturing this opportunity requires including end-use fuel switching in stationary applications of liquids class. If end-use fuel switching in stationary applications is permitted, rapid decarbonization of Canada’s remote communities is likely. This is a stated priority for the federal government and the CFS could be designed to assist, rather than hinder, this.

Recognizing the value of wood pellets

ECCC has made a significant effort to design a compliance credit creation mechanism for electric and hydrogen fuel cell vehicles. Companies such as U.S.-based Tesla will generate and sell credits, which will allow them to offer their vehicles for lower cost to consumers. This will completely change the energy market dynamics in Canada.

It is only fair for the Canadian wood pellet industry, a world leader in decarbonization, to expect the same policy development effort. Several other countries, including the UK, Japan, Korea, and the U.S., recognize the value of Canadian wood pellets to decarbonization by purchasing over three million tonnes of our fuel every year.

Permitting end-use fuel switching in stationary liquid class applications under the CFS is not asking for special treatment – it is asking for the same treatment afforded foreign electric vehicle manufacturers. It is time Canada recognizes the value of its own fuel by designing policy that does not inhibit growth of this proven, clean, GHG-reducing, job-creating industry.

Gordon Murray is the executive director of the Wood Pellet Association of Canada