Proceedings of the Standing Senate Committee on
Energy, the Environment and Natural Resources
Issue 3 - Evidence - October 6, 2011
OTTAWA, Thursday, October 6, 2011
The Standing Senate Committee on Energy, the Environment and Natural Resources met this day at 8:08 a.m. to study the current state and future of Canada's energy sector (including alternative energy).
Senator W. David Angus (Chair) in the chair.
[English]
The Chair: Good morning to all those here in the room, colleagues, witnesses, our viewers watching these proceedings on the CPAC network, the web and other media. This is a formal meeting of the Standing Senate Committee on Energy, the Environment and Natural Resources. We are continuing our study into a strategic framework for a national energy strategy in Canada. I will introduce our witnesses in a moment.
[Translation]
I am David Angus; I am the chair of the committee and the senators around the table make up the committee.
[English]
We have Senator Grant Mitchell from Alberta, who is the vice-chair of this committee; Library of Parliament support staff Marc LeBlanc and Sam Banks; Senator Robert Peterson from Saskatchewan; Senator Tommy Banks from Alberta; our clerk, Lynn Gordon; Senator John Wallace from New Brunswick; and our pit bull from the Yukon, Senator Daniel Lang.
[Translation]
From Montreal, Quebec, we have Senator Judith Seidman, and another Quebecker by way of Manitoba, Senator Paul Massicotte.
[English]
I see familiar faces at the end of the room. We are continuing our work. Can you believe that to date, we have had testimony from some 170 witnesses in this study, 71 of whom appeared before us during our trips last winter to Montreal, Quebec and the provinces in Atlantic Canada. It is our hope and intention shortly to go west to visit Manitoba, Saskatchewan, perhaps some northern venues and definitely Calgary and Edmonton in Alberta. Then we will go on to Vancouver, British Columbia, as we try to finish our hearings and fact finding with a view to focusing down on our report, which we would anticipate having for the public by early June 2012.
This morning we have a two-part meeting. During the first hour, we will hear from the Forest Products Association of Canada and in the second hour, from the Canadian Geothermal Energy Association. These are two areas in which we have had only marginal input so far. It is especially interesting to hear about forest products as we have heard so much about the potential of forest products and by-products as an energy source.
We have seen the first gentleman here, Mr. Avrim Lazar, in various modes of expression, and we are delighted he could be with us so early this morning. Mr. Lazar is the President and CEO of the Forest Products Association of Canada since January 2002, and he also chairs the United Nations' Advisory Committee on Paper and Wood Products, the ACPWP.
Mr. Lazar has held senior policy positions in the Government of Canada in the ministries of Justice, Agriculture, Environment and Human Resources and Development. During this period, he was responsible for national policy in areas as diverse as climate change, biodiversity, child poverty, employment insurance and labour force training.
Next and not least is Catherine Cobden, who is Vice-President, Economics, for the Forest Products Association of Canada. With over 20 years' experience, Ms. Cobden is responsible for files affecting economic competitiveness in Canada's pulp, paper and wood products sector. She supports FPAC member companies on issues ranging from forest sector transformation, taxation, competition, energy and rail policy. She is also responsible for the Future Bio- pathways Project, an innovative look at the opportunities available for the forest products industry in the emerging bio-economy.
You were kind enough to provide us with substantial materials. We received a press release entitled "New study points to promising bio-future for Canada's forest industry," a media backgrounder on the Future Bio-pathways Project and a summary of its findings, entitled "Transforming Canada's forest products industry."
It is my understanding, Mr. Lazar, that you will speak at the outset. You do not have a prepared text and will share your wisdom with us in your own, off-the-top way. We are looking forward to hearing from you and then cross- examining you very closely afterwards.
Avrim Lazar, President and Chief Executive Officer, Forest Products Association of Canada: Good morning, senators, it is a good way to start the day. I understand you worked late last night, so any time I meet a taxpayer, I will tell them your senators work until late at night and are hard at it early in the morning.
The Chair: And they are awake the whole time.
Mr. Lazar: It has been my experience. I have heard rumours of people nodding off, but I have never had that opportunity. I have always been subject to lively cross-examination, and I am looking forward to it today.
Energy is a preoccupation of the forest industry. If you look at our wood or paper products, they are basically a tree plus energy. We take a tree and use energy to transform it into our usual products, so we are a large user of energy who is very dependent upon it.
The impact of using energy is a preoccupation of the forest industry because the changing climate, the increasing concentration of greenhouse gases, affects forests. Our industry is dependent upon healthy ecosystems and as the climate changes, the ecosystems respond. We have had the unfortunate experience of the pine beetle getting out of control because of extra warm seasons, and we are anticipating changes in forest structure as the climate changes.
We are both energy- and climate-change focused in our industry. We are currently a large part of Canada's energy system, and we know that you have been approaching this study understanding that our energy use is a system with various energy sources. The energy produced currently in Canada's forest industry is equivalent to the output of three nuclear reactors. It is a substantial amount, enough to power Vancouver full time.
All of that is produced; it is green, renewable bio-energy, so we are a large contributor to Canada's energy system right now. In our mills, we are at about 60 per cent renewable energy and we have an objective to go to 100 per cent renewable energy on a net basis.
The Chair: Just remind us, if you could, Mr. Lazar, about the three nuclear reactors; are they any particular size? I am not sure what you meant, but how many megawatts roughly would you be?
Mr. Lazar: Ms. Cobden is quickly flipping through her documents, hoping she will find it. If we do not, we will get it to you soon.
Catherine Cobden, Vice-President, Economics, Forest Products Association of Canada: The figure I have at my disposal is 2.5 gigajoules per year.
The Chair: Thank you. You will probably tell us, but as I said at the outset, this is an area where we have only barely scratched the surface. Is this energy that your industry produces hooked into the grid or is it all in ad hoc sorts of places?
Mr. Lazar: I would not call it ad hoc; most of it is used to power our mills.
The Chair: That is really what I meant — for the purposes of your own industry.
Mr. Lazar: That is right. We do sell to the grid and we do power the local communities in which we work, but the vast majority of it is used for the purposes of the industry.
Ms. Cobden: Mr. Chair, I also did just discover that I do have the data available in kilowatts; for 2009, over 5 million kilowatts was produced from our industry's by-product biomass.
Mr. Lazar: Ms. Cobden, in addition to being our chief economist, happens to be an engineer, which may well make this conversation more informed.
The Chair: Our sometime attendee, Senator McCoy, was kind enough to provide us with a lexicon book that demystified a lot of these words like "gigajoules" and how the energy business looks to the lay person. Unfortunately she is not here to work with you, Ms. Cobden, so we will be relying on you.
Mr. Lazar: When you process a tree, there is a lot of waste. In the past, that used to go to landfill or be burnt to get rid of it, creating pollution. Now we use our entire waste stream to produce energy and other by-products. This is part of an overall zero waste imperative that the industry works with. We use sawdust and bark, but also the black liquor — the glue that holds the tree together — as an energy source.
That is pretty well our current context. What is more interesting is that our most sober assessment would say we could probably triple our output — not just be a net exporter but a large exporter of energy. Whatever number Ms. Cobden has given us, multiply it by three and we have the green energy potential of the forest industry.
This would be a considerable contribution to the grid. Because many of our operations are relatively remote, it also could involve the production on site for the communities that surround us. It could also be a very significant contributor in liquid form into liquid fuels.
Not only are we capable of producing power and energy, but also we have now been working with various technologies to take wood fibre and transform it into liquid fuels, so we are producing biodiesel and bio-ethanol. What else are we producing?
Ms. Cobden: We have the possibility of producing bio-diluent as well, which is very relevant in an Alberta context.
Mr. Lazar: Do you want to talk about that a little more?
Ms. Cobden: One of the things that we are interested in looking at is our potential to support the development of Canada's energy supply chain, with some supportive green energy addition into the mix. Whether that is in the form of biofuels, as Mr. Lazar has mentioned, or in the form of a bio-diluent that helps to transport the raw and unprocessed over to the refineries, there is definitely the technology that is making that a real possibility.
One of the interesting developments is that we can now take solid wood, and as Mr. Lazar has mentioned, as a by- product of our operations, and convert it to liquid fuel in less than two seconds. This is a major technological breakthrough.
Mr. Lazar: For Canada, with our vast forest resources, we have a huge opportunity of greening our energy supply and also greening what we put in a pipeline by using the waste stream from the forest industry.
The Chair: Is that what you mean by the diluent?
Mr. Lazar: Yes. I read that as "dilutant," but I assume that "diluent" is a more precise term.
Ms. Cobden: It is a diluent. Apparently it goes in with the unprocessed fuel and through the pipeline to the refinery. I do not know the current structure of what they use as a diluent, but there is a very keen interest in terms of greening that process up to use it based on a wood waste residue. We have the potential to produce that. We are not producing this product yet, but we are interested in trying to produce this at full scale and use it to get the diluent, to replace existing diluent streams, which I believe are petroleum — perhaps someone here would know — with a biologically based product.
The Chair: It is sort of a cleansing substance, I guess.
Senator Banks: It makes it more able to go through a pipeline. It makes it less sticky.
Mr. Lazar: If part of what the oil sands industry wants to do is reduce the environmental footprint of what they produce, using the diluent from the forest industry, which is green and natural, gives them a step in the right direction and makes what flows through the pipeline more acceptable. Obviously, it does not solve all the problems, but our experience of environmental progress is that there is almost never a silver bullet; it is a thousand important steps that add up to a real change.
I did describe our future as having huge potential with tripling, going to the energy output of nine nuclear reactors, and not just for our mills but being integrated in all parts of the energy system. There are two important contextual pieces to that. The first is that you do not want to solve one environmental problem, you do not want to solve climate change and create another environmental problem by trashing the forest. Cutting down Canada's forests is not an environmentally progressive thing to do. Our proposal is not primarily to use trees as energy, but to use the waste stream from the forest products industry as energy.
We think it is essential that, whether it is the whole tree or the waste stream, any source of bio-material for energy be harvested according to the highest standards. Even in areas in which there is currently logging, substituting logging for energy from logging for wood and paper still has to be done in the highest, most environmentally sustainable way.
One of the advantages that our industry brings to the energy system is that where we harvest, we are subject to the highest international standards. All of our operations have been certified at an international level, independently audited to the highest international standards and we are working in close relationship with major environmental groups on a trajectory to improving year by year. We have signed an agreement for our operations in the boreal forest, with Canadian Parks and Wilderness Society, the David Suzuki Foundation, Greenpeace, Canopy — all the more aggressive environmental organizations — to ensure that our harvesting practices meet the highest possible standards and to ensure that the environmental community recognizes these standards in the marketplace. Whatever energy would come out of the forest industry would also come with the green credentials with how the bio-material was harvested.
The other contextual piece is that we cannot look at environmental issues without looking at jobs. This is part of why we entered into an agreement with the green groups, to ensure that jobs were taken into account when they talked and to ensure that environment is taken into account when we talk. If you look at green energy and jobs, the answer is fairly clear for our industry. Producing energy as a by-product of producing pulp, paper and lumber produces five times more jobs than just burning the tree.
We are not recommending the creation of a bio-energy industry just harvesting trees, hauling them across the wilderness and burning them somewhere. We are recommending the integration of a bio-energy industry into the existing pulp and paper and lumber industry. We are suggesting that — we are more than suggesting because we have done numerous economic and engineering studies to demonstrate it — from an environmental perspective, using the waste stream is far more intelligent than simply harvesting trees and burning them.
From a social perspective, you get five times the number of jobs, and from an economic perspective, what you are doing is extracting maximum value from every tree harvested. You get the lumber; you get the pulp; you get the bio- energy; and we can also extract all sorts of bio-products, bio-plastics, biofuels, bio-pharmaceuticals, even bio-cloth.
Senators, I will not go on much longer because these conversations are more interesting when we are in interaction. I know it is early in the morning to listen to people go on and on. I will just summarize that we applaud the Senate; we think Canada needs a national energy strategy. We think that strategy must address the energy needs of Canada, the economic growth potential for Canada, the jobs for Canada, but also ensure that Canada's role in the global energy system is a contributor to reducing rather than increasing changed climate. We are very glad to offer the forest industry as part of the solution on all of those fronts.
The Chair: Thank you, Mr. Lazar. Ms. Cobden, will you also speak? You will just interject in the answers.
Ms. Cobden: Correct.
Mr. Lazar: She is here to make sure I get it right.
The Chair: Mr. Lazar, you are very wise. I have a couple of questions on the association. Is the Forest Products Association of Canada the present iteration of what was once the Canadian Pulp and Paper Association, based in Montreal?
Mr. Lazar: It is. The Pulp and Paper Association was different in that it included only pulp and paper companies. The industry changed because you only produce pulp and paper from lumber. The way the industry works is that you harvest the tree, you saw out your lumber, and then the chip stream is used to produce pulp, which is then turned into paper. We are called the Forest Products Association of Canada because we have the whole integrated value chain in it. We represent about 70 per cent of the industry across the country, from Newfoundland to Vancouver Island. We are located here in Ottawa.
The Chair: How many members? You say 70 per cent.
Mr. Lazar: It is about 23 members. We generally have the larger integrated companies. The smaller enterprises tend to belong to the provincial associations to deal with some of the more detailed aspects of forestry regulation. We consult regularly with the provincial associations, so most of our positions are shared by the entire industry. There are few areas in which there can be regional differences, such as the softwood agreement on energy. I could say with quite a bit of confidence that all the regional associations would be exactly where we are on probably everything we are talking about today.
The Chair: For the benefit of committee members, there is a listing of the members and more details about the association in the paper prepared for us by the Library of Parliament. I think it would be appropriate, on behalf of my colleagues, that we salute your members and your industry for the great initiatives. It is an industry that has had major challenges in the last decade. To be increasing rather than reducing the number of Canadians employed is quite counterintuitive, it seems to me.
Senator Mitchell: Thanks very much. I remember the first time you appeared at a committee that I was in, Mr. Lazar. I was quite inspired then by what your organization was doing. At that time — three years ago, I think — you announced that your industry had achieved greenhouse gas emission reductions of 44 per cent below 1990 levels, which way surpassed Kyoto and was a beacon. You have gone the next step. Your industry has transformed itself. Today you have emphasized a powerful point. If you do this right and address climate change and challenges, you create more jobs. Your statistic of five times as many when you use this resource properly is very inspirational.
I noticed in our briefing that there were a couple of government-sponsored programs that may have facilitated this transformation. I am wondering if you can discuss this. One is the Investments in Forest Industry Transformation, IFIT, program of $100 million and the other is the Pulp and Paper Green Transformation Program that was $1 billion. Could you describe how those programs worked and where the money came from?
Mr. Lazar: I will give you a bit of history. The industry used to be relatively prosperous because the dollar was low and we did not have much competition. Then competition arrived, globalization reached us and the dollar went where it went.
At that time, the instincts of government were quite naturally to step in and help the industry when a mill was faltering with money to keep the mill going and new investments. That kind of intervention — subsidizing faltering mills — made the industry less competitive, not more competitive. I am not blaming anyone. It was our industry that came and said "Help me" and it was local MPs who cared about people in their ridings who stepped in to help. However, the net effect was an industry that was weaker rather than stronger.
At one point our association had quite an intense meeting. Everyone agreed that we would tell the government "no" to subsidies. We do not want anything that freezes the status quo. We would like the government to help with our transformation.
After we agreed and stuck with that as a policy, some of the companies snuck around and asked for handouts, but it has not been happening because the general membership of the association is against them.
What the governments have been doing instead is investing in research and development, in greening their operations, in new technology and new technical partnerships. The Pulp and Paper Green Transformation Program was a response to the American black liquor subsidy. The U.S. subsidy was done in a way that transformed their industry because it was a cash handout if you were creating green energy, but you did not have to change anything.
Canadian investment was quite a bit more intelligent because you could only get access to that $1-billion fund if you were improving a Canadian mill. Instead of being a giveaway, it was highly leveraged. It had to be a green improvement to the mill, an investment in a Canadian mill, and it had to have both long-term green and competitiveness advantages.
The IFIT program that followed is similar. It is for bringing some of these new technologies of bio-products, bio- plastics and new ways of adding value in the industry to commercial scale.
We have matured in our relationship with government, from looking to government to insulate us from change to asking government to accelerate our transformation. That being said, it has to be put in the context of the global marketplace where we are competing. Of course, we export most of what we make.
If you look at Europe, the United States and South America, their governments are investing more than ours in transformation. They are investing more in green energy, in new technology and in R & D. While the Canadian government deserves large praise and has received large thanks from our industry for investing right and intelligently and doing the things we have been asking for, in thinking of a national energy strategy for Canada, we have to put it in the context of the global marketplace.
We like to think of the globalized economy as competition between companies around the globe, but in fact the global economy is very much international rather than global. It is competition between nations. Those nations that invest not just the right amount of money but invest intelligently clearly get an economic advantage. That is probably a longer answer than you wanted.
Senator Mitchell: That is a powerful observation.
You mentioned that some of the power you produce in your industry is sold into the grid. I have a couple of questions about that.
Does that require some kind of fundamental change to a grid? When a plant starts doing this do you have to go to the power company and say "We need a two-way street."
Second, what is the economics of that power? Is it only sold into the grid because it is subsidized, or is it actually competitive? In some senses I guess it is competitive because once you have produced it you might as well sell it for whatever it is worth.
Ms. Cobden: Thank you very much for the question. Being able to sell excess power into the grid is an infrastructure question. In my experience, it is extremely dependent on the location of your mill.
We do know of mills in Canada that have a lot more green energy potential, but they have to do this negotiation with the power company to ensure that the infrastructure is in place. I am aware of mills and power companies pooling resources to put those assets in place. In other locations there is plenty of infrastructure in place, so it is a difficult question to answer specifically.
The economics: In some jurisdictions there are extra green credits you can get, as an example, for green energy. The economics themselves actually work very well from a pulp and paper mill perspective. It is less clear on the wood side. You can definitely produce power economically at these major operations, so you do not require these subsidies.
This power is produced in your waste stream. It requires a major capital investment for the boiler, the pollution control equipment and that sort of thing, but once you have that asset in place, yes.
Senator Mitchell: Would it pay me to buy it from you for my house? Would that be cheaper than buying the power that I am buying, coal-fired power? When you sell into the grid, is it at a competitive price?
Ms. Cobden: I think that by province, the rate question is quite complex, actually.
Senator Mitchell: Of course, it costs different amounts for you to produce your power in different locations.
Ms. Cobden: It would. I am not an expert in electricity rates, but my experience would suggest there are quite strong regulatory controls over rates. Sorry, I cannot answer that precisely.
Mr. Lazar: It is probably less of a technical and more of a bureaucratic question in terms of how you actually get access to the grid. I do not think there is any question that the energy we produce would be at a competitive rate because it is mostly from our waste stream. It does enter an interesting question: If the government wished to increase the production of renewable energy, where should the leverage be put? Should it be in paying a premium for renewable energy or should it be investing in capital infrastructure? Our industry's view is that it should be investing in capital infrastructure. We do not want to build capacity on the basis of government promises of subsidies because, given democracy, governments change, ministers' views change. The constancy of energy policy in Canada over the last 20 years would not reassure any investor.
Our preference, if the government chose to be helpful, is to help us transform the infrastructure to produce the green energy and then let the marketplace prevail, rather than make changes hoping that the subsidies will be there in the future.
Ms. Cobden: In the Future Bio-pathways Project, this is a very specific question we looked at. We had heard a lot of interest in producing, for example, ethanol from wood, and we wanted to study all of these different technologies to figure out where the sweet spots were in terms of being able to produce those products at a profitable rate, with job creation.
We looked at 37 technologies. Half of them would not be profitable. The point is that there are a lot of places to make mistakes if you try to subsidize directly those things. That again leads us to the conclusion of supporting getting the widgets in place and not the production of the product long-term.
Senator Banks: Congratulations on the boreal forest agreement and all those other things you are talking about. It was not always so, but you now, in some respects at least, are a model that we hope other industries might follow with that kind of cooperation.
What will it take to get to the point that you referred to as a potential of producing three times as much energy as you are now and becoming, therefore, a large contributor to the grid? It is a wonderful thing that you are powering your plants with 60 per cent of your own generated energy, because that means you are not pulling it out of the grid from other places. What will it take? I think you have described the process, but where are we in the process? How long will it take to get there, and how much progress do you foresee in the foreseeable future?
Mr. Lazar: It is hard to say because it depends upon the availability of cash for investment. The last few years have not been pretty for the forest industry. During the recessionary time, of course, our capital renewal stalled. People were using all their cash to basically write off their losses, as we were selling at a loss. We are now back at the point of reinvesting and our focus is on upgrades and investments that should have been made during the normal course of business that were not because of the recession.
If we had access to a lot of capital, it would be happening quite quickly because it is the economic thing to do. Given that we have not got access to capital, the answer to your question depends upon when does the American housing market restart. Will Europe find some way of balancing their social aspirations with the realities of their economics? It depends on all of those other things.
If there were a government fund available, even a repayable fund, the problem is not that this does not make sense economically, it is just the capital flows that are a problem for us. We could do it very quickly, a matter of several years — not two years, but certainly not seven or eight. We could move very quickly if the capital were available. One of the things we are discussing with Minister Oliver is the concept of an accelerator fund, which would be repayable to the government. To avoid the temptation for the government to fund things that do not make sense or for the industry to do things just because there is government money there, people would only take the money for stuff that they have to pay back, so they would only use it for things that are economic. However, it would get over the lack of capital available for these sorts of investments and accelerate our transformation to green energy.
Senator Seidman: I wanted to ask you about the CanmetENERGY in the Department of Natural Resources. Canada's in-house research group has the CanmetENERGY program, which conducts clean energy research and technology and technology development, R & D. Apparently, they are working on biomass energy. I would like to know if you work at all with the CanmetENERGY program, and whether industry itself is conducting its own biomass research and development.
Ms. Cobden: Thank you very much for this question, senator. In fact, one thing that is very interesting about the forest industry, that Mr. Lazar alluded to but I will elaborate upon, is that the industry has in the past been very focused on working within itself. In the perfect economic storm that we have faced, we have grown to realize that partnerships and collaboration are a critical piece of the future that is also part of what it takes, I believe, to truly get maximum advantage out of what we are suggesting.
In our efforts, we have now reached out and worked with over 75 experts from across this country, the top experts really in the field, including CanmetENERGY. They have made significant contribution to our work, predominantly in the Future Bio-pathways Project. Again, the industry decided we can look at this question of how to maximize value from the Canadian resource, but we had better not think we have all the answers. We opened our process up, invited any expert that we could hear of or that we have heard of from around the country. Absolutely, they are a fantastic group.
Within our industry, we have our significant capacity as well in the form of FPInnovations; they are our R & D group. They have significant relationships. I believe they have an MOU in place with CanmetENERGY to share research. Of course, they work closely with eight NSERC networks on the development of energy technology.
Senator Peterson: I will pursue the same question as Senator Banks, the matter of financial stability and your industry generating enough revenue to do the retooling and modernization that you have to do to do all the wonderful things with the tree that you spoke about this morning.
Do you think that will ever happen in the foreseeable future or do we need some type of infrastructure improvement model to make it happen? I understand a lot of your industry is aging, old, and needs change.
Mr. Lazar: Yes, it will happen. To put a bit of context on it, the global demand for our products is increasing every year. Even during the recession, demand has increased overall.
With global GDP doubling in the next 20 years and the huge growth in the emerging economies, we have been selling like crazy. We are Canada's largest exporter to China. There is a market demand for what we make.
However, we face competition. In the past, when demand has gone up, people have planted tree farms in places like Brazil, Uruguay or Chile. That is slowing down because they need the arable land for food and biofuel. The UN has estimated that what is needed to meet food and biofuel demands over the next 20 years is twice the available unused arable land. There will be a huge squeeze, and the only way people will meet the increased demand for forest products is from the boreal forest. It will be us, the Scandinavians and the Russians that do the supply.
South Americans will stay in the business but they will not expand enough to meet the demand. Russian infrastructure is not growing, it is imploding. They are not developing the resource. The Scandinavians are sophisticated, but they have a difficult cost structure. We will be competitive.
Given that there is a marketplace, the investment will come. The question is this: Will it come quickly enough and will it be applied in the right places? For that, we are suggesting that the government step in with this accelerator fund to accelerate the investments.
I should also mention the accelerated capital depreciation. Over the last many budgets, year by year, the government has extended accelerated capital depreciation. People tend to underestimate how powerful that is.
Capital sits in a central fund and most of these companies are multinationals. They say, should I put it in my French mill or the mill in Georgia or invest it in my mill in Uruguay or in a Canadian mill? Accelerated capital depreciation means that investment comes back faster if you put it in Canada. It is a highly leveraged tax writeoff. It is not changing the amount of the writeoff, it is just changing its speed. However, because investors like getting their money back fast, accelerated capital depreciation really changes investment decisions.
The difficulty we have had is the government does the right thing one year at a time and the investment decisions take several years to come through. We have not reached the potential of accelerated capital depreciation because capital planning cycles are longer than the certainty that the accelerated depreciation will be there.
Senator Lang: I would like to hear your general comments on the pine beetle infestation, which is also in the spruce forest as well. What implications will that have on your supply?
It is startling for a layman to view some of the videos of the devastation that has taken place in some parts of country, especially on the West Coast, Yukon and down into the United States. It is one thing to talk about expansion in your industry, but it is another thing to say what will happen to supply. Can you comment on that?
Mr. Lazar: Our general view of the pine beetle is we are completely against it. We have been on record now for many years as being against it. We will stay steadfast with that position. I know it is not nice for a big industry to pick on a little insect, but so far that little insect has been winning almost every round of this boxing match.
We will have supply. Obviously, it will be reduced. The industry will never be as big as it used to be; it will just be more profitable. We will not harvest as many trees as we used to but we will extract far more value from them.
We probably will not go back to the number of jobs we had at our peak, but we likely will sustain something close to what we have now. If you look at the direct and indirect, it amounts to about 840,000 jobs. Most of those will be sustained. Global competition will never get easy, but with extracting more value from every tree and other transformations we have been going through, we are well positioned to stay in the game.
It is devastating, of course. I say that for Canada as a whole, but individual communities whose forest reserve has been devastated feel the pain now and they will feel it for many years to come.
The question of what we learn from the pine beetle is interesting. The first thing we learn is that in some ways, we have misunderstood climate change. We always think of climate change as a geographic event — storms, ice, floods and sea levels going up and down — but it is not the geosphere that is most threatening. We will not be harmed as much by hurricanes and floods as we will by the biosphere.
The biosphere is an intimate interaction with the geosphere. When you change weather systems, you change ecosystems. Our experience in the forest industry is that the plague of the pine beetle is an example of why we should be very worried about climate change.
It is true that the pine beetle has always been with us and other factors have contributed to its uncontrolled expansion. However, the consensus is that the primary factor is the fact that we have not had very cold winters for a very long time in northern Alberta and B.C.
The pine beetle actually produces antifreeze as winter goes on. Unless you get a hard kill early in the season, its population just expands and expands. One of the more troubling aspects is that as the number of individuals expands, the adaptability of the beetle increases. Adaptations are one in a million. If you have a million beetles, you only have one sort of adaptive freak. If you have a gazillion beetles, you have a whole bunch of adaptive freaks. I know it is very technical, but it is true. What you get is what used to be an in-control pest out of control and having a chance to leap species.
That is part of life when you are dependent upon nature, which is why the threat to nature of a changed climate is of deep concern to the forest industry.
Senator Lang: The one area that you never mentioned was the question of forest fires. In our society, we fight the fire and subsequently we have the results of that. I understand that is a great contributor as well, the fact that we are not letting these forests go through their natural evolution.
Mr. Lazar: That is a contributor to both pine beetle and other forest diseases.
Senator Lang: A significant contributor.
Mr. Lazar: Yes.
Senator Lang: I want to move on to another area, the repayable revolving fund. I noticed there is little mention, if any, about the provincial responsibilities here. Of course, they have the direct responsibilities from a number of constitutional points of view, and also from a functional, practical point of view.
When you talk about creating a repayable revolving fund, what kind of money are we talking about here? Do you see an involvement by the provinces? What involvement do you see with industry? It is one thing to come to government, but it is another thing to identify the amount and how you will pay it back.
Mr. Lazar: We would love the provinces to chip in, but because our role as a national association is to speak to the federal government, we leave it to the provincial associations to speak to the provincial governments.
Many times, people have said the federal government contributions should be conditional on provinces' matching contributions. It could be looked at two ways — either leveraging or giving up the federal capacity to act and making it contingent upon provinces agreeing. I think there is ample reason to believe that there is a national and a federal energy responsibility, and that is what we are appealing to.
The amount is an interesting question. We have gone through all sorts of internal conversations on what would be the right amount. We know that the projects that would be realizable in the short term that would give us clear economic results could easily use upwards of $3 billion.
To be clear, as an industry we want the deficit under control, and we are very supportive of governments balancing the needs for investment with the needs of not doing what the other countries have done and sinking into an unmanageable debt.
We are not saying the government necessarily should invest that amount. Regardless of what is invested, it would be paid back. We are not interested in handouts; we are interested in acceleration.
The exact amount would be a balancing question for the Minister of Finance as to how much stimulation the economy needs at any particular moment and how important it is to sustain control on the deficit. Then the next question is, once that amount is known, how much of it should go to energy infrastructure, to the forest industry, and for accelerated change?
We would have to give Mr. Flaherty an exact number, which we will at some point, but the truth of the matter is that we could very easily and usefully take a $3-billion investment and transform it into clear economic and environmental gains, but we are not certain what we will ask for this time.
Senator Wallace: In terms of the capital requirements that you need to expand the bio-energy operations, I am wondering if there are examples or if you see the potential in any jurisdictions in Canada for partnering with other industries that would be in reasonably close proximity, where even the capital that is required may be provided by another industry — perhaps a refinery is near a mill — and together they provide the funding for the infrastructure in return, of course, for a supply of energy. Does that potential exist?
Mr. Lazar: It is huge. We have been reaching out to both the energy industry and the chemical industry. The chemical industry is very interested in biologically derived chemicals, as is the energy industry interested in bio-energy. We have been reaching out. In fact, we set up a network to create contacts. The forest industry traditionally has been relatively insular. Our investment tended to come from within. Our value chain was fairly specific to forestry, and so those sorts of partnerships between sectors are not traditional for the forest industry. The association is pretty well set up at church social events in which we invite grooms and prospective brides and people with gleams in their eye from all sorts of industries to meet each other, and that has been more successful than we thought it would be. There is quite a bit of energy there.
Senator Wallace: Generally, do the regulatory authorities in the various provinces permit that type of cogeneration partnering to happen?
Mr. Lazar: So far, our experience is that the regulatory authorities are not the barrier. The barrier is more the lack of a history of working relationships.
Senator Seidman: In relation to what Senator Wallace is asking you, and now you are discussing cross-sectoral partnerships, which you refer to in your press releases, would you be able to tell us what cross-sectoral partnerships those might be in terms of what companies? You mentioned chemical, and I believe Ms. Cobden also mentioned partnerships with many companies. Could you give us some idea what exactly they might be?
Ms. Cobden: We would love to do that. In fact, the dating service that Mr. Lazar is referring to is officially called the Bio-pathways Partnership Network. We have 165 companies that have now signed on to learn more about what the forest industry and their business objectives might be, and where we might be able to partner together.
These companies range from small start-up technology companies that have a unique and new way to use wood, through to the significant aerospace companies, chemical companies — the Dows and DuPonts of the world. Energy companies are starting to take part. We really are attracting the attention of a broad spectrum of the industrial sector of Canada.
In fact, it is hard to measure the success of this network, of the dating service, because obviously those detailed conversations about partnership would go confidential fairly quickly, but we are extremely encouraged by the uptake.
Senator Banks: When we go to Grande Prairie, Alberta, we will see examples of that.
Senator Wallace: I have one final question. It relates to the environmental issues around the burning of wood to produce energy. I think to the general public and any of us who have or have seen fireplaces in neighbourhoods, and the waste that comes from chimneys, there is a concern about it. I realize this is probably and undoubtedly a topic that we could talk for hours about, but generally what would you say about the environmental impacts of the bio-industry, burning wood to produce fuel, in relation to emissions as compared to other sources of energy production?
Ms. Cobden: In a non-technical way, regarding the efficiency of a fireplace, of course, we have all seen the smoke that comes from that and the particulate matter in that smoke. In the way that we are using wood residues as a fuel in our operations, there is existing what we refer to as best available control technology out there, and the Canadian forest industry has fully adopted that technology to control particulate emissions. That is not to say that there is not a mill or two in very specific spots that might need more work here, but there is no technological barrier to controlling emissions. We can burn this stuff very cleanly. We can capture the particulate and recycle it and deal with it.
Mr. Lazar: The old way, as any of you who has seen a beehive burner knows, which was basically burning the waste, was very dirty, very particulate-intensive.
Senator Massicotte: I would like to follow up on a couple of questions. The essence of what you are saying is that "We need a push to get it right; we need to be more efficient, and all we want from you," when I read your proposal, "is an accelerator fund, liquidity, a capital source"; yet when I read your written materials, we see these words often, "government has the policies right; we need a bit of government support." Is that all you need, the accelerator fund? I want to be clear, because everyone wants something from the government. Everyone says "We are profitable; we just need a little bit of help."
As you know, most of us here believe in the marketplace. Any involvement by the government distorts the marketplace and causes inefficiencies; it is usually not in the interests of a country. The problem we have here is that, because we do not want to price carbon, we are stuck with regulation and specific incentives for different industries, and then the problems start. How do you ensure it is fair and that the capital is allocated fairly? We have people like yourself saying, "Other people have this head start. We need a head start."
Could you comment on that? Do you really need government support, and why not just make it work on your own?
Mr. Lazar: I represent industrialists. If you ask any of them if they would like a free and open marketplace in which to compete, they would say, "If we could have a world in which governments stick to cops, firemen and border guards, and let the rest of us take care of things, that is what we want." That is my industry's fantasy.
However, they have to do business in the real world. In the real world, we face two things that are not like that fantasy. One is massive government intervention in a micro-economic sense, regulations and all sorts of micro- management details. The other is massive investment in other countries in their industry.
We have $1 billion and the U.S. got $9 billion. The impact of that on the U.S. industry is huge because they have paid down all their debt. It gave them a huge advantage in terms of new investments. As long as we are in an international competitive system in which countries are investing in their industries, our view, and I think it is empirically demonstrable, is that it is simply naive to think you can keep jobs and be competitive, competing against other countries' treasuries.
If there were a global trading system — economic system — in which governments were not investing heavily, we are in. We are just as smart, hard working, have a great fibre resource, great energy advantages and we think we can beat anyone in the world without any government help. However, we cannot beat the government of Brazil, which is investing massively in R & D. We cannot beat the governments of Europe and the United States. That is the reality of the global marketplace.
The reason we have a sorry history of industrial strategy in Canada is that we have mostly invested in areas and industries that do not have sound economics. Our experience of investments is basically social interventions rather than economic ones.
From a point of view of making money, which is different from social intervention, where governments get involved, from a perspective of an opportunity for the country to make money and keep its standard of living, industry- government partnerships can be very successful. Just look around the world.
Our big caveat is it that is not just lots of money. It is smartly spent money. You will see over the last 10 years our lobbying has been very consistent: no subsidies and nothing to help a mill that cannot survive by itself. Invest in accelerating transformation, and for that us that means increasing our productivity, increasing our green credentials, and increasing our capacity to sell into new markets and create new products.
Would we do this without government? Yes, we would. We would do it as fast as our competitors who have access to government money? No, we would not.
Senator Massicotte: It is a tough argument because in history there have been many studies. Over the last 50 to 75 years, most government capital interventions have been disastrous. Look at the United States' experience with the solar investment that President Obama is dealing with right now. Look at the R & D credit we are looking at again. People are saying we are not getting the bang for the buck. Would your views change very much if there was carbon pricing? Regulatory is very useful. You say we are a free enterprise, but free enterprise pays for all costs of their effect on society, including polluting the earth and your country; if you are polluting, there should be a cost component there. The argument is strong for carbon pricing. Would your views change if there was carbon pricing in Canada?
Mr. Lazar: It would certainly change a lot. Our industry was quite unique when Kyoto came out. We said, "Let us just implement this. We have to do something and we would rather do it sooner than later. Let us get ahead of the cost curve and make our investments in energy efficiency and alternative energy before other people do so that we would be advantaged in a new world." We have been at this for a long time. I was the policy lead at Environment Canada when we negotiated Kyoto. I am not saying that it was the finest moment in public policy. Some of the homework that governments might have done had not been done.
However, at the time we all thought we would act on this, and for a bunch of reasons we have chosen not to. We have supported the current government's view that we should not move ahead of the United States in a way that would disadvantage Canadian industry, but the U.S. is investing massively in renewable energy and we are not. Our view is we have to match their investments not just their regulations if we are going to match the U.S. system.
It is not just the forest industry now. It is now pretty well a unanimous view among industries, including the Council of Chief Executives. Would we all prefer a carbon pricing system rather than bit by bit government intervention? Of course we would, but we have not got it, and in the absence of that we have to follow the U.S. approach to things, which is investment in renewable so you actually have the infrastructure there.
I want to give you one example of how R & D pays. This piece of paper is made out of wood fibre. It is the stuff that holds up big, heavy trees. It is very strong in two dimensions. It is not in the third dimension. With government help, we have developed three-dimensional pulp. It is just as strong as paper in three dimensions, just as light, comes from trees, you can use it in airplanes, cars and any place where you want strength without weight. It is biologically derived from trees harvested at the highest standards, so it is not like producing plastics or heavy metals. A Canadian firm holds the global patents for three-dimensional pulp and is now developing products. Several years ago that firm was close to bankruptcy. Without government help in developing that technology, that firm would still be struggling today. Now they are looking at being a global leader. There are many stories like that.
It is true that many government investments fail. Many private investments fail. What is important is can we maximize the intelligence of them and do we actually recognize which succeed. The difference between private failure and public failure is that in private failure, people who invested go away angry and there is a sort of private disaster. No one talks about it much longer after it happens. Failures of public investment are, in the system of democracy, rehearsed and rehearsed.
The Chair: Mr. Lazar, Ms. Cobden, you have both been really terrific witnesses. You are adapting this whole subject matter and the steps you have been taking, notwithstanding perhaps the policies of a previous government, into the real world today. It sounds like you are at the forefront of innovation. If we understood well, you are advocating public-private partnerships as a positive way forward in many of these areas, which I think is a terrific thing.
I hope we can come back to you. I am sure we will have some further questions as we put our report together. If you think of things or see areas where you feel we may be not getting it, please communicate with us. I think you are great communicators, and I want to thank you both very much for your input this morning.
Colleagues, you can see the clock. Senator Wallace has booked this chair starting at 10:30, so we will get right on with our next half of this morning's hearing. I believe our witness, Mr. John McIlveen, is here with us in his capacity as the treasurer of the Canadian Geothermal Energy Association.
John McIlveen, Board Member, Canadian Geothermal Energy Association: Yes.
The Chair: However, this is not your full-time job or avocation. You are the researcher director with Jacob Securities Inc., an independent, full-service investment bank providing underwriting and financial advisory services to companies in the renewable power, infrastructure, energy and mining sectors. Have I got that right?
Mr. McIlveen: Yes.
The Chair: We have heard a lot about geothermal as we have taken soundings across the country. I think we first heard about it in Vancouver when we were told how the Olympics were going to be totally green, how Vancouver was going to be the greenest city in the universe and how the big real estate developments in and around Greater Vancouver were now basing both their heating in the winter and cooling in the summer on geothermal.
We have heard the caveats about how important the geological structure is in any particular area before one goes ahead with geothermal. Of course, we have heard most about how wonderful geothermal is, but how expensive it is.
We have been waiting with great anticipation for you and your association to appear today. You have provided us in advance with a deck from the Canadian Geothermal Energy Association, plus speaking notes that I believe will form the basis of your opening.
Mr. McIlveen: It is an honour to be here. I hope to convince you that geothermal is worth further study, and I would be happy to assist in that regard should you decide to do that. First, however, I would like to distinguish between geothermal heat and geothermal power. I am here to talk about power today as opposed to heat.
To begin with perhaps a surprising statistic, the Toronto Stock Exchange is the leading geothermal stock exchange in the world. Since 2004, almost $1 billion has been raised to finance geothermal power development. Of that $1 billion, only $33 million has been spent in Canada. That is just out there to show you that there is a market, there is money being invested and perhaps, with some policy, we can capture more of that money here in Canada.
Geothermal is not new, it has been around for more than 100 years. The first field was developed in Italy in 1904, I believe, and it is still operating today. There are different types of geothermal, and I will mention three of them here.
First, let us compare geothermal with other forms of renewable power. Geothermal is base-load power, it runs 24/7. You cannot shut down a nuclear or a coal plant with wind or solar or any other renewable, for that matter. You can only do that with geothermal. It is also as cheap as coal and cheaper than nuclear.
It has a higher capacity factor, up around 95 per cent or 98 per cent, which means its availability. That is versus solar at 20 per cent, wind at 30 per cent and coal at 80 per cent. It also has the smallest footprint of any renewable power that there is. I was down at a solar farm in Windsor last week. It took 225 acres for 20 megawatts. You might need a few acres for that equivalent in geothermal.
The Chair: We had a witness here a week ago showing us slides and telling us about the solar farm in Arnprior, which is near here, and how many acres that consumed. Your point is well taken and we are cognizant of the issue.
Mr. McIlveen: There are over 10,000 megawatts of geothermal worldwide in operation now; 3,000 megawatts of that is in the western U.S. Canada does not have any generating geothermal power currently, but there is thousands of megawatts potential in Canada.
The Chair: Will you be able to tell us why Canada is so far behind the curve on this?
Mr. McIlveen: Yes, but generally speaking, it is lack of policy.
The Chair: Do not be shy.
Mr. McIlveen: Okay. Each 500 megawatts of geothermal that we can develop is equivalent to shutting down an average-sized coal plant or nuclear reactor. For perspective, Canada's total power capacity is over 120,000 megawatts.
Senator Banks: From geothermal or all sources?
Mr. McIlveen: For all power in Canada, 120,000 megawatts.
The Chair: That is per?
Mr. McIlveen: That would be coal, nuclear, et cetera.
The Chair: Yes, but would that be per day, per year, per month?
Mr. McIlveen: That would be the capacity, which means that at any given hour, we can produce 120,000 megawatts.
Geothermal heat is everywhere, but it is closer to the surface where tectonic plates meet, volcanic areas — places like the Pacific Rim or Iceland. For example, in Nevada, it might be one kilometre below the surface, while in California it is three kilometres below the surface. Here in Ottawa it is probably 10 kilometres; no one has drilled so we do not quite know, but I am guessing that.
I will explain how geothermal power works. First, you drill 15-inch production wells, which can be around three kilometres deep. You line those with steel and pump the hot water out of the ground. The water is superheated to above the boiling point, from 100ºC to as high as 300ºC.
Below the surface, it cannot expand to steam because it is trapped. Once it is brought to the surface, it has the room to expand into steam, which rotates the turbine. It is the same way steam rotates the turbine in a coal plant.
Once we run that steam through the turbine, which makes the power, that steam is recaptured on the other side of the turbine. It is cooled and condensed back into a liquid state and put back into the ground. As long as you are putting that water back into the ground as fast as you are taking it out, you have a closed loop system that is perpetual. That is what makes it renewable.
The second point I will mention here today probably represents lower hanging fruit in Canada, because it relates to oil and gas wells. This is called co-produced geothermal power.
Oil and gas wells also produce a lot of hot water. This hot water is a real nuisance to oil and gas companies, and these wells usually produce more water than oil. This must be separated at great cost to the oil companies.
However, to me that hot water represents power; it is not just something I have to deal with to get a barrel of oil. You can generate power at the same time you are extracting oil from the ground. Since these oil and gas well sites are often remote or well off the grid, that could save a lot of transmission systems going to these remote areas, as you can produce power right on site.
Third, geo-pressure also refers to oil and gas wells. These are situations where there is a strong artesian flow or there is high enough pressure that no pumping action is needed. This has enough both mechanical and heat pressure to create a rotating turbine.
These also apply to shut-in oil and gas wells. Typically, for an oil and gas well, you would be doing well to extract 50 per cent of that field economically with the technologies we have today, but that well is often still good for producing power. It is estimated in the U.S. that probably half the shut-in oil and gas wells have this potential, and that number is north of 200,000 wells. The average production from a well is probably from a low of a quarter of a megawatt up to about three megawatts per well. There is work being done by the Department of Energy in the U.S. in conjunction with private sector companies on this, so this is something others are spending money on. I am not recommending that Canada start spending money on that. I think it is being done in Germany, the United States and Australia, to an extent, and they are well enough down the road that we will be able to benefit from whatever results they come up with.
My recommendations are more, first, on the policy side, to open it up. Right now there is no permanent policy. Right now there is a standard procedure to permit to do oil and gas exploration or mining exploration, but there is not one for geothermal. Local communities do not understand geothermal. This can add years to even breaking ground.
We need to standardize the permitting process and get going. Right now I only know of two in British Columbia that are permitted to start exploration and one in the Northwest Territories, whereas obviously there are hundreds of known sites that we could start work on. That would be the first step.
The second step would be the geothermal rights program, again similar to oil and gas and mining.
The third would be a country-wide geophysical survey. This would involve mostly aerial or satellite infrared to locate the hot spots in Canada.
The fourth would be appropriate tariffs. Although geothermal has actually got a lower levelized cost than coal, each site is unique and it relates to how deep you have to drill. For example, in Germany they are drilling about five kilometres, which is not very economical. For that, they have tariff rates of more than 200 euros per megawatt hour versus your residential rate of about $70 per megawatt hour. That is how they compensate for their drilling costs.
The big holdback with geothermal is the drilling risk itself. You can drill a dry hole, and these wells cost anywhere from $3 million in Idaho to $20 million in southern California, depending upon how deep and whether they have to line it with steel or titanium. You do not want to hit too many dry holes. There is a real gap in the market. Investors do not want to fund the first two wells. Private equity likes to see the first two successful production wells before coming into the market. This is not of interest to venture capital. Venture capital is looking for 20 times return on their money. This is more like utility-style returns, which are in the mid to high teens for geothermal versus a little lower for solar and wind.
After seeing those first two production wells, private equity may come in, or infrastructure funds, more particularly. Banks do not lend until you are about 80 per cent drilled, because of that drilling risk. To get the first two production wells would run the developer in the neighbourhood of $15 million to $20 million. It costs about $5 million to figure out where to drill and then another $10 million to $15 million to put two holes in the ground.
That is where the real problem in the market is. There is a gap. I personally am not in favour of direct grants. I think there are other things we can do through the tax program to get this moving along, such as the flow-through shares presently used in oil and gas to at least utilize the tax losses that are created by drilling.
Another program that I know is being toyed with in other areas of the world but is not yet in place anywhere is an insurance fund. After deciding how many megawatts we wanted in Canada, as a first step, we would set up a fund to drill the necessary number of wells. The successful wells would then pay a royalty back into this fund, which would cover the cost of the unsuccessful wells. The contribution to this insurance fund — which is the best way to describe it — would be one time. The fund would be designed to be self-funding thereafter.
That would be the most tailor-made program for geothermal. Geothermal is not like wind and solar. With wind and solar, once you have your permits and your money, it takes nine months to complete. With geothermal, one you have your permits and your money, it takes four years.
This is why the ITC grants in the U.S. that have returned 30 per cent of the capital costs once you are online have been so successful for wind and solar. The nine-month time frame is so short that a bridge lender will lend against that ITC tax credit, but they will not do so in geothermal. They will not wait four years and expose themselves to a lot of drilling risk to get to the certainty of the ITC grant.
A standard formula for renewables does not apply to geothermal. It needs something unique, something tailored to it, to get it going.
Those are the main points that I wanted to make this morning.
The Chair: Thank you very much. The Canadian Geothermal Energy Association is based in Alberta. Is that where you are based, sir?
Mr. McIlveen: I am based in Toronto. Calgary is the head office for CanGEA.
The Chair: You have not told us much about CanGEA's membership. Are there some big companies that specialize in geothermal power?
Mr. McIlveen: Yes, there are. Our membership includes many of the largest oil companies in Canada. It includes a lot of the large engineering firms like SNC-Lavalin and certainly all the geothermal companies. Enbridge is one example. Enbridge just tippy-toed into the water with a $20 million investment into the U.S. joint venture. They have just started. Although the number of members is not large, probably in the area of 40, there are some significant names.
The Chair: You painted a picture of tremendous potential, but said that we have not gotten off the mark very much in Canada. You indicated that that is because there has been no proactive policy, at either the provincial or federal level, to advance this sector. Is there any initiative under way at the moment? In doing this study there will be ample opportunity for us to promote or laud the potential or otherwise. You have succinctly described the challenges, but what is the reality; what is happening?
Mr. McIlveen: The reality is you cannot get a permit. B.C. has released two in the last ten years. There is one community one in the Northwest Territories, a small one-megawatt project. You cannot start without a permit. That is the place to start.
The Chair: If no permits are being issued, there is clearly a roadblock. There is some reason, although I do not know what it is.
Senator Mitchell: One of the big hang-ups for many alternative energy sources is that they are not competitive with coal, hydro or whatever they have to compete with, but you have said that this is competitive.
We have no trouble giving drilling permits for oil and gas. Why is there a problem with drilling permits for geothermal? You would think it would be much more benign. Any problems you have with geothermal you would have with oil and gas, would you not?
Mr. McIlveen: You would have fewer problems. If a coal plant is 1,000 on the emissions scale, geothermal is 1, but they do not understand that. There is no protocol. You have many different levels, from First Nations to community to provincial. They are all looking at it for the first time. There need to be some sort of guidelines for them to follow in terms of permitting it rather than reinventing the wheel each time this comes across their desk.
Senator Mitchell: Are we talking about two different scales of geothermal? I am under the impression I could actually have some kind of geothermal heating and cooling system for my home, which would not go down 10 kilometres, yet you seem to be talking about an industrial-scale geothermal that would go down and find boiling water that turns into steam. Are we talked about two fundamentally different forms of geothermal for heating here?
Mr. McIlveen: Yes, geothermal for heating and cooling, you are quite correct, it is only ten feet below the ground. Ten feet below the ground is 55 degrees Fahrenheit. That can be used to both heat and cool your home. It is a no- brainer. All you need is room for 200 feet of coil that can be done on the average two-car driveway or under your front yard. You can put this in your house for $25,000. That sounds like a lot, but you put that on your mortgage, that is a hundred dollars a month. Right away you eliminate your gas bill and a third of your electricity bill for over $300 a month. Right out of the gate you are saving $200 a month. This kind of program should be mandatory, as far as I am concerned, for all new construction.
Senator Mitchell: The other one is more industrial. You would actually fire much bigger generators.
Mr. McIlveen: Yes.
Senator Mitchell: I was interested in two things you said. One is that we need a lease system, like we have for oil and gas leases. Is that what you are saying? A government could actually start to sell leases on public land and make money doing that, like they do on oil and gas leases.
Mr. McIlveen: Yes, the BLM in the U.S. has made tens of millions of dollars selling leases for geothermal.
Senator Mitchell: New Brunswick and Nova Scotia, for example, that do not have the kind of resources that Alberta has, could actually sell leases just like Alberta.
Mr. McIlveen: The difference there was in the early 1980s with another oil price shock, all the oil companies were drilling for geothermal. As soon as oil prices fell, they all stopped. Geothermal stopped for about 10 years. However, they drilled so many holes that there was a lot of good geophysical knowledge about the sites. You were not just coming in and bidding on a site because there was steam rising out of the ground, which there usually is on these sites.
Senator Mitchell: Your succinct points of what we could do, the steps, are great. One of them was the survey. You said you could fly over and use thermal imaging, yet at the same time you said you could drill a dry hole or you can miss. How can you miss if you can actually fly over and take a picture and figure out there is heat there?
Mr. McIlveen: There are two elements. You not only have to hit heat, you have to hit water.
Senator Mitchell: That is very interesting. Thank you.
Senator Lang: My understanding is that back in the Yukon the energy corporation is giving geothermal possibility a hard look. I do not know exactly where they are at with it, but it would be a significant investment on their behalf if they go ahead and explore the possibility. That is somewhat removed from the capital city of Whitehorse, but I would assume it would be enough to tie in to the grid if it were to become a reality. Are you familiar with that?
Mr. McIlveen: Yes, I am. It is a combination power and district heating system.
Senator Lang: As a question of permitting, in this case here, perhaps you could tell us from your knowledge of what has happened in the Yukon, is the permitting system in place to allow that to go on? I am not quite clear. You have said you have had problems with permits, but it sounds like where I come from the permitting would go ahead if an application were made. I am not quite clear how that works across the country.
Also, do you have a protocol or a template that you can give a provincial government to say that if you put this in place, this is the process we could follow and then we could proceed accordingly?
Mr. McIlveen: In the Yukon case, there is a local champion for the cause, but there are no such champions, for example, in British Columbia. The grid in each province is basically staffed and run by coal and gas engineers. Engineers are the last people to actually try something new. They do not like to take risks. There just has to be a better understanding for them. Even in the United States, where they are cranking out these permits, it still can take two years.
Senator Lang: I do not want to beat this to death, but the permitting is the responsibility, as I understand, of the province or the territory. That is where the responsibility lies. Do you have a template to give the B.C. government or the New Brunswick government to say: Look, if you adopt this as a government for your regulatory process, then those operators that want to come in and take a look at this alternate energy source have a way to apply and know what the guidelines are? Have you done that?
Mr. McIlveen: Canadian Geothermal Energy Association has been working with the B.C. government, for example, in that regard. I believe we were quite influential in getting those last two permits issued in B.C.
Senator Lang: I want to move on to another area, following up with Senator Mitchell on the question of satellite. You mentioned satellite as a possibility to help identify what you call the hot spots in the geological formation across the country.
Have you had direct talks with the aerospace industry about this and just what exactly these new satellites that they are looking at putting in place could do on behalf of your industry in order to identify and refine the information that we have across the country?
Mr. McIlveen: I personally have not. The infrared survey would be a first step to pinpoint where you should do a little bit further work. I do not have a cost estimate or anything like that here for you today.
Senator Massicotte: The chair made reference to the issue of why we are not seeing more of this. Your background is in the investment industry. You seem to know what works and what does not work in our economy. You are saying you need a bit of help from the government, but try to minimize the subsidy side.
Talk to us about the fact that there has been drilling in some countries that has been intercepted and halted because it increased the risk of seismic activity. Many parts of Canada, as you know, are subject to that risk. Is that why we are not seeing more drilling? Is that an issue?
Mr. McIlveen: No. That is a totally different type of geothermal I did not touch on today. It is called EGS or engineered geothermal systems. That is a system where heat exists but no water exists. This has been tried in a few areas around the world where they bring in water by pipeline and put it down there, hoping to heat it and create their own system.
To me, if the water was not there in the first place, you probably should not put more down there. That has caused seismic shocks enough to, say, break a few windows.
Senator Massicotte: It is not an issue in Canada?
Mr. McIlveen: That is not what I am talking about here today. I am talking about looking for geothermal systems where water already exists.
The Chair: It is interesting that you were thinking along those lines. I notice you talk about how many nuclear reactors could be replaced. I think of Japan immediately. They have a problem. There will be no more nuclear plants built or refurbished, and they have no sources of energy. I do not know what the geological formations are. Is there some potential for Japan there?
Mr. McIlveen: Absolutely. The figures are in some of the backup notes I supplied. Japan has 536 megawatts of geothermal installed now and much more potential. Japan is an area where four major plates meet, hence its instability. It has huge geothermal potential.
Senator Banks: You are talking clearly about power generation and not heat.
Mr. McIlveen: Right.
Senator Banks: We are practically as interested in heat generation, for the reasons that you mentioned, the huge saving in energy just in our houses, if we, unlike practically everyone else in the world, used it where it is readily available.
You said the practicalities are that in Ottawa, for example, if the water is there, it is probably 10 kilometres below the earth. You said there are other places where steam is seen to be rising out of the ground. Are there such places in Canada?
Mr. McIlveen: Yes, there are places in Yukon, Northwest Territories and British Columbia. That is the first indication. Right now, geothermal is rarely explored for. You only start doing some drilling in areas where steam is rising out of the ground, or at least hot water. The geyser Old Faithful in Yellowstone National Park is a geothermal resource. You only start spending money where there is physical evidence at the surface that this heat exists.
Senator Banks: Would there be circumstances in which such a well, if it had commercial potential, would be able to generate both heat and power?
Mr. McIlveen: Yes. In all cases, they can generate both heat and power. The situation for the heat is you need to be a little bit closer to the users. Either that is a town or if you are in a remote spot generating power, there is still excess heat that could be used for, say, a greenhouse.
Senator Banks: You mentioned that the Bureau of Land Management in the United States has generated a lot of revenue by granting leases. Senator Lang referred to the fact that most drilling permits in Canada are given by the provinces. In your view, is there a role for any agency or function of the federal government to grant such a drilling permit — for example, on federal Crown lands?
Mr. McIlveen: For the government to sell leases, I think there has to have been work done to make people want to pay for that. The ones where the BLM has been successful are where the oil companies drilled literally hundreds of small test wells, so there was a lot of geological information available. People knew what they were buying.
Senator Banks: There is a lot of such geological information and seismological information available in Canada, is there not?
Mr. McIlveen: Especially in terms of oil and gas fields, which is why I call them the low-hanging fruit. Those are the fields where we do have a lot of information. There is a small project trying to get started in a shut-in field in Saskatchewan right now. Those are fields where there is a lot of information, and that is worth money.
Senator Banks: The information that exists is seismological; when anyone is exploring, that type of information is obtained. Is there a repository of it someplace that would relate to geothermal water and steam? Is there someplace that someone can go now and say that based on having done this seismological work, it is likely that is a good place to drill for geothermal steam?
Mr. McIlveen: I am not sure. Each oil and gas field, if it was a public company, would have to file a 53-101 statement about the field, so that investors could have confidence that third parties looked at it. They would exist in fields for public companies. However, I am not sure whether a central repository exists.
Senator Banks: We have urged such a thing on more than one occasion.
Senator Peterson: I still cannot understand what the problem is getting a permit. It is incredible. Why could you not say you are drilling for oil and you just happened to find hot water and deal with it then? I cannot understand what they are afraid of. What is the issue? There has to be something. What is it?
Mr. McIlveen: I do not have a good answer for you. Whether it is simply an exploratory permit or whether it is the environmental permit, there is a lack of knowledge. They are not sure what they are looking at. They start from square one each time they look at a permit, and perhaps you are dealing with a different level or a different area within, say, BC Hydro each time.
Senator Banks: When you say "they," you are referring always to the provinces and territories. That is who "they" are; right?
Mr. McIlveen: Yes. It is the provinces that issue these permits.
Senator Peterson: We do not seem to know why; you are only drilling a hole. Water is inert. There has to be something more to it. What are the governments afraid of? What could happen? You have all this information and you cannot drill a hole.
Senator Banks: Perhaps they are afraid of a big water spill.
Mr. McIlveen: I do not understand it either. It takes them so long to wrap their head around it. Having never done it before, perhaps they do not know what they should be looking for. It is a matter of education.
The Chair: Is there another answer, though? We run into this all the time. We are dealing here with the big exploiters and producers of fossil fuels who have huge drag in this country and in all levels of government. Some of them seem to be the main members of your association. Perhaps they do not want to compete with themselves.
It is sort of like the folklore and the myths that we hear about in the pharmaceutical industry, that there are all these wonderful discoveries that have been developed by small biotech firms, but they never get to the food and drug authority and get cleared for consumption. You know what I am saying.
My two colleagues, Senator Banks and Senator Peterson, are reflecting what we are all thinking. Here you have given a wonderful thumbnail sketch of the wonders of geothermal power, and then you are saying Canada is last in the list of countries doing anything about it. We are asking why, and you are saying it is permits.
Am I making any sense? Is there a resistance by the private sector to promoting it more, or to lobbying government and having an educational and communications process — a program to get this thing out in the open?
Mr. McIlveen: The permits are just the first roadblock, and it is not a Canada-specific thing. It is difficult anywhere in the world. Even where they are familiar with it, it can still take a year or two to get the permit. I cannot explain the inner workings of the local grid operator or environmental permitting agency —why it takes so long. I do not know of a single developer anywhere that does not say the same thing.
As for how much money is involved, it might take them $1 million to get an environmental permit by the time you satisfy and check off all the boxes on these things. It is a slow bureaucratic process.
Senator Banks: The difference is that notwithstanding how long it takes to get a permit to drill whatever, wherever, the pipeline of applications to do so is pretty full most of the time. You are saying that there is no pipeline.
Are there thousands of people anxious to drill experimental, exploratory or production hot steam wells who are simply stymied by the fact that they cannot get permits? It seems to me there is not much of a demand for it at the moment by investors. Am I right?
Mr. McIlveen: You are correct at this point. Given the condition of the stock market right now, no one is willing to finance a junior developer. The stock values of these junior developers are down probably 60 to 80 per cent today.
Senator Banks: Enbridge is not a junior developer.
Mr. McIlveen: No.
Senator Banks: I am reflecting the chair's question. If this is such a good idea, Enbridge certainly knows how to drill stuff and how to negotiate the process of environmental permits, as do many of its equally distinguished colleagues. Why are they not doing it?
Mr. McIlveen: In terms of the oil and gas companies that have been circling around it for quite a few years trying to get up the knowledge curve to enter it themselves, I think they will. They were in it in a big way in the 1980s, but they were limited by technology back then.
They were looking for super-hot fields, over 250ºC. Now we can make power on fields as low as 100ºC, so that opens up the site potential much more.
Enbridge did not come in and finance that first $15 million in drilling. They did not take that risk. After all, they are a risk avoider. They waited until the developer spent that $15 million, had two production wells, and then they came in. They spent two thirds of the money required for the project and only got a 20 per cent interest in the project. That is simply because they did not want to take the drilling risk. They are happy to let someone else do that and then come in and finance it.
Senator Banks: Is there a technology shortfall? Is it extant now? You said this is going on in many other places. I presume that if one were able to find a viable production source the technology now exists to make it work and to make it economically viable.
Mr. McIlveen: Yes. We do not need to invest in technology. There are many other countries investing in the technology that we can benefit from.
Senator Seidman: I am still pursuing this puzzling situation. I will recap what I think I heard you say in response to questions and in your presentation.
There is a huge up-front investment. There seems to be insufficient data on where to pursue this. I sense that a small fraction of the resource is close enough to transmission lines and population centres. The whole issue of drilling has become an environmental concern in the shale gas area, that is, the fracking issue.
Might that last issue have some impact on a willingness to pursue this right now?
Mr. McIlveen: From the agency issuing the permit it might. Again, this comes back to lack of knowledge. They may be thinking that we will get seismic shocks or something like that. That is probably part of it, but it is a matter of education. The systems I am talking about are not injecting new water or water that did not exist, which is where you get seismic shocks. There are only about three of those sites being tested around the world today. It is a very early-stage technology.
Senator Seidman: I understand what you are saying, although, as you know, there has been a moratorium in several provinces in this country on fracking in shale gas, so obviously there is enough concern. There are a couple of studies ongoing to look at the science to be sure that we know everything we need to know.
You express with a great deal of certainty, it seems to me, that this could not be a problem in geothermal exploration.
Mr. McIlveen: The permit could be conditional upon no fracking. In fracking, cold water is introduced into hot rock to break it up a little bit. That is not what I was talking about here, that is, creating a reservoir. It is putting cold water down to break up the rock to make fluids flow more freely below the surface. If that was a concern, I would think a conditional permit could be issued.
Senator Patterson: I suggest that we talk with Enbridge here. There is some reason this is not happening. It is bigger than permits. Let us get Enbridge here and find out what is going on. They spent $20 million.
The Chair: Maybe it is regulatory. We have had the National Energy Board here three times and we have had Enbridge here. They are giving permits to drill in the Arctic, which is really dangerous. We are all thinking the same thing.
Senator Dickson: My question is in relation to regulation. There is activity now in Alberta, the Northwest Territories and British Columbia. Is there specific legislation in those jurisdictions relating to permitting to drill a well of the nature you are talking about?
Mr. McIlveen: No, and that would help. Again, that is education. If the issuing agency had some parameters, some guidelines, we might be able to speed things along.
Senator Dickson: Is there any province or territory in Canada with specific legislation, or is it a discretionary matter with the power residing with the minister of whatever?
Mr. McIlveen: No province has a geothermal policy.
Senator Dickson: I would like to get your comments on the study done by the Geological Survey of Canada as to the potential. Their study was in July of 2011. Was that a thorough piece of work? They identified the enormous geothermal resources in Canada.
Mr. McIlveen: It was a first step. I would not call it thorough.
Senator Dickson: What would you suggest be done? What are the next steps?
Mr. McIlveen: You drill down. There are many levels from satellite down to aerial, and then the next step is on the ground. There are so many different methods. There is soil testing, water testing, underground seismic surveys. There is metal telluric testing. It is something like underground sonar, if you will. There are many levels of testing. Once you have identified a zone that looks promising, perhaps a little bit more work can be done on it.
Senator Dickson: Is that something that the Geological Survey of Canada could undertake? Have they undertaken that in other areas?
Mr. McIlveen: Yes, they are fully equipped to do that sort of testing.
Senator Dickson: Perhaps we could have the Geological Survey of Canada in to talk to us further about what their plans are.
The Chair: That is a very good suggestion, Senator Dickson.
Senator Mitchell: Mr. McIlveen, how big would one of these electrical power plants driven by geothermal heat be?
Mr. McIlveen: A 50-megawatt plant would be about as big as the front lawn of the Parliament Buildings. It would be about two stories high.
Senator Mitchell: That would produce 50 megawatts. Is that as big as they would ever get?
Mr. McIlveen: They are usually done in increments of 30 and 50. The largest field in the world is Geysers outside of San Francisco. It is generating about 800 megawatts, but that would be across a multitude of plants.
Senator Mitchell: How many megawatts would one generate in Canada? How would it compare to a current coal plant? If it is big enough, they send infrastructure out to it to get the power, do they not?
Mr. McIlveen: You would probably go in 25-megawatt increments, even though you think the field may be good enough for 200. That is just to gain knowledge of the field as you progress and reduce your risk.
Senator Mitchell: You are saying you might have plants that produce 200 megawatts?
Mr. McIlveen: Yes. They would be plants in tandem. Right now the newest development is modular, 5 megawatts or 10 megawatts, and would fit on a flat-bed truck. They are pre-made. You bring them right to the site and put them in a series.
Senator Mitchell: An average coal plant is a certain size. I cannot remember how big that would be. I am not looking for how many modulars you could put together; I am just asking, if you found a good site, how much power do you think could be generated from that site? Is it infinite? Could we do 120,000 megawatts? Does the technology have some limit? Does the heat in the ground and water limit the amount of power it can generate?
Mr. McIlveen: There is a limit to each site if you want it to last. You can take all the power you want out of it, but the goal is to put the water back in the ground to make it perpetual, so yes, there is a cap on that. A typical plant is in the 30 to 50 megawatt size, but the field itself may support much more than that, and only by stepping stones can you figure out what the optimal is for that site.
Senator Mitchell: How many houses, for example, would 50 megawatts drive?
Mr. McIlveen: One megawatt does about 800 average homes.
Senator Mitchell: It would be 4,000. Thanks.
The Chair: Mr. McIlveen, apart from our genuine thanks for your appearance here in coming down from Toronto, in the realm of advice from you to us, if you had one page to appear in our report, in terms of recommendations or a message you want to get out to the highest levels of policy-makers, what would that message be?
Mr. McIlveen: I think permitting guidelines, then a survey, then the final hurdle for developers is financing that first $15 million for two production wells. Probably the quickest way, and something that Canada is used to, is flow- through shares such as are used in oil and gas and mining right now. That may help a lot, and probably for the government to get involved monetarily in a larger way. I would suggest further study.
The Chair: From us to you, we do spend quite a bit of time here looking into the energy sector and sources of energy. You have added to and enhanced our knowledge. More important, you have piqued our curiosity in the area of communication. Why do we not already know what you have been telling us this morning? These questions and issues that you have postulated seem, on their face at least, to have simple answers to them. What communications endeavours have you embarked on to get the word out better? I would suggest it would be a good thing to do, from the association's point of view. You will notice the previous group here, the forest products industry, has had to retool entirely. It was an industry — the hewers of wood and drawers of water, the backbone of Canada's wonderful natural resources — that was evolving into a dying, moribund, sad sack thing. They have come here with PR people, lobbyists, the whole nine yards, and they are constantly getting the message out. They are constantly on our backs saying, "Did you know this? Did you know that?"
I look at your list of members. It is not a case that you do not have the money to do it. I see you here, not only an investment banker type, if I may say, but knowledgeable; you understand this thing. I suggest you all want to spend some time spreading the gospel. We will help. This is a good place to start.
Mr. McIlveen: Despite our membership, CanGEA is living on a shoestring budget. It does not have the resources to mount the all-out assault.
The Chair: That surprises me. In any event, I want to thank you again. I want to thank you, colleagues, for getting engaged with this.
We are here. You obviously know where to reach us. We look forward ourselves to learning more from the Canadian Geological Survey and others about this. Stay tuned for report.
Mr. McIlveen: It was my pleasure.
(The committee adjourned.)