Proceedings of the Standing Senate Committee on
Energy, the Environment and Natural Resources

Issue No. 7 - Evidence - May 3, 2016


OTTAWA, Tuesday, May 3, 2016

The Standing Senate Committee on Energy, the Environment and Natural Resources met this day at 5:12 p.m. to study the effects of transitioning to a low carbon economy.

Senator Richard Neufeld (Chair) in the chair.

[English]

The Chair: Welcome to this meeting of the Standing Senate Committee on Energy, the Environment and Natural Resources. My name is Richard Neufeld. I represent the province of British Columbia in the Senate and I'm chair of this committee.

I would like to welcome honourable senators, any members of the public with us in the room and viewers all across the country who are watching on television. As a reminder to those watching, these committee hearings are open to the public and also available by webcast on the sen.parl.gc.ca. You may also find more information on the schedule of witnesses on the website under "Senate Committees.''

I would now ask senators around the table to introduce themselves, beginning with my colleague to the right.

Senator Mitchell: Grant Mitchell from Alberta.

Senator MacDonald: Michael MacDonald from Nova Scotia.

[Translation]

Senator Massicotte: Paul J. Massicotte from Quebec.

Senator Ringuette: Pierrette Ringuette from New Brunswick.

Senator Mockler: Percy Mockler from New Brunswick.

[English]

Senator Johnson: Janis Johnson from Manitoba.

Senator Patterson: Dennis Patterson from Nunavut.

Senator Seidman: Judith Seidman from Montreal, Quebec.

The Chair: I'd also like to introduce our staff, beginning with the clerk, Marcy Zlotnick; and our two Library of Parliament analysts who are both here tonight, Sam Banks and Marc LeBlanc.

Today marks the sixth meeting for our study on the effects of transitioning to a low-carbon economy, as required to meet the Government of Canada's announced targets for greenhouse gas emission reductions.

In the first segment of our meeting I am pleased to welcome Max Gruenig, President, Ecologic Institute US, visiting us from Washington, D.C.

Welcome to you, sir, and thank you for joining us. You have a presentation to make and then we'll go to questions and answers. The floor is yours, sir.

Max Gruenig, President, Ecologic Institute US: Thank you, Senator Neufeld. Thank you, dear senators, for inviting me here today. I'm very honoured to be speaking here and I'm glad to hear of your interest in evidence from Germany. I'll speak on German experiences with the energy transition and the transition to a low-carbon economy.

A low-carbon economy does not imply the end of manufacturing or industrial production; it requires a change in how economic value is created. A deep decarbonization requires not only marginal efficiency improvements but changes in processes and a systems approach to leveraging the full efficiency potential.

The low-carbon economy requires a reduction in energy intensity, plus a shift in energy sources, plus changing carbon-intense processes across all sectors. Only the three together can yield a deep decarbonization.

Long term, the German energy transition, or Energiewende, will improve the competitiveness of Germany's production economy through vast improvements in energy efficiency and cutting the costs of energy imports. A significant step toward achieving this lies in decoupling GDP from greenhouse gas emissions and energy intensity. Doing so increases energy productivity, which in turn reduces overall energy costs relative to production output. Although the trends have already begun to bear this out, it does not happen overnight.

The dynamic nature of the Energiewende allows it to adapt to short- and medium-term business and economic needs. Many credit this dynamism and the willingness of governments to respond to the business community's fears as a prime factor in the Energiewende's success.

Essential to this dynamism are priorities. The clear targets of the Energiewende enable governments and businesses to make amendments and alterations to the process, knowing where the process will ultimately lead. As the Energiewende evolves from a function of regulations to a market-based system, that dynamism will continue to increase, allowing for continued responsiveness to real-time needs.

These are the foundational elements of the German energy transition. The strategy pursues three objectives in parallel, aiming for an affordable, low-carbon and secure energy system. These objectives translate into targets.

Regarding climate change mitigation, Germany will reduce its greenhouse gas emissions by 40 per cent by the year 2020 compared to 1990 levels. By the year 2050, greenhouse gas emissions will be 80 to 95 per cent below 1990 levels. This massive climate change mitigation effort translates into specific targets for the energy sector, both regarding the increase of the share of renewable energy to 18 per cent by 2020 and 60 per cent by 2050, as well as higher goals in the electricity sector — 35 per cent by 2020 and 80 per cent by 2050 respectively; and also improving energy efficiency by 2.1 per cent yearly until 2050, resulting in a net reduction of primary energy consumption by 50 per cent by the year 2050 compared to 2008 levels.

Where are we in terms of meeting the targets and objectives? In 2014, we were at minus 27.7 per cent greenhouse gas emissions compared to 1990. In 2015, we had 32.5 per cent of gross power consumption from renewable sources. To put this in perspective, the level was 3.2 per cent in 1991.

The energy intensity in industry as a whole has made significant progress in efficiency efforts. From 1990 to 2014, it has decreased from 3.9 gigajoules to 2.3 gigajoules per 1,000 euros value added. In services, energy intensity went down from 1.3 gigajoules per 1,000 euros in 1990 to 0.7 gigajoules per 1,000 euros in 2014.

While GDP more than doubled from 2000 to 2014, we could observe good progress in reducing CO2 intensity of GDP and also energy intensity of GDP, although not yet being in line with the ambitious targets set.

Affordability and energy efficiency work closely together. Higher energy costs can be compensated by more efficient use of the energy and, on the other hand, higher prices incentivize a more efficient use of energy.

Germany, as a major manufacturer and export-oriented economy, relies on secure, safe and affordable energy. Moreover, since low-income groups are more vulnerable to rising energy costs, affordable energy is also a key social prerogative. Therefore, the Energiewende aims for a market-oriented, cost-reducing energy transition.

Now looking at actual costs in household electricity bills for 2014, comparing Germany and Canada, an average household in Germany was estimated as having energy costs or electricity costs of 978 euros a year compared to Canada, with 851 euros per year. These numbers need to be put in perspective, though. While in Germany the cost was 29.1 cents per kilowatt hour compared to Canada's 7.5 cents per kilowatt hour, energy consumption in Germany on average was 3,300 kilowatt hours compared to 11,300 in Canada.

The share of electricity costs as part of the disposable income has remained stable since 1990, oscillating between 1.5 and 2.5 per cent. Wholesale electricity prices have been decreasing consistently with the price now at around 3.5 cents per kilowatt hour, much lower than the renewable levy which was at 6.35 cents in 2016.

Energy costs for industry have also remained relatively stable except for the peak energy pricing around 2008, which of course affected some of the energy-intense industries severely. Beyond that, there's no clear growth or development in energy costs for the major industries in Germany.

In order to ameliorate increased cost burdens on industry after the rollout of the first phase of the Energiewende, the government introduced exemptions for energy-intensive industries and also put forward reforms to the tax code that transferred labour costs to energy costs, ensuring that companies that continued to hire or, at a minimum, did not lay off employees would not face a higher tax bill from the energy transition. The eco-tax reform is a key step towards shifting costs from labour to energy, thus supporting the decarbonization.

Energy efficiency is difficult to communicate since its focus is on less instead of more. It is also contrary to many established business models. Only if businesses can create sufficient value in energy efficiency, will they embrace the approach. Thus, we need to reshape business models. Utilities need to shift from volume-oriented pricing to service- based income. On the other hand, consumers have reduced incentive for energy efficiency if pricing shifts from volume to service.

The second part of the decarbonization: The energy transition towards renewable energy covers replacing existing high-carbon energy sources with low-carbon sources in all sectors of the economy. The energy transition in Germany is far better poised for mass appeal since it does not relay a vision of loss and reduction but can support ideas of growth and development. The more positive appeal supports the political acceptance and makes it more favourable in implementation strategies. In addition, governments can, in practice, pass subsidies more freely than raise taxes and fees.

In the electricity sector, the decarbonization is well advanced in Germany but will require additional efforts to achieve the 80 and 100 per cent renewables targets in the sector.

Now, with regard to how the German surcharge works, the so-called EEG-Umlage is a surcharge or levy paid by the electricity consumers in Germany to finance the feed-in-tariff guaranteed by the government to renewable energy suppliers. It appears on the utility bill and is calculated based on individual energy consumption, with variations in the formula depending on the type of customer. In 2016, the surcharge for households, for example, is 6.35 cents per kilowatt hour. For energy-intensive industry or other "privileged'' consumers, exemptions are made to maintain the viability and economic stability. With the transition to auctions in setting the feed-in-tariffs for renewable energies, the surcharge will further decrease over time.

The surcharge reduction for large energy-intensive businesses is not subsidized by the government; rather, it has been transferred, via a calculation, to the smaller consumers, including households.

One long-term benefit of not using government funds to subsidize the Energiewende is to keep the market as self- reliant as possible, but another reason for increasing the surcharge on households is unique to the German experience of the Energiewende. In many cases, they are paying themselves. Due to the push to build capacity on the front end of the Energiewende, a large number of private citizens joined in the effort. In 2012, the last year with available data, 46.6 per cent of renewable power capacity was owned by citizens. This has laid the foundation for a decentralization of the energy system, engaging citizens and communities in the process.

The surcharge has, however, impacted monthly household bills, accounting for more than 22 per cent of the average monthly electricity bill in 2016. This is where the focus on energy efficiency and overall reduction in energy consumption begins to pay off for households, just as it does for businesses.

The impact on the electricity sector: With more electricity coming into the market at zero marginal cost, long-term cost recovery of energy generation and infrastructure becomes challenging. The new low-carbon energy market cannot be viewed anymore as a commodity market based on marginal costs but will need to be framed as a services market, where pricing is not linked to the marginal costs of generation but rather to the quality and reliability of service.

Even with these longer-term challenges ahead, the energy transition is one of the least at-risk aspects of the deep decarbonization. While some utilities may be under pressure at times, they can adapt to and manoeuvre in these new waters. In fact, new opportunities arise.

In the non-electricity sectors, the energy transition is confronted with more obstacles, especially in the field of transport, where systemic barriers prevent the deep decarbonization.

Impacts on reliability: The minutes of power outages in Germany are among the lowest in Europe and decrease over time. To put it in comparison, numbers for Poland average 254 minutes of power outage per year per customer; France, 68 minutes; Denmark, 11 minutes; Germany, 12.5 minutes. So Germany is second only to Denmark in Europe, and Denmark, obviously, is also on a track to energy transition.

The third part of a decarbonization strategy, process change, is a tremendous challenge, as many industrial processes are carbon intensive, such as cement and steel production. Shifting to new processes is not always feasible, but there are other options that are often ignored — shifting to different materials, such as wood or bio-based products or shifting the demand side. Thus, the low-carbon economy links directly to the circular economy. This also implies the cascade reuse of input throughout various processes and requires a higher degree of coordination among businesses than currently exists.

Process change is, without any doubt, the most challenging of the three pillars of the low-carbon economy but also the most creative element, with the highest potential for business opportunities and new economic development.

Triggering innovation is essential for all three layers of the low-carbon economy. The German government does so via a combination of push-and-pull measures.

One way to provide additional seed and experimental funding is the reuse of revenue from the European Union Emissions Trading System in a national climate fund that supports initiatives from all groups, including businesses, civil society and municipalities.

The climate fund also provides funding for creating new markets for new products which may initially not be economically viable. Once the market matures, the costs move down the curve and the support is phased out.

It is important to understand that the German low-carbon economy is not a planned economy. It is imperative to nudge the private sector and consumers with minimally invasive measures toward a fully dynamic new economic reality. At the same time, there is no ignoring that even though this is not a zero-sum game — and it is important to stress that — there will still be winners and losers. It is evident that those who stand to lose or fear that they will lose will oppose the measures, sometimes in a vehement way.

What are the next steps? The German Energiewende is a work-in-progress. It was founded on the understanding that a clean, sustainable energy system is necessary for a vibrant 21st century economy. The process is dynamic, but measurable progress has been made.

Central to this process are three phases. The first is building renewables capacity while increasing efficiencies. Introducing feed-in-tariffs and prioritizing grid access spurs investment in capacity creation. The surcharge is not only motivating consumers to reduce consumption, but it also provides the system with opportunities to adjust the burden for certain consumers to minimize consequences for the broader economy.

The second is managing capacity growth to maximize potential for an expanded, modernized grid. A decentralized grid allows for more efficient and more adaptable delivery of electricity. Managing growth to fit the needs of the grid ensures stability in market prices and continued improvements in efficiencies.

The third phase: Allowing markets to create a self-regenerative environment for continued innovations. Markets are better able to adapt to the real-time needs of the system, allowing a liberalized market to set prices, which will create more certainty in short-term prices, as well as promote competition and further innovation.

The successful achievement of the third phase is essentially the beginning of the first. The Energiewende has as its ultimate goal a clean, self-renewing system powered by clean renewable energy. Yet throughout each of these phases, engagement will continue to be the primary driver toward realizing the vision of a sustainable future.

The Chair: Thank you very much. We'll now go to questions, beginning with the deputy chair of the committee.

Senator Mitchell: Thanks, Mr. Gruenig. It's very uplifting to hear you because we've been struggling with the idea of how costs will impede progress in finding renewables in Canada, how the objectives are so high and how we could ever do them quickly.

I understand that when your program began to create renewables to produce electricity — renewable technologies and renewable plants and so on — that many people were arguing it was impossible to ever achieve more than 4 per cent of electricity production in Germany based on renewables. But in fact today you're at 33 per cent. Could you comment on how that surprise occurred? Many people seemed so pessimistic, saying that it could never be done, and yet you vastly exceeded your expectations.

Mr. Gruenig: There are two parts to that. One is the development on the cost side, which was very impressive. Of course, since both the wind industry and the solar industry are global, the impacts actually of the German push on promoting renewables are felt worldwide. This basically triggered a decrease in cost for new installed capacity, both for solar and for wind at the global scale, which now everybody can reap the benefits of.

The other part of the equation is the flexibility of the electricity grid. There have been tremendous reforms to the system since the introduction of the renewable support schemes. The reaction time of the transmission system operators has been improved, meaning that the coordination has been more digitalized and automated as well as increased in terms of speed of response and agility to respond.

It's surprising that the amount of outage time is decreasing year after year, even though we have an increased share of what's called intermittent or flexible renewable power sources. Hydro is not our main renewable source. Clearly it's wind as the main source and then solar, of course, with very impressive changes.

In 2014, we had a partial solar eclipse over Germany. You can imagine what this does to an area where there's a lot of solar capacity installed. The nice thing with the solar eclipse is that it's predictable. That's a good thing. But that's actually true for most of it. Weather services have improved over the last decades to a degree such that today, in a three-day forecast, it's predictable to see how much wind and solar electricity will be fed in.

The fears in the beginning 20 years ago, when technology-wise we were in a very different time zone, have been proven unfounded to a large degree. Of course, it's continually evolving.

Senator Mitchell: One thing about renewables is they're distributed generally. It can be done in local areas and actually support rural jobs and economic development. In Germany, there have been co-ops and other initiatives at community, town, village and city levels, so you really have a distributed network. Has that supported regional economic development? Is that another benefit of this?

Mr. Gruenig: Absolutely.

The interesting part is that renewable energy can be generated in areas that are not usually prone or susceptible to economic development and can create jobs. It's interesting and sometimes overlooked. It's not just the installation but there's also a large maintenance part in the jobs creation value. Of course, there's the tax base, which is interesting for remote areas because it's a continuous and reliable revenue stream for municipalities and territories receiving these installations.

There has been recently a little change in the focus with the opening of offshore wind parks, which are at the opposite end of the scale of the distributed renewables. These are very centralized and remote production centres. Still, we have very high citizen-owned or cooperative-owned shares of renewable production.

Senator Ringuette: You have a national plan. How much community and citizen implication is there in developing this plan and do they have quotas to meet?

Second, you have developed quite an industry with regard to renewable energy systems. What has been the impact on the German GDP to compensate for whatever else?

Mr. Gruenig: On the first question, there is no specific quota for citizen ownership or cooperative-owned renewables or renewable generation facilities. This was actually just the result of the high interest of the population in the topic and, I would say, a lack of interest in the large incumbent utilities on the topic. They kind of missed the trend and did not invest heavily until recently. Thus a market emerged where people got together and created economic entities to support their own entrepreneurial vision.

Senator Ringuette: I'm hearing that entire communities are now self-sufficient.

Mr. Gruenig: Yes.

Senator Ringuette: That's the reality.

Mr. Gruenig: Yes.

I also mentioned the National Climate Fund, which also supports municipalities in holistic approaches that cover electricity as well as heat and transport approaches to the energy transition.

Senator Ringuette: My second question was on the GDP.

Mr. Gruenig: This is a tricky one. There are various official numbers on both the GDP impact — or the added value — and job creation. Actually, it's very difficult to discern how far you go with green jobs, even if you reduce it to renewables jobs. It is difficult. For example, often we have solar installed on rooftops of family homes by the same people who would also work on your plumbing or your furnace in your house. Are these renewable jobs or not, or how much of them are renewables? This is tricky to answer. It's actually fully integrated in the economy and not an isolated part in many ways.

Senator Ringuette: So it is impossible for you to make a distinction of the real impact of the national plan.

Mr. Gruenig: You could give a lower boundary by just looking at the pure renewables jobs from companies that only do renewables or only do wind energy. If you go beyond and look also at the suppliers industry, which often has mixed portfolios, then you have to differentiate. Of course, components used in renewables can also be used in other contexts. There it becomes trickier and you have more uncertainty. Actually, the range of numbers you can get on this issue is relatively broad, but I'd be happy to provide you with a set of answers.

Senator Massicotte: Thank you for being with us today. I listened to you carefully. I read your speech carefully. Help me out. I'm trying to get a brief summary from a macro perspective. How did you get there?

I understand your billing rates for electricity are about 400 per cent higher than ours, and I have to presume that motivates consumers to cut down on energy consumption. I noticed, though, in your comments that you excluded heavy electricity users from any of your surcharges, which is exactly the opposite of what I would have thought was necessary. I also know you dropped your nuclear energy production quite a bit in the last few years, which I gather obviously increased your energy dependence on coal to some degree. In a macro sense, how did you get there with all those variables?

Mr. Gruenig: Regarding the justification for exemptions for the highest consumers, you are right to say that we can get a lot from very few people if we go for the energy-intensive industries. It is 100 times better to have these industrial activities happening in Germany, under German environmental laws and regulations, rather than having them move abroad into less-regulated space where they will possibly cause harm not only to the environment but also to people.

That is the argument behind protecting these industries and encouraging them to stay in Germany. It was a very conscious decision not to make Germany the safe haven for the world's steel and cement industries, but simply to maintain the level we are at right now.

On the other hand, these sectors are also covered by the European emissions trading scheme, which covers CO2 emissions. There is an incentive for the energy-intensive industries, beyond energy prices, to reduce their CO2 emissions and work on their greenhouse gas impact.

Senator Massicotte: I understand your answer. One could say your policy is very simple: Let your heavy polluters get away with it while you tax smaller consumers — who don't have any bargaining power and can't move — and let them pay the costs for the heavy polluters and charge residential consumers 400 per cent more than they would pay otherwise. It seems to work. Should we do the same?

Mr. Gruenig: Household energy pricing was actually lower before but was still above 20 cents even before the introduction. We came from a much higher level, but of course it still hurts. There was quite a discussion in the media about the burden on households and especially on low-income families, and there has been also a political debate about how to deal with that.

There is absolutely no question that this was an issue, but in the end you also have to see that this policy, even though there were little alterations throughout its course, went through three different government coalitions of very different colours. So it can be said with confidence that there is, more or less, a national consensus on proceeding along this route and maintaining Germany's position as an industrial, or manufacturing, economy.

Of course, you are right that it is a little contradictory to say that we are not following other countries' full-service industry approach, because that's an easy way to decarbonization. You just get rid of industry and import your industrial goods, and if you are only in banking and other services, then of course it's easy to decarbonize.

Here, the target is really decarbonization while keeping that manufacturing, but even the manufacturing sector has to change, and it has made improvements. There has been about a 30 per cent improvement in the energy intensity in heavy industry, but this is still far from reaching our overall targets in the Paris agreement, or other targets.

You also mentioned the nuclear question. That is, of course, both related and separate because the decision for the nuclear phase-out was primarily driven by the population's rejection of the risk of nuclear energy. There were two waves to that. One was the creation of the anti-nuclear movement, which gained momentum after Chernobyl. As you can imagine, Germany was directly affected by Chernobyl. There was nuclear fallout on German territory which, of course, creates a political impact.

That was 1986, and then came Fukushima. Even though that was very far away, the memory of Chernobyl came back immediately. Fukushima really ended "nuclear'' in Germany for good even though the direct impact was limited. It is not the same type of reactor and there is no comparison for seismic activity or tsunami risk, but it suddenly became apparent that we had to do something. We have 22 reactors, many of them are very old and not up to the highest standards, and they would have been phased out anyway at some point, so we are seeing a form of early phase- out retirement. We still have a share of nuclear but we are slowly phasing it out.

Senator Seidman: In your presentation on the impact on the electricity sector, you said the new low-carbon energy market cannot be viewed as a commodity market based on marginal costs but will need to be framed as a services market where pricing is not linked to the marginal cost of generation, but rather to the quality and reliability of the service. Then you went on to talk about the reliability in Germany and how it's second only to Denmark.

I'd like to ask you about how you maintain the integrity of your electric grid. To what do you attribute that reliability?

Mr. Gruenig: There are four transmission system operators, and we have full separation between them and the generating utilities. The transmission system operators are responsible for maintaining grid reliability in their territory, but they also coordinate and collaborate across their territories. The number of interventions has gone up considerably, and this is actually the result of having more of a variety of renewable energy in the system and, at the same time, of maybe having more flexibility or variation on the demand side. It is also a result of a more integrated European market, even though it is not yet fully integrated. There is a lot of balancing activity happening at the different levels.

There is also some curtailing happening on the renewables side. It's still relatively low overall and the cost burden of that is still limited, but we are seeing an increase there. All of this points to the question of actually changing the design of the electricity market because we currently have a wholesale market and a separate retail market, and they are not connected. The wholesale market experiences more frequent zero pricing and negative pricing due to the prevalence of wind and solar power, and also the fact that some of the conventional power generation cannot or does not want to react directly to the pricing signals.

If too many people do not want to react to the price signal, you go below zero in the market. That leads to this very low average in the wholesale market, which is very positive for those who can purchase directly on the wholesale market. Some heavy energy industries are purchasing directly on the wholesale market, and some follow the price curves with their production profile, which is a new business model so you can produce steel with close to zero energy costs, which is pretty much a business advantage when compared to European neighbours.

We already have had competitiveness complaints from Dutch manufacturers because of the low pricing in Germany, but there is definitely a need to work on this.

Senator Seidman: You mentioned that the renewables have helped in the efficiency of your grid, and the fact that you're connected to several countries as well, in other words, the EU. But what about investment in networks, in other words, infrastructure? Because in your next steps you talk about an expanded modernized and decentralized grid. Have you been making investments in that as well?

Mr. Gruenig: Yes, but this has definitely been phase 2 of the project. In the beginning this has been overlooked and ignored a little. A couple of years there was a political consensus that there is a need for action, and then there was a negotiating and funding period, and now construction is happening.

Basically it's a lot about a north-south connection, because we have more wind in the north at the coast, and we have consumption centres in the south. So we have to get electricity from the north to the south.

Senator MacDonald: When I look at the numbers for Europe and Germany, the cost of producing electricity is four times what it is in Canada. I have to confess, this frightens me as a Canadian. What is the lesson for us? To me the lesson seems to be to avoid what Germany and Europe are doing.

We've seen energy decline and economic stagnation since about 2006 all through Europe and much of the Western world, and a lot of this is tied into the cost of energy. I just don't know how we can continue to go in this direction, and for countries with an industrial base to stay competitive or to keep their industrial base. I'm wondering if you could respond to that.

Mr. Gruenig: You are referring to the household prices for electricity, and of course they are pretty high in Germany. They are roughly 30 euro cents per kilowatt hour, which is pretty high from a Canadian perspective. Even within Europe, it's one of the highest. Denmark is higher.

But this is not the price that's paid by industry. The wholesale price, basically the lower boundary, is 3.5 cents on average, and industry pays different prices in between, depending on their negotiated rates.

The energy costs are not severely relevant for most industries. For Germany, car manufacturing is a major industry. I will not go into the climate impact of the car industry after sales, but in the production process for motor vehicles, trailers and semi-trailers, less than 1 per cent of the production costs are energy related. This also applies to mechanical engineering. One per cent of the cost portfolio is energy related.

Very few industries have very high energy costs. Some of them are very local, like the cement industry, but then there is the chemical industry, which is also a very important industry for Germany, and then steel and metal. These have higher energy costs, but still the share of energy costs in the total cost portfolio is relatively stable over time; so we don't see that drastic increase, partly due to the reduced cost burden on them.

Your point about the stagnating GDP is true if you look at Europe overall, and Europe and Germany have suffered quite a bit. The 2009 crisis hit Germany, and we had some damper in 2012. Overall, Germany is still the powerhouse in the eurozone and the EU overall. It is actually coming out of the crisis as the leader and is the most prosperous country in the European Union. It is and is attracting a lot of people from the stagnating economies in the south, all of which did not venture on the renewables pathway.

Senator MacDonald: I'm not sure if that answers my question, but I'll ask you something different.

I am interested in one aspect of wind power. The more I look at on-land wind power, turbines, the more I am turning against them. They're expensive to maintain; they can't respond to demand. But I am intrigued by the potential of the huge offshore wind turbines that are being developed in Europe. Can you expand on what has been going on with them in terms of their efficiency and ability to produce power?

Mr. Gruenig: For wind, the costs have come down quite a bit, and we are at a point where wind is competitive with coal and gas, depending on the market. In Germany, offshore wind power makes sense to some degree because Germany is very densely populated; so we have land scarcity. In areas where land is a scarce resource, offshore wind power does make sense.

Offshore wind power has access to more stable, reliable and powerful wind throughout the year. The first two large wind parks in the Baltic Sea were delivering more than what was projected in the first year of production. They also worked without having major breakdowns in the material.

The technology is maturing and prices are coming down. However, in a situation where land is widely available, the cost advantage is relatively apparent on the onshore side because the technology is a lot more down to earth. Maintenance is simple and the cost of maintenance is a lot lower.

Senator Johnson: Do you believe that due to global efforts to transition to low-carbon economies it is getting more difficult to raise capital to fund the building of the new coal-fired facilities?

Mr. Gruenig: Yes. Definitely we are seeing a change in the financial markets, where there is now an increased awareness of the need to be climate responsible in their actions. So financing new coal projects has become more difficult.

However, at the same time, we still see the problem, even in Germany, that coal is difficult to get rid of because the more we have cheap, affordable gas in North America and renewables, this also lowers global coal prices, and coal is a global commodity.

Senator Johnson: The lower the prices, then, of course it's going to be used.

Mr. Gruenig: Exactly.

Senator Johnson: How are you getting past that, or will you?

Mr. Gruenig: Actually, the coal situation requires regulatory action, so we will see additional measures to then force a coal phase-out. We already see that some of the owners of open-top mining, lignite mining, are selling their assets. They are already anticipating the end of the business model and aren't waiting for regulators to take steps but are moving first. They do not want to be the last ones to leave the room.

Senator Johnson: It would be nice to see more of that regulation done in other Eastern European nations where it's very bad.

Mr. Gruenig: It's a big challenge.

Senator Johnson: It's a very big challenge, yes.

Has Germany's increase in renewable energy improved the country's energy security and is it less dependent on natural gas inputs from Russia?

Mr. Gruenig: Yes, but there are also several factors. There was a strong political will to reduce imports from Russia across the European Union. We've seen an overall decrease of imports of natural gas, but there are other factors.

In Germany, gas is used a lot for heating and in industrial processes. The heating factor is also weather dependent. Your import needs also depend a lot on factors that you cannot really control.

Yes, we see a decrease on import values from Russia, but we also have a second pipeline built. It's a mixed picture that also causes tension within the EU.

Senator Johnson: Of course it causes tension. How are you going to resolve that? That's another long discussion.

Mr. Gruenig: It's a long discussion.

Technically speaking, energy security is improving because of this situation. We're not moving towards importing more gas.

Senator Johnson: We just need more sun everywhere, right?

Mr. Gruenig: Yes.

Senator Mockler: There's a well-known parliamentarian that I know, and he's always making reference to Fred and Martha; that is, who pays? When you look at households, the people, the Freds and Marthas, do you think they're having a hard time paying their electrical bill?

Mr. Gruenig: Certainly there are people who have a hard time. However, looking at energy poverty — and there's a definition in Europe for "energy poverty,'' including people who live in homes not sufficiently heated or people living in homes that are not sufficiently lit up. This is not an issue in Germany. This is an issue in poor eastern neighbours in the European Union where energy poverty is a real issue.

In Germany, even after labour market and social welfare reforms, there is still a functioning welfare system that provides a basic level of safety, even to those who don't have access to the labour market. Actually, there is a basic layer of protection keeping people from falling into energy poverty.

Senator Mockler: When we look at energy efficiency programs, they're all over the world, or trying to be all over the world. Do you believe that rising energy cost is necessary to drive energy efficiency programs?

Mr. Gruenig: That's a good question, especially in times of relatively cheap energy — where we are nowadays, both for oil and natural gas. Of course, that's where energy efficiency cannot only drive on the cost side. You want additional benefits that come with energy efficiency. I think that's very important not only for households but also for businesses. If a product provides more utility in many dimensions, such as maybe an LED light that provides superior lighting compared to fluorescent lights in terms of light quality, plus it saves electricity, then that's where you can promote energy efficiency even if the cost benefit may be less significant — especially in an environment with lower energy costs compared to Germany.

In Germany, the energy efficiency benefits are relatively easy to get because you have high retail prices of about 30 cents per kilowatt hour.

The Chair: Right about now, 30 per cent of the electricity generated in Germany comes from renewable sources. Do you count nuclear as renewable?

Mr. Gruenig: No.

The Chair: What is the spread in the rest of your energy generation? How much is coal; how much is nuclear? Do you know?

Mr. Gruenig: We have a lot of what we call brown coal or lignite. It's still very dominant and it's pretty inefficient energy.

The Chair: Bad stuff?

Mr. Gruenig: Yes, if you've seen it.

The Chair: It's bad stuff.

Mr. Gruenig: It's quite interesting. It's domestic, so it's around 25 per cent. I don't know the current value, but the past value is around 25. Then about 12 per cent is nuclear. That's also decreasing because they lowered the output and because they're phasing out nuclear power plants. We then have hard coal which is all imported. That's about 17 per cent.

Then we have some natural gas. As I said, electricity from natural gas is actually a relatively small share of the electricity system because natural gas is a lot more expensive in Germany than in North America, mostly because we have very little domestic natural gas. It is imported at I think something like three times or four times the rate in North America.

The Chair: The record I have is 46 per cent coal. That's hard coal and lignite.

Natural gas is at about 11 per cent, and nuclear is going to be phased out by 2022.

Mr. Gruenig: Yes.

The Chair: What will you replace it with for firm energy? You need firm energy. It's great to have all the nice intermittent energy, but what will you replace it with?

Mr. Gruenig: Since it's a slow phase-out, it's replaced step-by-step by both renewables and, of course, we will have some coal remaining in the system for a while. There will be a coal phase-out. Mostly we're talking about a lignite phase-out. We will also keep natural gas in the system in Germany. That's why we have the direct import pipelines from Russia, ensuring that natural gas gets delivered.

The Chair: But you still need firm power.

Mr. Gruenig: They all deliver firm power. In the power markets, there was a term called "generating baseload.'' The power markets say, nowadays, that wind can generate baseload.

In Germany, there are rare days — the calm, cold, winter day, with no wind and no sun. Plus, let's say we have high demand on top. Of course, we can buffer a lot by being integrated in the European energy market, and that's actually becoming increasingly relevant because weather patterns are similar regionally, but across Europe there's enough diversity to balance these severe moments. But even within Germany, we have enough variation in weather patterns to actually make what we have now, the 30 per cent of renewables, just the beginning. There is no real threshold inside there. People always said 20 per cent is the maximum in terms of intermittent or flexible renewables. It turns out that we can go to 30 and even higher. We had days where we had a full system just on renewables.

The Chair: We've gone past the time. I probably shouldn't have asked those questions. Anyhow, thank you very much for your presentation and your answers. They were very good. I think everybody enjoyed them.

Welcome to the second portion of this meeting of the Standing Senate Committee on Energy, the Environment and Natural Resources. We are continuing our study on the effects of transitioning to a low-carbon economy. I am pleased to welcome, via video conference from Edmonton, Don Wharton, Managing Director for Carbon Transition for TransAlta Corporation.

Thank you very much for being with us today. Sorry we got started a little late, but the chamber sitting went a little longer than we expected.

I believe you have a presentation to make, and then we'll go to questions and answers. The floor is yours, sir.

Don Wharton, Managing Director for Carbon Transition, TransAlta Corporation: Thank you for having me here today. Again, my name is Don Wharton, and my role at TransAlta is the Managing Director for Carbon Transition, which I hope is appropriate for the discussion this afternoon.

I appreciate the opportunity to talk to you today about the perspective of a large, diversified Canadian electricity generator in terms of the carbon transition to a low-carbon economy that we see currently happening within Canada and around the world.

Before I begin, I'd like to provide you with TransAlta's experience in the electricity sector very briefly. We are one of Canada's largest publicly traded power generators and marketers of electricity, with over 100 years of experience in that regard. We're based in Calgary, with about 2,300 employees.

Uniquely in Canada, we have, I believe, a diversified geography. We're active in five provinces in Canada, four U.S. states and in Australia. We're diversified in terms of our fuel portfolio. We're in coal, natural gas, hydro, wind and solar.

We have 80 facilities around the world, with over 8,500 megawatts of generation. We are, interestingly, Canada's largest coal-fired generator. In the same breath, we're also the largest operator of wind energy in Canada, as well as the largest operator of hydro in the province of Alberta.

The majority of our generation is today in coal, although that's been significantly reduced from historic levels. We also, though, have about 35 per cent of our generation from natural gas and 20 per cent today from a combination of wind, hydro and solar, and that is growing annually.

For my remarks today, I'd like to focus on six topics that I hope will be of relevance and interest to the committee in terms of our perspective on big issues associated with power generation in Canada. Those six are: managing costs and impacts of transition; transitioning away from coal-fired generation, specifically; some views on investing in clean technology; views on interprovincial transmission potential, views on carbon pricing; and, finally, views on hydro power.

I want to give context to my remarks in a couple of ways. The first is to let you know that, as a generator, it's really in the DNA of our company to be concerned with three basic elements of changing fuel mix. One is the maintenance of reliability of the supply of electricity. That simply has to be priority number one for any power generator, and we take that responsibility as an absolute top priority.

The second one is keeping consumer cost impacts as low as possible as we start to shift fuel mix in Canada. That's a critical element. I've heard, even today, the interest of the committee in that particular aspect.

Finally, and maybe a slightly differently from what you may have heard previously, I want to make the point that maintaining the viability of industry participants is actually a critical element in terms of keeping those participants viable financially in order to actually invest in making the transition happen that we're looking to make happen.

It's with those underlying criteria that I'll make the remainder of my comments.

The first one, as I mentioned, was around managing cost impacts. TransAlta's observation is that we are already on a path to a lower carbon emissions future. We have seen transition occurring in almost every type of geography that we're actively involved in. The question is not one of if the transition is happening, in our minds, but, more importantly, how it's to be done.

The goal is to transform a region's fuel mix in a sustainable manner. That's really the challenge. Governments everywhere are struggling with the how part and exactly how to do that in a way that meets the criteria that I rolled out earlier.

We believe that it's possible to achieve emission reductions while minimizing price impacts, but clearly the role of government in policy making is critical in terms of designing policies that help to make that transition both sustainable and, most importantly, at a cost that's bearable by all electricity consumers.

I would like to also mention that it's important, at least in my view, to recognize that almost every electricity market in Canada is different and that solutions in one jurisdiction may well not work for another. Canada's electricity market has evolved in a very regional way, largely managed by provincial jurisdictions, very different across the country. So I will make remarks, but I want to emphasize that we need to be careful not to take those as generalizations. I hope to, in the questions, get at perhaps more specific answers on one aspect or another.

The other thing to mention is that we actually do believe that electricity prices are going to be rising anyway, even without a transition to a cleaner economy. That really relates to the need for large investment in infrastructure in electricity across the country, the need to replace retiring assets of any sort, quite frankly, with newer assets, which always results in a larger cost or a higher cost of generation than long-lived, legacy and fully depreciated assets. So I think it's important to recognize from a cost perspective that we will need to deal with cost impacts on electricity consumers in one fashion or another, and on top of that we will add the costs associated with transitioning certain types of fuel to a cleaner generation. It's a two-stepper, if you like.

Let me talk specifically for a minute about the transition of coal-fired generation, something that's very important to our company. As a large coal-fired generator today, it is very topical in regions like Alberta.

Our coal-fired portfolio has gone from about 70 per cent coal 10 years ago to about 45 per cent of our fuel mix today. We see that continuing, certainly driven by environmental imperatives. The federal greenhouse gas regulations on coal-fired generation, which were promulgated in 2011, set part of the stage for the earlier retirement of coal generation. Other provinces, including Alberta, are looking to accelerate that phase-out. We recognize that it's a representation of social desire; so certainly we're not arguing against it.

I want to point out that we certainly believe that it's important to phase the transition away from coal in certain jurisdictions that are highly dependent on it today in a very careful manner. That's certainly not just a self-interested comment from our company's perspective. We actually believe that aggressive, pre-emptive decisions to retire coal- fired generation make good headlines, but they aren't necessarily the sustainable manner in which you want to transition your fuel economy. Certainly in some respects, they could create challenges with reliability on grids and unnecessarily higher costs of generation, as opposed to a better scenario, perhaps, where coal is still transitioning in a careful, managed fashion, which allows it to support the entry of new cleaner generation renewables, maintain the reliability of grids and also keep the companies making the transition viable so that they can continue to invest.

Getting to the how part, it really is attention to detail about how coal is moved out of Canada's energy mix in a careful, managed and thoughtful way, and not simply by decree.

I want to talk briefly about clean technology investment and our views on that. On the fossil fuel front, we see real potential in the near term, given this transition from coal, to look at coal-to-gas conversion, particularly in Alberta. We think that interesting step could allow coal units to transition at a lower cost than a complete shutdown and replacement by new technology. It has some potential and we're certainly one company looking seriously at the potential for converting some of our coal units to natural gas firing.

Some of you may be aware that we've also had a history of examining carbon capture and storage as a technology to reduce emissions on coal-fired generation. We worked on a project with both federal and Alberta provincial funding a few years ago. It turned out that at the time it was not an economic prospect, and we shelved that work. We continue to monitor that technology carefully and believe that there may be some breakthroughs to allow coal to continue to be used in a clean way, in fact cleaner than natural gas generation.

We were one of Canada's early investors in wind technology. We've seen dramatic reductions in the cost of wind generation over the last, say, 15 years. We've seen increases in scale and capacity factors for wind generation that together have helped to bring down the cost of wind generation to the point where in some regions it's close to being competitive with some traditional baseload fuels. We could perhaps talk more about that in a minute.

As a company, we have invested in solar generation. We see solar as being about where wind was 15 years ago, which means that for pricing today, solar is not directly competitive without some form of support subsidy or requirement by governments. We do see it on the same kind of trend line for improving performance, reducing costs and ultimately getting to close to where wind is today. We are investing in solar and see it as a leading-edge technology.

We're also looking at battery storage and have several projects under way here in Alberta to look at the potential for electricity storage. Of course, it would be a tremendous breakthrough if that technology proved both economic and at a scale that was able to make changes to how electricity actually flows. It would change the whole nature of our business. We believe we're perhaps 15 to 20 years away from a very large-scale, robust shift in that technology; but it is fascinating and we are involved.

We are finding that in all of the jurisdictions where we operate in Canada, the U.S. and Australia, regardless of the fuel type and type of generation we're building, it's becoming increasingly difficult to site almost any kind of generation. Each generation technology seems to have challenges with respect to public acceptance and environmental footprint. I'll give you an example.

In early days of wind generation in Alberta, it was easy and straightforward with lots of public support to build a wind farm in southern Alberta. We were welcomed with open arms. Increasingly we're seeing, not so much in Alberta but in other jurisdictions, resistance to wind generation in some locations, which has to be dealt with.

To give you another example, in order for a solar farm that we own in Massachusetts to produce the same amount of generation that a 100-megawatt coal plant would produce, we would need a footprint of about 4,600 football fields. That's not an insignificant statistic. I just wanted to recognize that regardless of where we go with the transition, we're going to have challenges in siting new generation.

Briefly I want to mention transmission. As I mentioned earlier, without the changes in generation mix that we're looking to in a transformational environment, we would have to invest significantly in Canada's transmission infrastructure in order to achieve a reliable supply across the country. One thing mentioned frequently, and it was a discussion at the first ministers' meetings, was around the idea of interprovincial electricity transmission as potentially a contributor to a clean energy transformation.

While in our view it is correct that that can contribute to the optimization of cleaner energy across the country, I want to point out that there is a challenge. Given the regionalism of electricity markets across the country, it's important for the committee to recognize that should we build large-scale interprovincial transmission, there could be significant repercussions in terms of the effect of that imported electricity on certain markets, and the impact on electricity prices, on the incumbent electricity generators and on the regulatory frameworks that might be different across the jurisdictions making this happen.

It's not a simple thing. It is challenging. I simply want to point out that while interprovincial transmission is an interesting idea, it's not exactly straightforward.

Carbon pricing might be of interest to this committee. TransAlta is operating in a variety of jurisdictions that already have carbon pricing, such as Alberta and B.C. There's cap and trade in Quebec and soon to be in Ontario. We're operating in California and Australia. As a company, we support the concept of putting a price on carbon in some form or fashion. We believe that markets respond well to that kind of signal. However, based on our experience, I would caution that ideas, for example of a national carbon price, are perhaps a challenge for exactly those reasons that I was talking about earlier. The diversity of the legacy situation across the country is so different that we would worry that a single carbon price across the country might be expeditious in terms of interprovincial trading of carbon but could be very challenging in terms of a differentiated impact on different jurisdictions based on their legacy fuel mix, their regulatory framework, their market design and that kind of thing. Again, that is something to be cognizant of.

The final point I wanted to raise is around hydro. We are actively involved in hydro generation and have been for 100 years. We are a strong believer in the value of hydro. In fact, in jurisdictions where we have hydro, we see the value of hydro in terms of not only being clean but also being very available for system support, ancillary support and energy storage. It has a tremendous amount of attributes that can be beneficial to reducing overall emissions associated with power generation.

However, there are challenges with the capital requirements of new hydro. Today in Alberta, for example, it is not directly competitive with natural gas and even coal or wind, for that matter. The question is: How do we move toward an increased use of hydro in jurisdictions that have options that are more competitively priced, keeping in mind that we want to keep the costs to consumers as low as possible? I leave that as a question as opposed to a solution, but I wanted to make the committee aware of our views on that.

Let me conclude by saying that as a company we do see that this transition is already under way. We are supportive of doing that in a thoughtful, careful and responsible manner. As we progress to the next step of evolution in our industry, we look forward to engaging with provincial and federal governments to discuss how policies and programs that will support that will continue.

Thank you for having me today. I look forward to your questions.

The Chair: Thank you very much, Mr. Wharton. We'll now go to questions.

Senator Massicotte: Thank you for being with us, Mr. Wharton.

Let me be direct. The code words I hear from you are "be careful of competition; be careful of hydro; be careful of legacy assets.'' Your company has invested lots of money in the coal plants which generate most of the electricity. The message I am getting is be careful. To the extent that you wanted to have restrictive regulations on it, it will affect us. It will affect our costs and our costs to consumers. That's what I hear.

What do you recommend relative to the fact that you are a big producer of electricity via coal, yet we want to go green? What do you recommend specifically? What should regulations look like from the federal government side?

Mr. Wharton: I will speak specifically about the Alberta situation because that's where we have our coal assets in Canada. We are already in discussions with the Alberta government regarding how this is to be done.

To my point, there is a need, in our view, for a known and certain schedule for coal plant retirements that are date specific if they are different than the federal retirement dates that are currently in place. That certainty of "when'' is an important element in terms of planning not only for the replacement of that generation but also for maintaining the reliability of the system. Yes, a certainty of schedule of coal transition is important.

Speaking strategically, if I were a government policy maker, I think I would recognize that if I were to retire coal in an aggressive, immediate manner in Alberta, you would get a dash to natural gas generation as the only technology able to fill the void that quickly in terms of the required supply of base flow generation as opposed to a scenario in which you might carefully transition coal, keeping some available for baseload support of the grid and a reliable system, and allowing renewable energy — wind, solar or other technologies — to enter at a more reasonable pace and be fully supported. The grid is fine. The renewables can grow on their own accord and coal can slowly retire.

Senator Massicotte: Let's say, theoretically, that we use the U.S. regulations that Obama has pushed out on coal. If we applied those to your industry, how would that look compared to the current situation?

Mr. Wharton: In my view, there is one attribute of the U.S. Clean Power Plan that I think is worth some scrutiny; that is, the plan essentially provides simple targets to jurisdictions, to states, to achieve certain levels of reduction. It's not prescriptive. It doesn't determine what kinds of fuel you would use or how to achieve the targets, but it simply sets the target for achievement in emission reductions. That certainly provides industry with much more flexibility. It provides local or state governments with more planning flexibility as opposed to a fuel-specific and prescriptive type of reduction policy which may or may not be the best.

Senator Johnson: Good evening. You have been very busy in your company transitioning. In terms of your renewable generating facilities, which you have been expanding in your portfolio of renewable wind and solar over the last few years, does renewable generation still rely on government measures or subsidies to be competitive with fossil fuel generation?

Mr. Wharton: As a general statement I would say yes, it does to some extent in terms of wind and certainly for solar. I would even put hydro generation in there in regions where it's competing with fossil fuel generation, such as in Alberta.

Senator Johnson: How is Alberta doing in terms of wind? I'm from Manitoba. We have lots of wind, but I don't think we have been using it to the extent you have, have we?

Mr. Wharton: I'm not sure statistically if we're still the largest wind province in Canada, but we're one of the top two or three in terms of installed capacity.

Recently, the investment in wind generation has leveled off, in large part because of two things: the elimination of any kind of subsidy available through the federal government and the dramatically lower price of natural gas. In markets that are competitive, like Alberta, it is really the lowest cost generation that wins the day. We have seen a plateau in the province in terms of wind investment.

Senator Johnson: Has there been an improvement in managing the integration of renewable generation into the electric grid?

Mr. Wharton: I would say yes, in general. That includes in terms of the system support for renewables like wind.

Let me speak specifically of wind. Certainly in jurisdictions that we're involved in, we have seen improved management of wind resources. The growth of scale and performance of wind resources also helps in terms of their contribution to any particular grid. We have seen the same thing in Ontario.

The short answer to your question is yes, it is improving. However, there are still some challenges with transmission integration. That will continue as we perhaps geographically diversify generation, not just wind but other types.

Senator Johnson: Is it possible, then, to have a substantial increase in wind and solar generation without affecting the reliability of the electricity supply?

Mr. Wharton: This is one of those generalized statements, so I have to be careful in saying this, but let me use Alberta, just to be specific. In our view, the short answer is no. The analysis and studies we've been doing recently show that when we retire 100 megawatts of coal-fired generation and we bring on the same amount of new wind generation, we also have to build close to 100 megawatts of baseload fueled by something like natural gas in order to achieve the same reliability that the coal provided to the system. We are having to double the replacement of a particular generation technology — coal in this case — in order to maintain the same reliability that we had achieved historically, in our view.

Senator Johnson: Thank you.

Senator MacDonald: Thank you, sir, for your presentation today.

I first want to ask you about your Keephills 3 facility. I've always had an interest in coal generation because you are the largest user of coal to generate power in the country, but Nova Scotia still relies more on coal to produce its percentage of power. This facility was built in 2011. How efficient was this facility compared to the older models, and the older stock? I understand it has a projected lifespan of five decades, yet Alberta is calling for zero emissions from these plants by 2030.

Is that going to strand your capital? What is going to happen to that investment? I expect that it is very substantial.

Mr. Wharton: It is a substantial investment.

To the first part of your question, it does use the latest technology in terms of coal-fired denigration. It's 10 per cent to 12 per cent more efficient than a conventional coal-fired generator in terms of both its emissions and electricity generation performance.

To the second part of your question, if and when the Alberta climate leadership plan is put into effect and 2030 arrives — at which point the Alberta government says that there will be no further emissions from coal-fired generation — then it would indeed strand some capital associated with that plant. I believe that is, to its credit, why the Alberta government wanted to make sure there is no unnecessarily stranded capital associated with their policy. That's part of what we're discussing with them currently.

Senator MacDonald: If it's going to be shut down 30 years before it's supposed to, how can you avoid stranded capital? Will they compensate you, or can you convert it to natural gas?

Mr. Wharton: Compensation is certainly on the table in terms of our view of what would be required, but it's not the only thing. Converting that plant to natural gas would allow it to continue under the proposed policy.

Establishing long-term contracts for supply would help in terms of other technologies that we could develop. A natural gas plant as a replacement with a long-term contract would be helpful in terms of replacing some of the lost and stranded capital associated with the Keephills 3 plant. There is no question that somehow, some way, we need to recognize that there is value stranded and, I believe, to appreciate that and compensate generators for those losses in a fair and just way.

Senator MacDonald: I also understand that you were part of Project Pioneer in Alberta. Of course, it deals with carbon capture. I'm one of those people who are increasingly having trouble understanding the efficiency or viability of carbon capture. What it says here is you have abandoned it, along with your partners, Enbridge and Capital Power. It says:

. . . the market for CO2 sales and the value of emissions reductions . . . are not sufficient . . . to allow the project to proceed.

What is that really saying? Does this technology work? Is it a waste of time and are we putting a lot of money into something that is not going to work and drive the price of electricity through the roof?

Mr. Wharton: Here are my thoughts on that. I believe the jury is still out on carbon capture technology. We actually believe the technology is absolutely workable today. The challenge is whether it is economically sound.

Carbon capture and storage research and development is a global effort; it's not just Alberta, TransAlta or Canada that is involved in this. Finding a way to continue to keep coal in the fuel mix and meet environmental imperatives is a tremendous goal. If we were able to achieve that, it would have global implications.

My answer to you is that we don't know if it's going to be economically viable in the future. We think there are some signals and we've seen improvements continuously since we were involved in our Project Pioneer in 2010 through 2012, but ultimately it must be done in a way that is competitive with alternatives, because if it is not, then it's a waste of money.

Senator MacDonald: Thank you.

Senator Seidman: Thank you very much for your testimony this evening.

We just heard from Max Gruenig of the Ecologic Institute US, and we talked about Germany's transition to renewable generation. We spoke about many things, but one of the questions was about the electric grid and investments that are necessary in the transmission networks and the whole infrastructure. He did tell us this was the so- called forgotten element and it hadn't really been considered until now, in a second phase — especially the need to build north-south grid infrastructure.

You also mentioned in your presentation to us the transmission structure and necessary investments. You talked about the regionality of transmission markets and how this could impact certain areas of the country. Could you explain that to us a little more, please?

Mr. Wharton: An example might be most useful way to do that. In fact, about 40 years ago, strangely, my father worked on the concept of an interprovincial Western Canadian electricity grid tying Manitoba, Saskatchewan and Alberta together. That idea still remains and is, I think, even more current today. There is lots of interest and rationale for doing that.

My concern might be, for example, that if you were to connect thousands of megawatts of power supply from Manitoba Hydro — assets that have been largely paid for by the Manitoba taxpayer and perhaps the ratepayer to some extent — into a competitive Alberta electricity market and, on top of that, burden fossil generation with a price on carbon — and I say that in an objective and not a derogatory way — what would you potentially find is a dramatic depression of the price of electricity in a place like Alberta.

That would make the viability of those other forms of "sunk'' generation — hardware, essentially, for natural gas plants and even wind farms — subject to a much lower electricity price than they would otherwise see if they were islanded as they are today. That decreases the viability of those assets and the legacy generators to maintain them, and to invest in transformational technology of their own.

It's a very large instrument, or a club, if you like, that may have benefits. But I do want to caution the committee that it could have significant impacts on how electricity is supplied and how the dynamics of electricity pricing occur in various jurisdictions. We can't be blind to that. That is just a cautionary note.

Senator Seidman: Do you still think that building out infrastructure in the way your father conceived 40 years ago is a viable option?

Mr. Wharton: I think we should look seriously at that option, absolutely, as part of a portfolio of solutions that we might use. Assuming good judgment based on good analysis and data, and taking into account the issues that I've raised, I see no reason why we would take it off the table.

Senator Mockler: I have three little questions. You've mentioned that you're more competitive with the windmills. I come from the province of New Brunswick, When I look at the original agreements that we have had with our three producers of windmill electricity, they were producing below the output levels that they had envisioned when the farms came on board.

What is the position of TransAlta, at this present stage, in New Brunswick?

Mr. Wharton: If I understand your question correctly, first of all, we do have wind assets in New Brunswick which perhaps you are absolutely aware of.

In terms of the point you made about those wind farms producing less than originally envisioned, in our view that's not a surprising situation. In fact, wind farms produce, typically, quite a variable output on an annual basis, in some cases more than and in some cases less than an average level for which they were designed. That's really based on the wind itself and the wind resource, which varies, as we all know.

There are cases where wind units are designed with overly optimistic wind regimes that never materialize. That has not been our experience in Nova Scotia, but what we have seen recently are lower than normal wind regimes that affect the output directly. It doesn't mean that those plants aren't capable of generating at higher levels, with higher annual resources.

Senator Mockler: You mentioned Nova Scotia. I was referring to New Brunswick.

Mr. Wharton: I also meant to say New Brunswick.

Senator Mockler: We are committed to reducing emissions by 30 per cent below 2005 levels by 2030. I know you're following it very closely. According to Environment and Climate Change Canada, the emissions gap needed to reach this goal is more or less 290 metric tonnes of carbon dioxide, which should be the equivalent.

First, do you believe that this target is achievable? Second, do you believe that it is likely that energy costs in Canada will have to rise considerably in order to meet this target?

Mr. Wharton: Thank you, senator. That's a very important question.

My answer to part 1 would be that today, with the policies that are in place and the plans and commitments made by governments, I can't see how we could get to meeting our 2030 target. That implies, to me at least, that something significantly additional to what we've are seeing today needs to happen if we're going to have a hope of achieving that 2030 target. That's a challenge we all face.

As to the second part of your question around costs, my short answer would be that, yes, we do see costs increasing. We have decided, as a nation, I think, to pay attention to greenhouse gas emissions, to price that and put a cost on it, if you like. That's going to have significant implications, and I believe all Canadians ought to be prepared to see the effect of that and respond. If you care about price and about emissions, then perhaps that's the right signal to be sent. It's not a pleasant message in terms of our objective as a company to keep costs as low as possible, but I believe it's realistic.

Senator Mockler: You've mentioned that there are things that we need to change in order to reduce those emissions by 30 per cent. What are the economic risks in transitioning to a low-carbon economy, and given the experience you have, in what ways can we minimize these economic risks?

Mr. Wharton: Thank you, senator. I don't want to pretend to this committee that I'm a policy maker, although I do have my own personal views. Let me have a crack at answering your question, but I'm not sure I'm going to do a very good job.

In my observation, and I'm speaking personally in this regard, we need to look much more broadly at emission reduction opportunities across the economy in ways that we haven't done previously. So it's been relatively easy for governments to identify things like the electricity sector, in particular, coal-fired emissions to some extent, and oil and gas; but perhaps governments have been less inclined to address emissions from transportation, residential buildings, technology, agriculture, those kinds of things, for various reasons. I can't see how we could possibly achieve anything close to the goals we have set for ourselves as a country unless we are holistic in terms of looking at all opportunities in all sectors, regardless of whether they are large industries, small commercial enterprises or individual citizens. I think we have to do that.

Secondly, I believe we're talking about a transformation that needs to take place over a significant period of time, perhaps even well beyond 2030. To expect that we could turn on a dime and achieve massive emissions reductions in very short order I think is overly optimistic. I think we should be realistic and say that we're making enormous transition in terms of our entire economy, that we need to take the appropriate time to do that and that the goal is to achieve it, not to achieve it at a certain, specific point in time.

I'll stop my comments there, but that's how I see it.

The Chair: In the system that you operate, how much intermittent power can you integrate into your system at the present time, with the technology that's available today?

Mr. Wharton: Again, good question, Mr. Chair.

The potential to integrate or to grow intermittent technology, or let's call it renewable technology, in the systems that we are participating in is actually quite large. It's almost only limited by the size and capability of the electricity system in terms of grid and the ability to support those new technologies coming in; but renewables, being intermittent by nature, need to have baseload, reliable support from something else. In some cases it might be nuclear. It could be imported electricity. In Alberta it's natural gas generation. But to achieve the reliability standards that we require of ourselves in terms of reliability of supply, essentially 0.03 per cent of the time, the standards would say you would have a shortage of supply. It is a miniscule amount. That means you need reliable baseload supply of some form or another to support that renewable entry. You can get lots of renewables; you just need to build something else or have something else to support that.

The Chair: I appreciate all of that. I know about baseload. I'm quite familiar with that. You hear things about 20 per cent, 30 per cent intermittent into a baseload system — I'm talking about your system — or 40 per cent. We've heard that in some places it's more than 50 per cent. I need that information. What is it? I know that if you build more baseload, you can put more intermittent into it, but with the technology today what's the percentage that you could put in comfortably?

Mr. Wharton: Perhaps I wasn't clear enough. The actual number is zero per cent. In other words, you can't have renewable generation as part of your regular baseload supply that's unsupported. You can have significant growth in renewables, but almost every megawatt of new renewable generation, in our view, needs to be supported by some other fashion. Does that get at your question?

The Chair: Actually, I'll call you, because no, it doesn't.

Mr. Wharton: I'm sorry.

The Chair: We heard in the presentation before that in Germany they can integrate as high as 50 per cent intermittent power into their baseload system. If you have a baseload system of 100 megawatts, how much intermittent power can you get into that system? Could it be 10, 20 or 30 per cent?

Mr. Wharton: I'll give you an answer you may not like, and that is that the percentage you can integrate depends on your acceptable levels of reliable supply. If you're prepared to endure a lack of supply, outages at a significant level, then you can integrate perhaps 50 per cent, as Germany has been doing, if you have the ability to shed loads and to have customers who are prepared to take brown-outs as a reality. On the other hand, if I said that I have zero tolerance for any kind of brown-outs and I'm not prepared to change my behaviour because you ask me to, then I would say the answer is zero renewables. It is a range, depending on the acceptability and your appetite for less than 100 per cent reliable supply.

The Chair: I give up. We'll go with the zero per cent, then, that can be integrated into the system.

Let me ask a couple of other questions. You said that if you took 100 megawatts of coal out of the system, baseload, you would have to build 200 megawatts of wind. Did I hear you correctly when you said that?

Mr. Wharton: No. What I said is if you take 100 megawatts of coal out of Alberta's system today and you wanted to replace that with wind, that would be fine; you could build 100 megawatts of wind. But in order to maintain reliability, you would also have to have another 100 megawatts of another baseload or reliable or non-intermittent supply in order to ensure you have a reliable system.

The Chair: On that one, you and I agree. I understand the answer you're giving is what I wanted to hear. So when it's said that wind power is comparable in cost to build to coal or natural gas, it actually isn't if you want to have the baseload and the reliability. It's actually twice the cost; would that be correct?

Mr. Wharton: I believe I mentioned in my remarks that it's essentially doubling up in terms of the cost of the replacement generation.

The Chair: One last question: What is available in Alberta for the development of green energy? Do you have more hydro you could build in Alberta, nuclear, or what's available?

Mr. Wharton: We have some hydro resources that are untapped, but it's not large in the Canadian context. We have some existing in central and southern Alberta, some river systems that still have potential for hydro development. Then in the North, places like the Slave River seem to have a significant potential, but far away from transmission and from load, or from demand.

The hydro is restricted in Alberta, to some extent, compared to British Columbia, Manitoba and Quebec, but there are perhaps 2,000, 2,500 megawatts worth.

The wind resource is huge and still tremendously untapped. There's tremendous growth potential in wind in terms of the resources itself, and the solar regime is strong as well in most of Alberta. The resource is there. The question is whether it can be generated in an economically competitive manner.

The Chair: Thank you very much for your remarks and some very good answers.

(The committee adjourned.)