HomeMy WebLinkAboutINS-16-067 - Ontario Cap and Trade Program - Bill 172, O. Reg. 144/16
REPORT TO:
Finance & Corporate Services Committee
DATE OF MEETING:
September12, 2016
SUBMITTED BY:
Cynthia Fletcher : Interim Executive Director – INS
519-741-2600 ext. 4424
PREPARED BY:
Danny Persaud : Manager,Gas Supply Operations & Regulations
519-741-2600 ext. 4255
WARD(S) INVOLVED:
All
DATE OF REPORT:
September 1, 2016
REPORT NO.:
INS-16-067
SUBJECT:ONTARIO CAP AND TRADEPROGRAM – BILL 172, O.Reg. 144/16
OVERVIEW &COMPLIANCESTRATEGY
___________________________________________________________________________
RECOMMENDATION:
That staffbe directed to developa detailed utility strategy for Ontario’s new Cap
and Trade Program and report to council in early 2017; and further,
Thata new stabilization and capital reserve fund be created to mitigate rate
volatility and fund capital projects relating to the Cap and Tradeprogramas
outlined in Appendix C to staff report INS-16-067.
EXECUTIVE SUMMARY:
The report provides a brief introduction to the Ontario Cap and Trade program, its impact to
Kitchener Utilities (KU) and KU’s compliance strategy. Five main topics are discussed
including the creation of a new carbon cost centreand reserve funds, the creation of a new
carbon portfolio & compliance plan, the need to amend the gas purchasing policy for carbon, rate
structure & cost recovery and bill presentment. Staff makes tworecommendations in the report:
Staff develop a detailed utility strategy for Ontario’s Cap and Trade Program
Staff createsnewstabilization and capital reserve funds to mitigate rate volatility
and fund capital projects attributed to cap and trade.
*** This information is available in accessible formats upon request. ***
Please call 519-741-2345 or TTY 1-866-969-9994 for assistance.
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Source: Government of Québec
BACKGROUND:
Cap and trade is an emissions trading system (EMS) launched by the Ontario Liberal
Government in May 2016 in an effort to fight climate change by placing a price on carbon
emissions. It is founded on a federal plan of helping to limit global temperature rise by 1.5°C by
cutting emissions by 15% from 1990levels by 2020. The first compliance period runs from
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January 1 2017 to December 31 2020.
At a high level, cap and trade works on the principle of setting a “cap” on greenhouse gas
(GHG) emissions and allowing efficient businesses to “trade” emission allowances (EAs) to less
efficient businesses. Businesses that report emissions under the cap (either through abatement,
new technologies, efficiencies etc.) are able to sell their unused credits to the market and
businesses that exceed the cap are able to buy credits to offset their emissions.
Offset projects are projects that can be undertaken or purchased by businesses to reduce its
carbon footprint. These projects effectively reduce or remove greenhouse gas from the
environment. Some examples include tree planting, carbon capture, creation of biogas etc.
These projects will generate a new tradable credit called an offset credit. Offset credits itself can
also be purchased by businesses and can be used in place of up to 8% of its compliance
obligation for each compliance period in place of emission allowances. The Ministry of
Environment and Climate Change (MOECC) is currently developing the details of this new
regulation, expected to be finalized in 2017.
All natural gas utilitiesin Ontario, including KUare deemed mandatory participantsin the
program and as such, must purchase emission allowancesor offset creditsfor all of KU’s
customers (refer toAppendix A for customer group definitions)which are in group A and those
in group B that have not voluntarily opted-into the program. Currently, KU projects that it has
no customers in group B or group Cand as such, will be purchasing allowances\credits on behalf
of 100% of our customers (group A).
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The money to be recovered by the Province is estimated to be $1.9 billion annually and will be
deposited into a green investment fund.Starting in late 2016, a new home renovation rebate
program will be launched by the Province and funded from this fund to provide incentives for
home renovation projects that will aim to help shift Ontario to a low-carbon economy.
REPORT:
Creation of new Carbon Cost Centre and Reserves
Carbon is to bea new commodity that must be procured, stored and expensed as part of the
natural gas business in Ontario. In order to facilitate this new operation, KU has createda new
cost centre called “CarbonCO”.This new cost centre will manage the revenues and expenses
for the program. In addition, a new stabilization reserve fund and capitalreserve fund are to be
createdin support of the City of Kitchener’s obligations under the Cap and Trade regulations, as
outlined in Appendix C to staff report INS-16-067. The stabilization reserve fund is required to
operate Cap and Trade as a self-contained program in accordance with the legislation. The
capital reserve fund will hold funds related to facilityprojects and/or the implementation of the
program.
Creation of new Carbon Portfolio & Compliance Plan
Along with the creation of the new cost centreCarbonCO, a new portfolio and compliance plan
will be developed to manage carbon obligations. This new portfolio, which will be similar to the
gas supply portfolio, mayconsist of adiversified mix of emission allowances, offset creditsand
greenhouse gas conservation initiatives.
In accordance with the carbon portfolio, a new compliance plan will be developed to describe
how the portfolio is to be managed. It will also include a risk management planwith scenario
analysis and risk mitigation strategiesas well as forecastsand procurement strategies.Staff is in
the process of developing the details of this new portfolio and compliance plan and will provide
an update to council in early 2017.
Amendmentto Gas Purchasing Policy & Hedging Strategy
KU already has an exemption to the City’s purchasing policy with respect to purchasing the gas
called the gas purchasing policy. This exemption must be amended to account for the new
carbon commodity. As per emissionsforecast, KU expects to require approximately 508,000
emission allowances annually.
While staff does intend to keep as much in line with previous direction provided on the gas
commodity with respect to purchasing and hedging, staff is in the process of developing the
details of this new amendment and will provide an update to council in early 2017prior to the
first government issued auction, which is anticipated in March 2017.
Rate Structure & Cost Recovery
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Three types of Cap & Trade compliance costs have been defined through legislation for the
utility to recover through rates: customer-related obligations, facility-related obligations and
administrative costs.These have been defined in Appendix B.
KUhas completed preliminary budgeting; forecasting and cost recovery analysis based on
information provided by the Ministry of Environment & Climate Change (MOECC) and the
Ontario Energy Board (OEB) and has proposed the following preliminary 2017 rates in order to
recover costs attributed to Ontario’s Cap and Trade program:
1 Customer Related Obligation $0.033704 per m³
2 Facility Related Obligation & Administrative $0.001980 per m³
*
3 (1+2) Total Rate increaseto GROUP A & B (non-opt in) $0.035684 per m³
*
4(2)Total Rate increase to GROUP B (opt-in) & GROUP C $0.001980 per m³
*no customers currently exist for GROUP B or C.
approximate $75 per
For the average residential customerin GROUP A, this would result in an
year increase on the gas bill
.These cost forecasts are in line with those of the government and
other natural gas distributors. In administering the cap and trade program, KU forecasts that
approximately $27,000 of new funding will be required as part of the 2017 budget and the
balance will be reallocated from the existing gas delivery administration funding. New capital
funding will be collected for billing system changes and facility related greenhouse gas reduction
projects of approximately $100,000 as part of the 2017 budget.
Bill Presentment
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Rates will be brought forward for discussion at the October 3 2016 FCS committee meeting and
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will be ratified at the October 24council meeting. In accordance with OEB direction, KU will
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be including the cost of cap and trade in the delivery line on the billbeginning January 1 2017.
This is in accordancewith other natural gas distributors in Ontario. KU will revisit this approach
in 2018 to determine if it continues to be the most prudent approach.
ALIGNMENT WITH CITY OF KITCHENER STRATEGIC PLAN:
The recommendation of this report supports the achievement of the city’s strategic vision
through the delivery of core service.
FINANCIAL IMPLICATIONS:
The additional cost to KU’s natural gas ratepayers of Cap and Trade isestimatedto be
approximately $10-12 million annually (based on an anticipated auction floor price of $18.09
per tonneof emissions)and approximately $40 million over the first compliance period. To put
this new major cost information in perspective,this is roughly half of the gas supply portfolio
andslightly less than the annual gas transportation expense.The anticipated 2017 cap and trade
rate for all KU customers (system & direct purchase) is $0.035684 per m³. The money recovered
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will be used to purchase carbon allowances\credits to cover emissions and to fund programs that
reduce greenhouse gas emissions for the Utility. The money recoveredby the Provincewill be
used to fund provincial programs that aim to shift Ontario to a low carbon economy.
COMMUNITY ENGAGEMENT:
KU will work with the Communications Division to ensure that media outlets are provided with
a press release to inform customers. An insert is being prepared to be distributed with utility
bills in October, November and January, and an alert will be posted on KU’s website.Details of
Ontario’s new home renovation rebate program will also be posted on the website.
INFORM – This report has been posted to the City’s website with the agenda in advance of the
council / committee meeting.
ACKNOWLEDGED BY:
Cynthia Fletcher, Interim Executive Director,
Infrastructure Services
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APPENDIX A – Customer Group Definitions
Facilities that emit fewer than 25,000 metric tonnes of carbon dioxide equivalent (TCOe)
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emissions annually are not participants of the program but will pay a cap and trade charge on
their utility bill as the utility will purchase allowances\credits on behalf of these customers. This
is roughly equivalent to approximately 13,000,000 m³ of gas and includes all residential,
apartment and small commercial and industrial facilities. For ease of reference, this customer
GROUP ‘A’ customers
group shall be herein referred to as .
Emitters between 10,000 to 25,000TCOe annually are eligible to voluntarily enroll in the
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program and will have to manage their own carbon emissions by purchasing their own
allowances\credits and will not pay the emissions recovery portion on their natural gas bill.
These customers may also receive free incentives for early enrollment. For ease of reference,
GROUP‘B’customers
this customer group shall be herein referred to as .
Emitters over 25,000TCOe annually are mandatory participants in the program and are termed
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large final emitters (LFEs).These facilities are required to manage their own carbon emissions
by purchasing their own allowances\credits and will not pay the emissions recovery portion on
their natural gas utility bill. For ease of reference, this customer group shall be herein referred to
GROUP‘C’customers
as .
Source: Blackstone Energy Services
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APPENDIX B – Cap and Trade Compliance Costs
Customer-related obligation costs include the costs of allowances being purchased on behalf of
the customer base that is not in the Cap and Trade program. These costs are prescribed to be
borne by all customers except mandatory (large final emitter) and voluntary participants, of
whom are responsible for managing their own compliance obligation.
Facility-related obligation costs include costs that are directly attributable to ensuring
compliance for the utility’s owned andoperated facilities. These include GHG abatement
initiativesto mitigate facility-related GHG emissions. Because this is considered the cost of
doing business, these costs are also prescribed to be borne by all customers.
Administrative costs include costs for monitoring, reporting and verification (MRV) of
emissions, purchasing\trading emission credits, managing the utility’scarbon portfolio and
business processes & systems changes. These costs are also prescribedto be borne by all
customers.
Source: Ontario Energy Board – Cap and Trade Staff Discussion Paper
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APPENDIX C – Reserve Sheets
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ReserveFundInformationSheet
NameofReserve/ReserveFund GasUtility(CapandTrade)Stabilization
Category ReserveFund
Type Discretionary
Classification Stabilizaton
Purpose
StabalizestheannualoperationsoftheCapandTradeprogram(OntarioCapandTradeProgramBill172)
intheoperatingbudgetoftheGasUtility
FundingSource
transferfromtheGasUtilityforpreviousyearsoperatingsurplusesintheCapandTradeprogram
interestincome
AppropriationofFunds
transfertotheGasUtilityforpreviousyearsoperatingdeficitsintheCapandTradeprogram
TargetLevel
Minimum:
Closingbalanceshouldnotbelessthan10%ofthecapandtradeannualrevenues
Rationale:BasedonbestpracticesasdeterminedbytheGovernment
FinanceOfficers'Association(GFOA)
Providescontingencyforthefluctuationsincarbonallowancepurchasesfromyeartoyear
andunforeseenevents
Maximum:
Closingbalanceshouldnotexceed15%ofthecapandtraderevenues
Rationale:BasedonbestpracticesasdeterminedbytheGovernment
FinanceOfficers'Association(GFOA)
Helpsavoidsignificantrateincreasesinanygivenyear
Excess:
Theexcessisusedtoadjustcap/traderates.
NextReview:
Reporting
annualreporttoFinanceandCorporateServicesCommittee
Accountability
CostCentre5018900
DivisionalOwnershipFinance&CorporateServices,FinancialPlanning
OwnershipLeadSeniorAnalyst,FinancialPlanning
(InfrastructureServicesUtilities)
InterestAllocation
Yes
Other
PreviousPolicyNew
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ReserveFundInformationSheet
PreviousTitleNotapplicable
ResolutionDate
AmendmentDate(s):
RepealDate:
ProposedstartdateJanuary1,2017
EndDate(ifapplicable)
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ReserveFundInformationSheet
NameofReserve/ReserveFund GasUtility(CapandTrade)Capital
Category ReserveFund
Type Discretionary
Classification Capital
Purpose
ProvidesfundingfortheGasUtilitycapandtradecapitalprojects
forfacilityrelatedGHGreductionprogramsandnewsystemmodifications.
FundingSource
transfersfromcapandtradecapitalprojectsasaresultofcapitalcloseouts
interestincome
AppropriationofFunds
transferstoGasUtilitycarboncapitalprojects
TargetLevel
Minimum:
Rationale:50%oftheaverageannualbalanceofapprovedexpendituresinthe10yearcapitalforecast
Providesforunanticipatedrequirements
Maximum:
Closingbalanceshouldnotexceed1.5timestheaverageannualapprovedcapital
expenditures
Rationale:providesflexibilityforfundingforprojectsasneeded
Excess:
Excessfundinggreaterthanthemaximumbalancetransferstothe
GasUtilityCapitalReserveFund
IftheGasUtilityCapitalReserveFundisatthemaximum,theexcess
isusedtoadjusttheuserrates
NextReview:
Reporting
annualreporttoFinanceandCorporateServicesCommittee
Accountability
CostCentreTBD
DivisionalOwnershipFinance&CorporateServices,FinancialPlanning
OwnershipLeadSeniorAnalyst,FinancialPlanning
(InfrastructureServicesUtilities)
InterestAllocation
Yes
Other
PreviousPolicyNew
PreviousTitleNotapplicable
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ReserveFundInformationSheet
ResolutionDate
AmendmentDate(s):
RepealDate:
ProposedstartdateJanuary1,2017
EndDate(ifapplicable)
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