HomeMy WebLinkAboutINS-17-014 - Cap and Trade Program Update
REPORT TO: Finance & Corporate Services Committee
DATE OF MEETING: May 1, 2017
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: April 20, 2017
REPORT NO.: INS-17-014
SUBJECT: ONTARIO CAP AND TRADE COMPLIANCE UPDATE &
GREENHOUSE GAS EMISSION COMPLIANCE INSTRUMENT
PURCHASING POLICY
___________________________________________________________________________
RECOMMENDATION:
That the greenhouse gas emission compliance instrument purchasing policy as
of this report, be adopted, to comply with O.Reg. 144/16
The Ontario Cap and Trade Program, and further;
That an exemption be added to Schedule A Exclusions, Chapter 170
Purchasing and Materials Management Bylaw for greenhouse gas emission
compliance instruments.
BACKGROUND:
Greenhouse gas (GHG) emission compliance instruments are a new commodity that
must be procured, stored and expensed as part of the natural gas business in Ontario
due to the provincially legislated Cap and Trade Program.Kitchener Utilities (KU) is a
natural gas distributor in Ontario and is mandated to comply.
In order to fulfil compliance obligation to the Ontario government, KU must
purchase approximately 2M tonnes of carbon dioxide equivalent emission (tCO2e)
st
compliance instruments by December 31 2020.
This report outlines a high level strategy for fulfilling this obligation and recommends the
acceptance of a GHG emission compliance instrument purchasing policy similar to the
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onecurrently in place for natural gas purchases that adds an exemption to Sche
Exclusions, Chapter 170 Purchasing and Materials Management Bylaw.
REPORT:
GHG Emissions Compliance Portfolio Strategy
GHG compliance instruments come in two types emission allowances and offset
credits. Emission allowances are the standard compliance instruments and act as
tradable permits where 1 allowance = 1 tonne of carbon dioxide equivalent emission
(tCO2e). KU plans to fulfil most of its Cap and Trade obligations with these instruments.
Offset credits are another type of compliance instrument where KU can invest in or
procure credits from environmental projects that reduce or remove greenhouse gases
from the environment in a way that aims to or emissions
produced by the These instruments will allow KU to offset
Protocols surrounding offset credits are currently in development by the province and
KU plans to be a strong advocate in this area to leverage the applicability of the
existing environmental operations and work with the Region of Waterloo to identify win-
win opportunities to partner on new and existing offset projects. Some protocols under
consideration are: tree planting, landfill offsets, sewer gas offsets, and other sources of
biogas (renewable natural gas).Offset protocols are expected to be finalized in late
2017, early 2018 and KU plans to utilize its full offset allocation as economically
feasible.
Other elements of the emissions compliance portfolio include the reduction of
greenhouse gases through improved facility projects and customer conservation
programs. Some KU specific projects under consideration include revision of processes
and procedures surrounding flaring &venting,enhanced leak survey of stations and
anticipated procurement of more efficient equipment.
Union Gas to offer its customers access to the provincial green investment fund, which
provides incentives to customers that undertake energy efficiency upgrades.
Further exploration of these projects and programs are currently underway.In March
2017, KU procured the services of a cap and trade consultant, ClearBlue Markets to
assist with the development of the emissions compliance portfolio and procurement
strategies.
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GHG Emission Compliance Instruments Purchasing Policy
KU has an existing exemption within Schedule A-
and Material Management Bylaw with respect to the purchasing of natural gas.
Additionally, a specific gas purchasing policy (I-560) was approved by Council in 1998
and last reviewed in 2014.A new exemption is required for greenhouse gas emission
compliance instruments due to its similarities to the natural gas commodity (high
volume, high cost, market tradable instrument coupled with tight purchasing timelines
andthe high recurring nature of purchases). It would simply become a significant
administrative burden to have council approve all emission compliance instrument
purchases. While the similarities to natural gas warrant a purchasing policy, the
discrete nature and lack of physical delivery of these instruments warrant a distinct
purchasing policy from the one for gas.
The existing gas purchasing policy permits a market responsive portfolio that favours
rate stability by utilizing a three year horizon on which a portion of the gas portfolio can
be fixed. This strategy lends itself nicely to the cap and trade program as the market
functions in a similar manner. The compliance periods for the Cap and Trade program
are three years and prices for these instruments are designed to increase over time.
rate stability approach, it is prudent to employ a similar strategy
to that employed on the natural gas portfolio. As the market is in its infancy, hedging
limits are retrieved from the gas purchasing policy as these ratios have previously been
accepted by council. These ratios have also been shared with our consultant and they
are acceptable. As the market matures, liquidity improves and the dynamics are
realized, these limits shall be revisited.
With its natural gas purchases, KU limits its financial exposure by contracting with large
firms that employ investment grade credit ratings. This is particularly important because
natural gas is a non-discrete product that flows in a pipeline over time. Emission
compliance instruments are discrete and delivered at a particular point in time and as
such, credit risk is minimized for spot purchases. A credit risk arises from fixing prices
for future delivery. In this sense, KU has opted to employ existing risk controls used for
natural gas purchases for the forward purchases of emission compliance instruments.
While this proposed purchasing policy outlines a high level approach to managing the
emission compliance portfolio, a detailed purchasing strategy will be provided at an in-
camera caucus meeting as these discussions are deemed confidential and market
sensitive as per sections 32 (6), (7), (8) and (10) of the Climate Change Mitigation &
Low-carbon economy Act, 2016 (Bill 172).
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ALIGNMENT WITH CITY OF KITCHENER STRATEGIC PLAN:
vision through the delivery of core service.
FINANCIAL IMPLICATIONS:
Not applicable.
COMMUNITY ENGAGEMENT:
INFORM
advance of the council / committee meeting.
ACKNOWLEDGED BY: Cynthia Fletcher, Interim Executive Director,
Infrastructure Services
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APPENDIX A Greenhouse Gas Emission Compliance Instrument Purchasing
Policy
Policy No:Click here to enter text.
POLICY
Approval Date:Click here to enter a
Policy Title:GREENHOUSE GAS EMISSION
date.
COMPLIANCE INSTRUMENT
PURCHASING POLICY
Next Review Date:Click here to
enter text.
Policy Type:ADMINISTRATIVE
Reviewed Date:Click here to enter
Category:Administration
text.
Sub-Category:Agreements & Contracts
Amended:Click here to enter a date.
Author:Manager, Gas Supply
Operations & Regulations
Replaces:Click here to enter text.
Repealed:Click here to enter a date.
Dept/Div:Utilities
Replacedby:Click here to enter text.
Related Policies, Procedures and/or Guidelines:
Please use LINKS to related documents whenappropriate
Policy Number: I-560 (Gas Purchase Policy)
1. POLICY PURPOSE:
Concise,easy-to-understand statement, which explains the objective or philosophy underpinning the policy.
This policy outlines the purchasing methodology of greenhouse gas emission
compliance instruments to comply with O.Reg. 144/16 The Ontario Cap and
Trade Program, and forms an amendment to Exclusions of the
and Material Management Bylaw.
2. DEFINITIONS:
Unusual or specialized language, acronym, jargon or unique application of words.
Emission
of fulfilling the obligations of the Ontario Cap and Trade Program (O.Reg.
144/16) in accordance with the Climate Change Mitigation and Low-carbon
Economy Act (Bill 172).
3. SCOPE:
Statement as to whom the policy applies, as well as exceptions and the ramificationsof non-compliance,if
anyand deemed appropriate to include.
POLICY APPLIES TO THE FOLLOWING:
All Employees
ManagementPermanent Full-Time Employees
Permanent Full-Time Non UnionPermanent Full-Time C.U.P.E. 791
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Policy No:Click here to enter text.
Policy Title:Click here to enter text.
TemporaryPart-Time Non-Union
StudentPermanent Full-Time Union
Continuous Part-Time EmployeesPart-Time Employees
Continuous Part-Time Non-UnionContinuous Part-Time Union
Council Local Boards & Advisory Committees
Specified Positions Only:
DCAO, City Treasurer, FCS
Director, Utilities
Mgr. Gas Supply Operations & Regs.
This policy ensures responsible and fair procurement of emission compliance
instruments and serves to minimize financial risks and maximize consistency to
ensure prudent portfolio management.
4. POLICY CONTENT:
Policy details, including specific roles and responsibilities relating to the policy.
(1).
periodic tendering for consulting services, shall monitor market and economic
forces to develop a prudent emission compliance instrument purchase strategy.
(2). For emission compliance instruments not purchased at government auctions &
reserve sales, the emission compliance instrument purchase strategy shall reflect
a three year timeframe and use a disciplined approach (subject to market
conditions) to acquire a blended portfolio (Table 1) of emission compliance
instruments, which varies the pricing and allows for future settlement of the
contracts to provide some rate stability while remaining more responsive to
market pricing.
Table 1: Portfolio Hedging Limits (% Fixed)
Year 1Year 2Year 3
Max60 %40 %20 %
Min20 %20 %0 %
(3). For emission compliance instruments purchased at government auctions,
purchases for future compliance periods will not be permitted, as settlement is
required immediately.
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Policy No:Click here to enter text.
Policy Title:Click here to enter text.
(4). The ongoing performance of the greenhouse gas emissions compliance portfolio
in meeting its strategic objectives and customers' rate expectations shall be
reviewed on a regular basis and revised as needed and approved by Council.
(5).ure market
competition and employ prudent risk controls.
(6). For emission compliance instruments not purchased at government auctions &
reserve sales, the emission compliance instrument supply contracts will only be
placed with large, financially secure suppliers with a proven industry track record.
Before supply contracts are placed, the City must ensure that the supplier has a
strong financial rating as evaluated by an independent evaluator. For
transactions involving future\\forward purchases, the supplier shall have a
Baa (Investment Grade) or provide adequate financial assurances
commensurate with exposure of the contracts to an individual supplier as
deemed by the Manager, Gas Supply Operations & Regulations. When dealing
with a marketing entity for supply, assurances will be sought from the corporate
parent.
(7). All new emission compliance instrument counterparty contracts and transactions
will be authorized by the Deputy CAO City Treasurer, Finance and Corporate
Services Department or in his /her absence one of the City's signing officers and
the Director of Utilities or in his /her absence, the Manager, Gas Supply
Operations & Regulations.
(8). For emission compliance instruments purchased at government auctions, all bid
securities required for such transactions will be authorized by the Deputy CAO
City Treasurer, Finance and Corporate Services Department or in his /her
absence one of the City's signing officers.
5. HISTORY OF POLICY CHANGES
structure and job
the intent and purpose of the policy and require Council or Corporate Leadership Team (CLT) approval.
Administrative Updates
The date (yyyy-mm-dd) and a short annotation on the nature of the change to reflect the current corporate
structure i.e. Departmental re-organization / Titling changes / Standing Committee restructuring.
Click here to enter text.
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Policy No:Click here to enter text.
Policy Title:Click here to enter text.
Formal Amendments
The date of the resolution passed by-01-20-
Click here to enter text.
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