Gattinger Part 2 — Major Projects: Can We Build Enough Fast Enough?
This is the second part in a four-part series analyzing key pieces of Ottawa's energy and climate agenda. For the first part, click on the link below:
The federal government’s climate plans hinge on rapidly building an unprecedented quantity of new energy infrastructure. There is growing recognition and concern that Canada lacks the policy and regulatory frameworks to enable the country to build enough fast enough.
What’s the problem? How do we solve it?
Start with the problem. McKinsey estimates Canada needs $1.6 trillion of capital expenditures to transform its energy system and broader economy to net zero by 2050. This is a massive increase in capex over business as usual.
What’s more, $1.6 trillion may be a conservative estimate. In Ontario, the Independent Electricity System Operator estimates that decarbonizing the province’s bulk power system will cost $400 billion or more. And that’s just the upstream part of the province’s electricity sector. At the local distribution level, Toronto Hydro estimates it will cost $10 billion in upgrades to the local grid to achieve the City of Toronto’s net zero by 2040 goals. Scale that up to all local distribution in the province, add the capital to reduce emissions across the entire provincial economy, roll that up across the country, and the investment requirements are jaw dropping.
Whatever the total number, it’s going to be huge.
Attracting this much capital requires a clear, predictable and timely investment environment for building major energy projects.
We don’t have that in Canada. Many would say we don’t have a lot of major projects in the pipeline because of it.
The federal government is alive to the challenge and has stated it will ‘fast track’ good projects. But fast-tracking — itself fraught with challenges — only deals with one part of the problem.
Investor confidence is like a three-legged stool. One leg is timeliness, and the other two are clarity of the rules and predictability of decision-making.
Decisions also need to secure the confidence of individual Canadians, affected communities, Indigenous peoples and other levels of government. Ottawa can’t ram through an approval and expect it to stick — many will say that isn’t fair. Cue lengthy court challenges.
What’s to be done?
Unpacking the challenges helps pave the way to solutions.
The biggest challenge? Uncertainty about the policy future. Ottawa has yet to finalize fundamental policy measures like the Clean Electricity Regulations and the oil and gas emissions cap. And while the federal government has established a path for carbon tax increases to 2030, a new government or deteriorating economic conditions could change that. Establishing carbon contracts for difference will help to reduce uncertainty.
Major project economics hinge on clarity of these policies — and many others. Ottawa will need to create a lot more policy certainty before investors dig deep into their pockets. The risk that a policy change upends project economics is simply too high.
But that’s only the tip of the iceberg of challenges — and areas for solution-seeking.
Rules and expectations for evaluating projects are far from clear. This is especially the case for impact assessment, where Ottawa is still in the early years of implementing Bill C-69. Although the range of projects that fall under federal impact assessment is narrower than many people think — hydrogen and CCUS are not on the Impact Agency’s project list, for example — many projects needed for emissions reductions, from mining for critical minerals to cross-border electricity infrastructure to nuclear waste storage, will require federal approval.
And there’s always the possibility that the environment minister designates a project for federal assessment.
How assessments are scoped, how cumulative effects are addressed, how decisions are made about which Indigenous communities proponents need to consult with, remain unclear. The Impact Agency has issued guidance documents, but there remain a lot of open questions about assessment expectations. Telling proponents things will be worked out at the application stage is cold comfort when it takes years of design work, engineering and local consultation to get to that point.
Consultation is another area of challenge — and opportunity. Ottawa has rightly acted on reconciliation with Indigenous peoples, including through federal UNDRIP legislation. But there is a yawning gap between this broad policy position and how it will apply in practice — implementation guidance has yet to be published and there is considerable uncertainty about how Ottawa will discharge the Crown’s duty to consult.
This is where the concept of ‘fast tracking’ hits a big wall. Ottawa may want projects built quickly but that doesn’t align with the time needed for meaningful consultation and partnership development with Indigenous communities. Taking the time to consult properly and build genuine relationships — notably equity relationships — paves the way for projects to end up in service, not in court.
Add to these issues that Indigenous communities are becoming de facto regulators — they are increasingly doing their own impact assessments, and developing standards that reflect community priorities and concerns.
While this emerging reality makes project decisions more complex, there are multiple opportunities to improve current practices. Ottawa must figure out how Indigenous-led regulatory processes interface with federal regulatory processes. Joint or delegated decision-making with Indigenous communities could open the door to less contested approval processes. It would also contribute in unprecedented ways to the process of reconciliation.
To do this, the feds need to be willing to cede some control — something that’s difficult for government agencies. But this is where things are headed. Better for Ottawa to be out in front of it than embroiled in disputes over it.
There are also ways to streamline things. Ottawa could prioritize decision-making for projects that feature robust partnerships with Indigenous communities. It could explore ways to streamline consultation processes to avoid subjecting the same project — and the same Indigenous communities — to multiple consultation processes by different ministries and organizations.
There is also a lot of room for streamlining among the multitude of federal and provincial regulators involved in major projects. Opportunities include integrated approval processes across the federal government and with provinces, deferring to provincial decision-makers where feasible and taking a risk-based approach to regulation. It’s better to focus on risks that are not well understood than those for which there are well-established risk mitigation measures.
This kind of streamlining requires trust among regulators, levels of government and between regulators and industry. Safe spaces to take risks are needed — collaborative approaches that build trust over time, regulatory sandboxes for regulators and industry to work together on innovative approaches, or pilot projects to experiment with new ideas.
The biggest challenge for predictability and certainty centres on the role of politicians in project approvals. Federal reforms in recent years see the environment minister and cabinet taking a much bigger role in project decision-making. Decisions from the Impact Assessment Agency and from the Canada Energy Regulator come to politicians for final approval.
This generates tremendous uncertainty — and risk — for proponents. Late-stage cabinet decisions and discretionary decision-making upending rigorous regulatory processes strike fear in the heart of investors.
Ottawa is unlikely to reopen Bill C-69, but it could significantly reduce political risk by establishing guardrails around ministerial and cabinet roles in decision-making. Stipulating that the advice of regulatory agencies can only be accepted or rejected — not opened up with new conditions added — would be a good place to start. So would requiring open and transparent communication about consultations undertaken by cabinet and the reasons for cabinet decisions.
Another challenge is permitting. Even if a project succeeds in getting to yes, the quantity, sequencing, and co-ordination of permitting adds time and uncertainty. Multiple agencies are involved and each actor comes to a project with a different lens. The Trans Mountain pipeline expansion project required something like 3,000 permits. Yikes.
What’s worse, permitting entities have put the kibosh on projects that got the green light from policymakers and regulators.
There’s tremendous potential for Ottawa to streamline permitting to ensure it doesn’t hold up projects at the eleventh hour.
A final challenge is the capacity of existing systems to handle the desired volume of project applications on the horizon. Do federal regulators and policymakers have the human resources to manage it all? Ditto for the supply chain and labour force requirements of rapidly building this much infrastructure. In addition to capacity-building, Ottawa should consider identifying certain types of projects for priority review. Priorities could include domestic and global GHG reduction potential, energy security and economic reconciliation.
Bottom line, to successfully pursue its climate goals, Ottawa needs to create clarity, certainty and timeliness for federal energy project decision-making. While there are many complex challenges, there are many things that can be done to address them. Time to roll up our sleeves.