Energy storage and the energy transition: a shift in conversation from need to adoption
Authors
Milosz Zemanek
Gino Bruni
Since our update one year ago, energy storage continues to develop in both Alberta and Ontario while being further incentivized by recent draft federal legislation regarding clean energy income tax credits and a clean (net-zero) electricity future. Energy storage appears to be here to stay and has widely been accepted as one of the solutions for Canada’s energy transition; however, the conversation has shifted from its need to conversations around the (a) issues regarding how the technology can/should be adopted and its role in the “mix” of grid resources and (b) project and financing structures that may be necessary to fully utilize the benefit of the incoming legislation.
Federal
There have been a number of important federal developments impacting energy storage, since our Fall 2022 update titled Energy storage in Canada: energizing the transition1.
On August 4, 2023, the federal government released draft legislation regarding the Clean Technology Investment Tax Credit (ITC)2, which provides up to a 30% refundable investment tax credit for the capital cost of “clean technology property”, which includes electricity storage equipment systems that do not use fossil fuels in their operations. This definition captures batteries, flywheels, supercapacitors, magnetic energy storage, compressed air storage, pumped hydro storage, gravity energy storage and thermal energy storage.
Six days later, on August 10, 2023, the federal government released draft clean electricity regulations (Clean Electricity Regulations), structured to promote Canada’s drive toward a net-zero electricity grid by 2035, with the aim of helping Canada achieve its overall net-zero emissions target by 20503.
The draft legislation provides some clarity but also raises several questions and potential issues4. While the ITC will undoubtedly incentivize energy storage (along with other non-emitting) development in Canada, its effect on developers (and therefore lenders) has the potential to be somewhat diluted by the other constituencies that may request their share of the “pie”. For instance, we have seen proposed adjustments to power purchase agreement pricing (both public and private) if a counterparty receives an ITC and expect that similar asks from engineering, procurement and construction contractors and original equipment manufacturers could follow, especially since such contracts are also being adjusted to account for labour and related objectives embedded in the ITC.
Nevertheless, the ITC will impact the economics and financing of energy storage projects, and the Clean Electricity Regulations will place further pressure on the electricity grid to decarbonize, which, in our view, will increase the need for energy storage to assist with this transition, help maximize existing grid resources and grid flexibility, and provide some of the benefits we outlined in our update a year ago.
Alberta makes progress on projects
The slow trickle of storage projects has continued in Alberta, with four 20-megawatt (MW) transmission-connected battery projects going online in the past year. This brings the total to seven in the province, six of which (or a total of 210 MWh of storage capacity) are owned and operated by Enfinite, a Calgary-based company, who plans to energize a further three 20 MW projects, to bring its total storage capacity to 315 MWh.
There are also 19 transmission-connected storage projects in the Alberta Electric System Operator’s (AESO) active connection queue, two of which are under construction: the Jurassic Solar+ project (80 MW of storage) and TransCanada Energy’s Saddlebrook Solar+ Storage project (6.5 MW of storage).
11 of the 19 projects in the queue are combined generation and storage projects (Solar+ or Wind+) that have not yet received approval from the Alberta Utilities Commission (AUC) for construction and operation. These projects are therefore impacted by the Government of Alberta’s pause on renewable power plant approvals, which is in effect until February 2024.
Regulations for storage projects have also progressed in the past year. The market rules applicable to energy storage, the Energy Storage ISO Rule Amendments, were approved by the Alberta Utilities Commission on June 13, 2023, and will come into effect on April 1, 20245. Among the amendments are necessary clarifications to ensure energy storage can participate and bid into Alberta’s energy and ancillary services markets.
Battery storage proponents are also working with the AESO to make amendments to the ISO tariff, which currently treats energy storage like any other load on the system, failing to recognize that storage is different because, while it is a “load”, it does not consume power like most other end-users. The AESO has acknowledged that this may allow for different rates to be charged when energy storage resources are drawn from the grid. In Spring 2023, the AESO initiated the Energy Storage Tariff Working Group to consider such changes to its tariff and ensure that it is not a barrier to entry. Work is ongoing, with the goal of recommending modifications to the ISO tariff for approval from the AUC in the near future.
Ontario storage capacity update
In the past year, the Ontario Independent Electricity System Operator (IESO) concluded its expedited request for proposal (RFP) process for long-term contracted capacity and announced the procurement of 15 energy storage projects with a total storage capacity of 822 MW and 586 MW of additional natural gas capacity from planned expansions and upgrades to existing facilities.
The storage projects, which range in size from 5 to 300 MW, are scheduled to be in service no later than 2026, and 9 of the 15 projects have Indigenous community participation of at least 50%.
The total 1,325 MW of long-term capacity (storage and natural gas procurements), combined with the 250 MW of storage from the Oneida Energy Storage Project expected to be in service by 2025 (which we discussed in our update last year), the 1,400 MW of summer capacity secured in the IESO’s annual capacity auction, and a new agreement for the Brighton Beach Generating Station to continue operations, have provided the IESO comfort that it will satisfy the province’s electricity needs through to 20286.
The IESO’s long-term RFP launched this fall (bids are due in the second week of December), with the goal of procuring an additional 2,500 MW of storage to be in service toward the end of the decade.
Back to the future
One year ago, we spoke of the merits and uses of energy storage and how it could serve a critical role in Canada’s energy transition, including the decarbonization of the electricity grid. Since then, the ITC and Clean Electricity Regulations have cemented the critical role that energy storage can play. The developments in Alberta and Ontario are also evidence that energy storage is here to stay.
The conversation has now shifted to the adoption of energy storage (including what roles it should play)7 and some of the difficulties that can arise, including the implementation of this new technology on an existing (“old”) grid, transmission constraints, interconnection queue backlog and supply chain issues.
For the expedited RFP, the IESO concluded that natural gas procurements were necessary “as a transitional resource to help maintain reliability as Ontario grows its storage fleet”8. On the same basis, the IESO plans to continue to procure natural gas resources in the long-term RFP. In particular, the IESO noted that, while batteries provide a quick ramp up and down for changes in demand, they only provide energy for about four hours9 before they need to recharge, whereas natural gas generators can run for 12 hours or longer if necessary. Additionally, the IESO noted that natural gas can provide voltage and frequency stabilization services to the transmission grid (although these are services that can, to a certain extent, also be provided by energy storage)10.
This is just one example of the “growing pains” that are to be expected with the implementation of new technology on a grid that has been established for decades and whose roots reach back to the 19th century. It also shows the need for further development of long-term and greater-capacity energy storage to overcome some of the concerns that grids and utilities have, as well as further energy policymaker education in respect of the “Swiss Army knife” nature of energy storage (where the same storage asset can provide many different services—in some cases, effectively contemporaneously).
Transmission constraints were also a factor in the IESO’s selection process in the expedited RFP. The IESO uses what it calls a “Deliverability Test” to test transmission capacity for a proposed project, and a number of proposals received a “Deliverable but Competing”11 assessment. Effectively, this meant that such energy storage projects had to beat out all other proposed connections in their transmission area, notwithstanding how good their proposal was in respect of the RFP overall. As a result, many energy storage projects that had compelling economics were ultimately not selected, especially when competing against gas generation resources (for the reasons mentioned above). This is a cruel irony given that energy storage is a technology that can act as transmission deferment or replacement. It presumably does not help that energy storage is both a load (to charge) and a supply (to discharge), and therefore, theoretically12 uses twice the transmission of a typical generator (which only supplies power) or an end-user load (which only draws power).
More troubling, not just for energy storage but all energy transition projects, are the delays resulting from interconnection queues (the AESO Connection queue, now impacted by the Alberta Government’s pause on project approvals, is one example). Similar connectivity issues exist throughout the G-7, most proximately in the United States where there are reportedly 430GW of projects queued up13.
Finally, battery energy storage continues to struggle with supply chain issues related to component rare earth metals, such as lithium (most of the supply comes from Australia, Chile and China), and demand competition from other end-users of lithium-ion batteries, such as EVs.
In short, while the future is bright and exciting for energy storage in the long term, near-term issues arising from the adoption challenges, transmission constraints, interconnection backlogs and supply chain constraints will need to be overcome in order to successfully implement storage into our existing grids and reap the benefits it can provide to help accelerate us through Canada’s energy transition.
- See additionally, “Clean energy ITCs: clean technology and CCUS draft legislation released”, August 22, 2023, accessed online at: https://www.torys.com/our-latest-thinking/publications/2023/08/clean-technology-and-ccus-draft-legislation-released
- Government of Canada, Clean Electricity Regulations, Learn about the draft regulations, accessed online at: https://www.canada.ca/en/services/environment/weather/climatechange/climate-plan/clean-electricity-regulation.html
- For example: (i) the available ITC is reduced on a dollar-for-dollar basis if other government support has been granted to a project—borrowers that have obtained Canada Infrastructure Bank (CIB) financing for more than 30% of their project costs may find that they are ineligible for ITC and (ii) the ITC “recapture” regime and the proposed rules in respect of partnership structures (partners are only eligible to claim ITC up to their “at-risk amount”, which can be relatively small in a highly leveraged project and will require modification of existing transaction and financing structures in order to maintain “finance-ability” of projects and maximization of the ITC.
- AUC Decision 28176-D01-2023.
- IESO Resource Adequacy Update, May 16, 2023.
- For instance, one small distribution company in a non-Canadian jurisdiction is proposing buying and installing battery storage for its residential customers in order to “harden” the grid and defer certain maintenance costs. https://www.utilitydive.com/news/green-mountain-power-vermont-storage-grid-hardening/696180/
- The long-term RFP also includes a category for 8-hour storage providers.
- IESO Resource Adequacy Update, June 27, 2023.
- The transmission constraints in Ontario are increasingly reflecting the bottleneck nature of grids everywhere—most proponents in the current long-term RFP received “Deliverable but Competing” assessments, and some proponents who received such an assessment in the expedited long-term RFP were assessed as “Non-Deliverable” less than a year later.
- Only theoretically because virtually all energy storage systems will typically charge at off-peak times (to minimize cost), during which the transmission system is significantly under-utilized.
Le mois dernier, le Canada a publié sa première Stratégie industrielle de défense (la Stratégie), qui souligne l’engagement du Canada à développer une base industrielle de défense solide et à stimuler la croissance économique. Ces efforts pourraient aussi comprendre le renforcement de l’état de préparation à la biodéfense et aux contre-mesures médicales, ce qui pourrait constituer des débouchés pour le secteur canadien des sciences de la vie en raison de l’importance accordée aux capacités nationales en ce sens et de la nécessité d’atténuer les risques d’urgences sanitaires.
Développement de contre-mesures médicales au Canada
Comme indiqué dans les bulletins précédents, le quatrième pilier de la Stratégie est axé sur la « sécurisation des chaînes d’approvisionnement pour les intrants et les biens clés » par le renforcement de la production nationale et le stockage de ressources. L’accent est mis tout particulièrement sur les contre-mesures médicales, en précisant que nos « alliés ont établi un lien explicite entre l’état de préparation à la biodéfense et aux contre-mesures médicales et leur sécurité économique et nationale, en élaborant de nouvelles stratégies et de nouveaux mécanismes pour faire progresser ces travaux ». Les contre-mesures médicales désignent divers produits réglementés pouvant être utilisés pour protéger la population lors d’une situation d’urgence de grande ampleur, comme l’éclosion d’une maladie ou une attaque impliquant des armes chimiques, biologiques ou nucléaires. Il peut s’agir de vaccins, de médicaments thérapeutiques et produits biologiques, de dispositifs de tests diagnostiques, des équipements de protection individuelle ou industrielle, et d’autres dispositifs médicaux. Les contre-mesures médicales sont essentielles à la réduction et à l’atténuation des dommages lors d’une urgence de santé publique.
Exploiter les voies réglementaires mises en place lors de la pandémie de COVID-19
Pendant et après la pandémie de COVID-19, le Canada a mis en place plusieurs nouvelles voies réglementaires comme mécanismes d’accélération des approbations de produits médicaux, ce qui pourrait offrir au gouvernement des options pour déployer des contre-mesures médicales afin de faire face aux risques pour la santé publique. Au début de la pandémie, Santé Canada a émis diverses ordonnances provisoires pour permettre l’importation et la vente de médicaments et de dispositifs médicaux qui n’avaient pas eu l’approbation des voies réglementaires traditionnelles. Or, Santé Canada a plutôt fait confiance aux voies d’approbation réglementaire et de l’exemption de certaines exigences en homologation de produits des pays impliqués dans la transaction. Beaucoup de ces règles provisoires ont depuis été officiellement intégrées à la réglementation en vertu de la Loi sur les aliments et drogues et ont été appliquées bien après la COVID-19. Conformément au Règlement sur les aliments et drogues, Santé Canada tient à jour la Liste des maladies qui menacent la santé publique et utilisera une procédure d’autorisation modifiée pour les médicaments d’urgence de santé publique pouvant traiter les affections figurant sur la liste. De même, le Règlement sur les instruments médicaux a établi une liste d’instruments médicaux répondant à un besoin urgent de santé publique, ce qui permet à Santé Canada d’autoriser la commercialisation de ces instruments de manière accélérée. Ces outils réglementaires sont utilisés automatiquement quand une situation médicale présente un grand risque pour la santé publique au Canada et nécessite une action immédiate pour contrer ce risque.
Le rôle de la Stratégie dans le renforcement du régime réglementaire de la santé au Canada
La stratégie prévoit que le Canada adoptera une approche proactive en matière de planification en amont des crises sanitaires. Le gouvernement entend s’assurer que les produits médicaux sont déjà disponibles au Canada afin qu’ils puissent être distribués rapidement en cas d’urgence. D’autres modifications récentes au Règlement sur les aliments et drogues permettent de prépositionner au Canada tous les médicaments d’urgence en santé publique, ce qui signifie qu’ils peuvent être importés dans des installations d’entreposage canadiennes avant que leur mise sur le marché n’ait été autorisée. La Stratégie s’appuie sur ces fondements, en faisant référence à l’organisme existant Préparation aux crises sanitaires Canada (PCSC), un organisme opérationnel spécial au sein d’Innovation, Sciences et Développement économique Canada (ISDE), et à un nouveau Fonds des sciences de la vie, lesquels « collaborent avec des partenaires internationaux et de soutenir l’élaboration et la production de contre-mesures médicales ». PCSC supervise la Stratégie en matière de biofabrication et de sciences de la vie du Canada, qui vise à développer un secteur national des sciences de la vie fort et compétitif doté de capacités de biofabrication de pointe, en mettant l’accent sur la capacité à se préparer et à faire face aux futures priorités et crises sanitaires. Dans cette optique, il y aura des occasions pour les fabricants de nouer des collaborations de recherche et des accords commerciaux ou d’approvisionnement liés aux contre-mesures médicales financées par des programmes fédéraux.
Étroitement lié aux capacités nationales, le pilier III de la stratégie implique « Investissement ciblé pour renforcer un secteur canadien de la défense novateur », avec la promesse que le gouvernement fédéral « soutiendr[a] la recherche et le développement, protéger[a] la propriété intellectuelle, soutiendr[a] les petites et moyennes entreprises, investir[a] dans les compétences et la formation, et encourager[a] les exportations afin de créer un secteur de la défense agile et concurrentiel à l’échelle mondiale ». La nécessité de favoriser le développement de la propriété intellectuelle (PI) et la conservation des droits du Canada est mentionnée à plusieurs reprises dans la Stratégie. Par exemple, la Stratégie prévoit l’établissement de partenariats officiels avec l’industrie canadienne qui « [assureront] la propriété et le contrôle nationaux de la propriété intellectuelle (PI) et des capacités essentielles. » La Stratégie reconnaît l’immense talent des établissements canadiens et la précieuse recherche qui y est menée actuellement et qui est déjà financée par des subventions de recherche d’organismes tels que le Conseil de recherches en sciences naturelles et en génie et les Instituts de recherche en santé du Canada, et fait aussi référence à l’engagement de 1,6 milliard de dollars pour de nouveaux fonds de recherche dans le budget de 2025. Cette prise de conscience de la nécessité de promouvoir et de soutenir l’innovation au Canada laisse présager des possibilités de financement, notamment dans les domaines où le Canada accuse un retard en matière de production nationale et où des engagements d’investissement et de fabrication au Canada peuvent être pris.
Prochaines étapes
Dans les prochains mois, nous prévoyons que le gouvernement du Canada publiera d’autres directives et des mesures de suivi. L’équipe de défense des conservateurs poursuivra sa couverture de perspectives sur la défense au Canada en publiant une analyse supplémentaire pour donner des précisions sur l’incidence de la Stratégie sur de multiples secteurs.