Carbon capture plan faces doubts after Capital Power cancels $2.4-billion project

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Capital Power Corp. CPX-T has scrapped plans for one of Canada’s largest carbon-capture projects, dealing a blow to the country’s efforts to reduce emissions from industries that produce or heavily use fossil fuels.

The Edmonton-based power generator announced in its quarterly earnings report on Wednesday that it is discontinuing pursuit of the $2.4-billion project because it does not work financially. It had previously said that the proposal would annually capture up to 3 million tonnes of emissions from natural-gas units at its Genesee generating station in Alberta.

“Through our development of the project, we have confirmed that CCS [carbon capture and storage] is a technically viable technology,” Capital Power said in its statement. “However, at this time, the project is not economically feasible.”

The decision relates at least in part to continuing tensions between industry and the federal government about the extent to which public dollars will be used to provide revenue certainty for this form of decarbonization. And it raises questions about the future of carbon-capture investments being considered by other heavy emitters.

That uncertainty has major implications for Canada’s ability to hit its national climate-change goals, including net-zero greenhouse-gas emissions by 2050. Industry and Ottawa have pinned hopes for meeting those targets, without eliminating fossil-fuel sectors entirely, on being able to use the technology to catch carbon at sites from which it otherwise enters the atmosphere, then either bury it underground or use it in other industrial processes.

Although Capital Power declined an interview request on Wednesday, senior vice-president Jason Comandante earlier this year told The Globe and Mail that the company was considering parking the project because it was disappointed by the pace of negotiations with the Canada Growth Fund. The CGF is the new federal agency that has the task of offering revenue-certainty tools broadly known as carbon contracts for differences (CCfDs).

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Ottawa has already committed to significant financial backing for carbon-capture projects, by covering up to 50 per cent of capital costs through a new investment tax credit, although there has been industry frustration with slowness in putting that measure into law. And Alberta’s provincial government has committed to grants covering an additional 12 per cent of the upfront investments.

But Capital Power and other carbon-capture proponents have argued that additional financial assurances are needed from government, because CCS facilities will have high operational costs, and otherwise lack a reliable revenue stream.

While those revenues could come from earning and then selling credits under Canada’s industrial carbon-pricing system, industry has cited uncertainty about whether a robust credit-trading market will take shape – and about whether the pricing system will survive changes in government – as impediments to investment.

CCfDs are meant to address that concern by effectively creating a floor price for the credits’ value, with government taking on the risk if credits don’t trade for that amount.

The first such deal – a carbon-credit offtake agreement between the CGF and Entropy Inc., a carbon-capture subsidiary of Advantage Energy Ltd. AAV-T – was reached last December, to back a smaller project in Alberta.

But that deal set a relatively low per-tonne price of $86.50. That’s well below the guaranteed price that other companies have been seeking for their carbon-capture plans, according to three sources familiar with the CGF’s negotiations. The Globe is not identifying the sources because they were not authorized to speak publicly about the talks.

Other factors, beyond the apparent CCfD impasse, may also have played into Capital Power’s decision that its project was not financially workable.

Those include additional revenue volatility related to a restructuring of Alberta’s electricity market being undertaken by the province’s government, as well as the impact of interest rates higher than when the project was first conceptualized in 2021. The company’s leadership has also changed since that time, with Avik Dey replacing Brian Vaasjo as chief executive officer in 2023.

And while Capital Power has walked away from the table, other heavy emitters are known to still be in active negotiations with the Growth Fund. That includes Heidelberg Materials HDELY, a German company hoping to build the world’s first cement plant with full-scale carbon capture in Edmonton.

Nevertheless, carbon-capture advocates seized on Wednesday’s news as evidence of governments having failed to give emitters enough confidence that projects will pay off.

“These projects can still work,” said Michael Bernstein, the executive director of the think-tank Clean Prosperity, which has led the public push for CCfDs. “But the policy environment is not yet where it needs to be, including on contracts for difference, to put in place a strong signal to emitters that there is going to be a strong financial case for moving ahead.”

Mr. Bernstein suggested that sending that signal involves quickly reaching deals with other companies, now that Capital Power has retreated, but he also continued to call for a broader CCfD program to be put in place. To date, Ottawa has indicated that the Growth Fund can invest up to $7-billion in such deals, which may not be enough to meet the demand for them, and has prompted speculation that the agency is driving hard bargains to stay within its means.

Last month’s federal budget hinted at addressing that concern, including by stating that the government is “evaluating options to enhance the Canada Growth Fund’s capacity to offer CCFDs.”

As of now, however, the Growth Fund has committed under $1-billion, through the lone deal with Entropy.

While some environmental groups expressed dismay about the loss of another, larger potential carbon-capture deal, others cited it as evidence that the technology is an impractical way of addressing pollution, and that governments’ focus should be on replacing fossil fuels rather than abating their emissions.

“Carbon capture is unnecessary, ineffective and expensive,” Environmental Defence Canada said in a statement. “The most effective way to deal with carbon-dioxide emissions is to prevent them from ever being created.”