Summary report: the future of Ontario’s natural gas market

Written by Charles Park, Energy Systems Engineering B.ASc. Candidate, University of Toronto

Mindfirst hosted a seminar called “The Future of Ontario’s Natural Gas Market” on May 22, 2015. It examined the evolution of Ontario’s natural gas market due to technological advancements, the business opportunity for Ontario to re-position itself as a natural gas leader, the expanding role of natural gas to support Ontario’s future energy needs, and the caveats to its use due to Ontario’s ambitious greenhouse gas (GHG) pollution reduction targets.

In the past 5 years, advancements in drilling technology have caused a fundamental shift in the way Ontario sources its natural gas supply.  Prior to 2010, Ontario was predominantly served through a network of pipelines from 2 locations: the Western Canadian basin (Alberta) and the Gulf of Mexico. In these areas, a traditional extracting method was used in which the ground was only drilled vertically into the porous rock to release underground gas to the surface. Recent developments in technology have allowed the extraction of unparalleled amounts of natural gas in the Marcellus and Utica shale regions southeast of the Ontario lakes. This was enabled by advancements in fracking, the combination of horizontal drilling, which accesses a previously unexplored breadth of subterranean area, and fracturing, which involves pushing water and sand through the vertical wells at very high pressures. This shakes the subterranean rock to release shale gas to the surface. The new-found accessibility to the vast reserves has allowed shale gas to contribute up to 50% of American and Canadian natural gas production in the past year and is projected to make up over 80% of this total (approximately 40 trillion cubic feet) by 2025.

The growing shale market provides a timely business opportunity for Ontario to expand its natural gas infrastructure. Ontario’s proximity to the Marcellus and Utica regions confers a competitive advantage that is not available through current sources of natural gas. For instance, natural gas from Alberta is transmitted through the TransCanada pipeline. Since Ontario is located at the end of this pipeline, it receives the highest tolls from TransCanada, sometimes more expensive than the fuel itself. Sourcing natural gas from the Marcellus and Utica regions can eliminate this part of Ontario’s cost structure. Ontario also has a strong incentive to invest in new pipeline infrastructure to maintain its position as a key North American gas player. Local distribution companies from the States are willing to do business in Ontario because of the Dawn Hub: an integrated storage facility (292 PJ of energy) located southeast of Sarnia. It provides a highly liquid and cost-effective trading hub for over 100 gas companies to buy and sell natural gas according to their seasonal needs. Depending on the season, a region may choose to source its power through an optimal balance of natural gas from either storage or transmission facilities. For example, a region like Boston has no storage capacity. Instead of bundling all its peak winter capacity requirements into costly transmission pipelines, Boston can come to Ontario’s Dawn Hub to access more cost-effective gas on an as-needed basis. There are several projects currently underway, pending approval, to increase pipeline capacity between the Dawn Hub and the Marcellus and Utica regions, with one prospect aiming to connect the US pipeline network towards Dawn and then Niagara, where Ontario’s demand centers reside.

Natural gas systems are becoming an important component of Ontario’s supply mix, both at the residential and high-voltage grid level. At the residential level, natural gas is a relatively cost-effective way of meeting home heating needs, costing less than half of what is incurred by time-of-use electricity. At the high-voltage grid level, gas-fired generation will play a critical role as Ontario’s peaking fuel. With Ontario’s recent stance to phase out coal generation and to increase the penetration of renewable energy, the system has relied on more natural gas to help respond to variable load patterns. Natural gas also has a role in meeting Ontario’s capacity shortfall due to the upcoming refurbishment of nuclear facilities, with gas procurement options including the re-negotiation of expiring non-utility generator contracts or participation in the electricity market through a capacity auction in which either shut-down coal plants (like Nanticoke and Lambton) can be converted to natural gas facilities or new build can be committed.

While gas provides an important reliability benefit, Ontario’s GHG reduction targets may challenge the extent to which natural gas can be incorporated into the supply mix. The recent move towards cap-and-trade aims to achieve reduction targets of 37% below 1990 levels by 2030. This will require an effective allocation of carbon emission allowances to the electricity sector to facilitate both the objectives of system reliability and environmental sustainability. By 2050, Ontario hopes to achieve  a reduction of 80% below 1990 levels. In this long-term planning horizon, natural gas will not necessarily provide the game-changing breakthroughs required to meet emission reduction targets. Rather, the energy sector will need to rethink its approach to generating and consuming energy, through avenues such as moving towards an electrified infrastructure that reduces emissions in the transportation sector through electric vehicles or developing more economic forms of carbon sequestration.

The natural gas market is a promising area for economic prosperity and increased reliability benefits in Ontario, enabled through the development of fracking technologies and facilitated through the Dawn Hub. Going forward, Ontario needs to manage a delicate balance between these objectives and an equally important effort to reduce greenhouse gas pollution.

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