Feds sign $200M carbon contract for Calgary-based Entropy

A Calgary carbon capture company has signed a first-of-its-kind carbon offtake agreement with the federal government, a significant milestone that some say could help unlock future private-sector investments in decarbonization projects.

The federal Liberal government announced Wednesday that it has signed a deal with Entropy Inc., a privately owned company that has developed a unique modular carbon capture, utilization and storage technology.

The agreement will see the federal Canada Growth Fund — which is making a $200-million direct investment in Entropy — also provide the company with a large-scale, long-term fixed-price carbon credit offtake framework.

Under the terms of the deal, the Canada Growth Fund has agreed to purchase up to 185,000 tonnes of carbon credits from Entropy for a 15-year term at an initial price of $86.50 per tonne.

The federal government promised in its recent fall economic statement to introduce a "carbon contracts for difference" framework in order to give certainty to companies considering investing in emissions reducing technology.

Carbon contracts for difference reduce the risk for businesses investing in clean technologies by guaranteeing the price of carbon for a fixed period of time.

In other words, if the federal carbon price is cancelled by a future government or does not increase as projected, having a contract for difference in place gives companies the assurance that their pricey investments in decarbonization technologies will still be worthwhile.

"When you have a project that costs hundreds of millions of dollars, it takes a decade or so to pay out. So the carbon tax is not a suitable instrument to incentivize that investment," said Entropy CEO Mike Belenkie in an interview.

He added having a carbon contract for difference in place means that Entropy no longer has to make its decarbonization bet solely on the premise that the federal carbon price will continue to increase.

Removes investment risk

Wednesday's announcement removes enough of the investment risk that Entropy will be able to go ahead with its proposed $49-million second phase of its carbon capture and storage project at parent company Advantage Energy's Glacier gas plant in Alberta, he said.

"For us, this is the perfect solution," Belenkie said. "We have 15 years guaranteed offtake … it's more than enough for us to go out there and know that for the service we provide, we'll be able to recover our investment."

Many environmental groups have said a broad carbon contracts for difference framework has been the missing piece when it comes to encouraging private-sector investment in decarbonization in Canada.

Michael Bernstein, executive director of Clean Prosperity, said the concept is particularly important for carbon capture, where it complements an already announced investment tax credit.

"There's no direct revenue from carbon capture for a lot of these companies, so there ultimately has to be a business case," Bernstein said in an interview.

"These companies need to know that if they're putting in hundreds of millions of dollars of their own capital, that there's an economic justification for that."

Bernstein said while Wednesday's announcement is potentially hugely significant, it won't lead to a wave of final investment decisions by companies right away. The first contract is specific to Entropy, and Bernstein said what is needed is a more standardized version of a contract that is broadly applicable to other companies.

"We've been really encouraging the Growth Fund to take that more systematic approach … so the companies know right from the beginning what they might receive," he said.

One group that has been lobbying for carbon contracts for difference is the Pathways Alliance, a consortium of Canada's largest oilsands companies that has proposed building a $16.5-billion carbon capture and storage network in northern Alberta.

The group has not yet formally committed to go ahead with the project.

On Wednesday, Pathways Alliance spokesman Mark Cameron said the organization is working with the federal government to explore how carbon contracts for difference can be applied to large-scale projects such as the Pathways proposal.

"It is encouraging to see Ottawa acting on the essential need to help de-risk investments in emissions reduction projects with tools such as carbon contracts for difference," Cameron said.

"We applaud today's announcement."