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Canada Energy & Utilities Infrastructure Forecast


Fitch Solutions Sector Intelligence  

 

    THIS COMMENTARY IS PUBLISHED BY FITCH SOLUTIONS COUNTRY RISK & INDUSTRY RESEARCH and is NOT a comment on Fitch Ratings' Credit Ratings. Any comments or data are solely derived from Fitch Solutions Country Risk & Industry Research and independent sources. Fitch Ratings analysts do not share data or information with Fitch Solutions Country Risk & Industry Research.

    Canada Energy & Utilities Infrastructure Forecast

    • 11 Aug 2022
    • Canada
    • Infrastructure

    Key View: Energy and utilities infrastructure will be a key focus of infrastructure development in Canada over the coming years, with projects linked with the country's broader decarbonisation agenda, such as renewables development, to be a target of expanding investment. Nevertheless, the sector will underperform the wider construction industry over our forecast period, as an increasingly challenging environment for midstream infrastructure development, notably for new oil and gas midstream infrastructure, weighs on overall investment in the segment.

    Latest Developments
    • The Bank of Nova Scotia signed a 15-year power purchase agreement (PPA) with Evolugen, a unit of Brookfield Renewable Partners, to secure output from the 40MW Spring Coulee solar project in the Canadian province of Alberta. The solar facility, which will be located near the town of Cardston, will feature around 70,000 bi-facial photovoltaic modules and is expected to produce around 60GWh of electricity in the first year. Construction is scheduled to start in Q222, with commercial operations due to start in 2023, according to a press release from Evolugen.
    • In April 2022, Boralex partnered with Énergir and Hydro-Québec to develop three 400MW wind projects in the Canadian province of Quebec. The overall investment for the projects is estimated to reach CAD3bn (USD2.4bn) and includes Des Neiges Wind Farm – South, Des Neiges Wind FarmCharlevoix, and Des Neiges Wind Farm – West. Hydro-Québec will purchase the output from the facilities.
    • BluEarth Renewables broke ground to start construction of a 145MW wind project in the Canadian province of Alberta. The project, called Hand Hills, will be located in Starland County and will require capital investment of around CAD250.0mn (USD194.1mn).
    • Wild Rose 2 Wind has signed a 15-year PPA with Pembina Pipeline to offtake a 105MW portion of renewable energy and associated renewable attributes from the 192MW Wild Rose 2 Wind Farm in the Canadian province of Alberta. Siemens Gamesa Renewable Energy will supply 38 units of its SG 5.2-145 turbines. The CAD360mn (USD276.7mn) project is due to start construction in late-2022.
    Energy And Utilities Infrastructure Data (Canada 2021-2031)
    Indicator 2021e 2022f 2023f 2024f 2025f 2026f 2027f 2028f 2029f 2030f 2031f
    Energy and utilities infrastructure industry value real growth, % y-o-y 3.8 -1.7 -4.2 -4.6 -1.3 0.3 0.0 0.6 1.0 0.6 0.2
    Power plants and transmission grids infrastructure industry value real growth, % y-o-y 2.5 1.6 1.1 0.9 -0.3 0.7 -0.2 0.5 1.2 0.7 0.2
    Oil and gas pipelines infrastructure industry value real growth, % y-o-y 8.1 -12.5 -24.7 -33.3 -13.2 -5.5 -3.7 -2.2 -1.9 -2.2 -2.5
    Water infrastructure industry value real growth, % y-o-y 2.6 2.1 1.9 1.8 1.7 1.6 1.9 1.7 1.5 1.3 1.1
    e/f = Fitch Solutions estimate/forecast. Source: Statistics Canada, Fitch Solutions
    Structural Trends

    Midstream Challenges Weigh On Overall Energy And Utilities Infrastructure Outlook

    Construction on energy and utilities infrastructure in Canada will underperform the wider construction industry in Canada over the coming years, with the sector to see a weakening of investment overall as challenges facing midstream infrastructure development in particular weigh on overall growth. We expect that energy and utilities infrastructure construction will contract in real terms by 1.7% y-o-y in 2022 and see an average annual growth of –0.9% in real terms over our ten-year forecast period to 2031. We expect oil and gas pipeline infrastructure construction in particular to see a considerable weakening over the coming five years, as obstacles will largely prevent the launch of new projects, leading industry value to fall as construction works wind down on two large-scale projects currently under construction: the CAD12.6bn (USD9bn) Trans Mountain Expansion (TMX) and the CAD6.6bn (USD5.3bn) Coastal Gaslink projects.

    Comparatively, we expect water infrastructure as well as power and transmission grid infrastructure to see stronger investment over the coming years. In the water sector, an enhanced focus on environmental projects in line with the goals of the Liberal government’s CAD180bn infrastructure plan will see significant growth in construction activity over the coming years. In the power sector, continued investment in several large-scale hydropower projects will support construction activity over the short term, with the sector to increasingly benefit from a rising focus as well on the development of non-hydropower renewables projects, in line with the country’s increasing focus on decarbonisation.

    Non-Hydropower Renewables A Key Focus Of Power Investment

    Power infrastructure development will stand out as a driver of energy and utilities infrastructure development overall in Canada over the coming decade, as the country will see a sizeable increase in power capacity, spurred particularly by growth of non-hydropower renewables and, to a lesser extent, the continued development of hydropower capacity.

    We expect investment in the sub-sector will see significant investment over the coming years, spurred by government policies aimed at transforming the country’s power mix as part of broader efforts to combat climate change. Our Power team expects that Canada’s power sector will see a significant expansion in power capacity over the coming decade, with a net increase of 10GW to reach a capacity of 165GW in 2031, up from 155GW in 2021.

    The expansion in power capacity will be driven primarily by growth of non-hydropower renewables capacity, which our Power team expects will see a net gain of 8.3GW of capacity over our forecast period, increasing from 21.1GW in 2021 to 29.4GW in 2031. Non-hydropower renewables will, therefore, be Canada's power capacity growth outperformer over our 10-year forecast period to 2031, accounting for nearly 80% of the country's total net growth in electricity generating capacity. This increase will see the share of non-hydropower electricity generation as a percentage of total generation rise from an estimated 8.1% in 2021 to 10.4% in 2031. The country's large renewables project pipeline, exceeding 15GW, poses an upside risk to our forecasts over the coming quarters.

    Renewables To Outperform
    Canada - Electricity Capacity By Type, MW & Non-Hydro Renewables Share of Electricity Generating Capacity, % of total (2021-2031)

    e/f = Fitch Solutions estimate/forecast. Source: EIA, IEA, NEB, CANSIM, Fitch Solutions

    The outperformance of non-hydropower renewables development in Canada will be underpinned by the government policies at both the national and provincial levels aimed at reducing greenhouse gas emissions and supporting renewables development. This includes plans to phase out the use of coal-fired power plants by 2030, as well as the implementation in 2019 of a national carbon tax in the country. These taxes are set at the provincial level in the case of a number of provinces while a federal backstop pricing policy set through the Greenhouse Gas Pollution Pricing Act can be implemented when requested by a province or when a province does not have a carbon pricing policy in line with federal benchmark stringency requirements. Over the next decade, the government aims to considerably increase the federal carbon tax and the provincial carbon tax rates, as these must meet the federal standard: from April 1 2020, the federal government increased the carbon tax rate to CAD30/tonne for any province without a carbon tax already in place, and plans to increase the carbon tax by CAD15/t per year from 2023 to 2030, rising from CAD50/t in 2022 to CAD170/t by 2030.

    This will progressively increase the attractiveness of renewable power development while decreasing that of thermal power plants (notably coal and oil-fired plants), further supporting the growth of the renewables sector. In December 2020, the Liberal government announced a new CAD15bn expanded climate plan, entitled ‘A Healthy Environment and a Healthy Economy’, illustrating the strong commitment of the federal government under Prime Minister Justin Trudeau in particular to lowering greenhouse gas emissions. The expansion of the supply of clean electricity in the country in order to make clean power available in every community is among the plan's key goals.

    Within the renewables sector, wind projects are set to outperform owing to greater profitability relative to other types of renewable power projects, with wind projects to account for the largest share of non-hydro renewables projects added over the coming decade in Canada. We expect that wind capacity will increase by a net of 5.3GW between 2021 and 2031, rising from 14.3GW to 19.7GW. Comparatively, we forecast solar capacity to see a net increase of 2.2GW over the same period, rising from 3.5GW in 2021 to 5.7GW in 2031.

    In addition to non-hydropower renewables development, hydropower projects will account for a significant share of construction investment into the power sector with hydropower capacity set to increase by 3.4GW over the next ten years, increasing to 86.1GW in 2031, up from 82.7GW in 2021. The 1,100MW Site C project, a USD12.8 project being built by BC Hydro on the Peace River in British Columbia, and the 824MW Lower Churchill Project, a USD9.6bn project, stand out among projects currently under construction.

    Challenging Policy Environment To Limit Canada Midstream Development

    Oil and gas midstream infrastructure development in Canada will face considerable obstacles over the coming decade, leading investment in midstream projects to fall as projects face greater scrutiny and significant opposition from environmental groups, First Nation groups and, in some cases, political leadership at the federal and provincial levels. Canada hosts a sizeable pipeline of oil and gas midstream infrastructure projects, with projects either in planning or under construction totaling over USD39.4bn in investment, according to our Infrastructure Key Projects Database. This robust project pipeline, the second largest of any market globally by project value, reflects considerable efforts in the country to expand oil and natural gas export capacity and overcome infrastructure bottlenecks which in recent years have negatively impacted the sector amid rising levels of oil and natural gas production over the past decade.

    Nevertheless, we expect projects will face significant obstacles over the coming years, with few large-scale projects currently at the planning stage likely to see realisation. Recent years have seen a shift in the political and regulatory landscape in favour of greater scrutiny of midstream projects, particularly since the formation of a Liberal government at the federal level in 2015 under Prime Minister Justin Trudeau. While the Trudeau government has supported pipeline development in some cases, most notably the government’s decisions to back the Enbridge Line 3 Replacement and Trans-Mountain Pipeline Expansion (TMX) oil pipeline projects, the government has taken a number of other steps which have weighed on pipeline development and clouded the outlook for new pipeline projects in particular.

    For example, in 2016, Trudeau’s government announced its decision to block the Northern Gateway project, an oil pipeline project proposed by Enbridge which would have involved the construction of a 1170km pipeline between Bruderheim, Alberta and Kitimat, British Columbia. In addition: in 2019, with government support, Canada’s parliament passed Law C-69 which established stricter regulatory procedures for large-scale infrastructure projects and was largely opposed by the oil and gas industry. Among changes brought about by the law are the broadening of the scope of project review, the introduction of economic and social factors into the review process, and greater participation by stakeholders in the environmental assessment process.

    Weak Midstream Development To Weigh On Energy And Utilities Construction Growth
    Canada - Energy & Utilities Infrastructure Industry Value By Sub-Sector, CADbn (2016-2026)

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