Introduction

Background

3.1 Scientists have documented the causes and impacts of climate change in all regions of the planet. A primary cause of climate change is the increase of greenhouse gases in the atmosphere. These gases include carbon dioxide, methane, nitrous oxide, and ozone. In 2015, more than 80 percent of Canada’s greenhouse gas emissions came from energy production and use. According to Environment and Climate Change Canada, the main sources of these emissions were the oil and gas sector (26 percent), transportation (24 percent), buildings (12 percent), and electricity generation (11 percent).

3.2 In 2015, under the Paris Agreement, part of the United Nations Framework Convention on Climate Change, Canada committed to a reduction of 30 percent in greenhouse gas emissions below 2005 levels by the year 2030. Clean energy technologies are one way to decrease greenhouse gas emissions from energy production and use. They include technologies that bring about the production, transmission, distribution, and use of energy with low or no greenhouse gas or other air emissions. Examples of clean energy production technologies include

• solar photovoltaics, a technology that uses solar cells to convert sunlight into electricity without producing greenhouse gas emissions;
• wind turbines, a non-emitting technology that uses turbines with large propellers to capture wind energy and produce electricity;
• tidal turbines, a non-emitting technology that uses turbines to capture the energy from ocean tides and produce electricity; and
• fuel cells, which use the chemical energy of hydrogen to create electricity with zero emissions.

3.3 Clean energy technologies also include innovations that reduce energy use, increase energy efficiency, or support other low- or non-emitting energy technologies, rather than producing energy themselves.

3.4 According to the International Energy Agency, three major strategies could contribute to reducing greenhouse gas emissions: 38 percent of cumulative global emission reductions between 2013 and 2050 could come from energy efficiency, 32 percent from renewable energy sources, and 12 percent from a technology called carbon capture, utilization, and storage (CCUS).

3.5 The CCUS technology involves capturing carbon dioxide from industrial operations such as coal-fired electricity plants, oil sands upgrading, natural gas processing, or cement manufacturing plants. Because it involves large capital costs, CCUS is suitable primarily in large facilities. The carbon that is captured is transported for storage underground, or for use in other operations—most often to facilitate the extraction of oil through a process called enhanced oil recovery (Exhibit 3.1). According to the Intergovernmental Panel on Climate Change, CCUS creates a net reduction of emissions by 80 to 90 percent when the carbon is captured from coal-fired electricity plants and stored underground.

3.6 To meet regulations that set limits on emissions, Canadian coal-fired electricity plants that are new or that have been operating for 50 years or more will be able to operate only if they use CCUS. The federal government announced in 2016 that it plans to phase out plants that exceed the emission limits by 2030.

3.7 While many clean energy technologies are already in use, some are not yet at the commercialization stage, because they have not yet demonstrated their technological and economic potential. Private sector funding is often hard to secure at this demonstration stage, given the high-risk nature of unproven technologies.

3.8 The federal government has recognized that innovation in technology is key to meeting its commitments to reduce greenhouse gas emissions and has taken steps to fund demonstration projects through various initiatives. Private sector funding may be easier to obtain if a project has received government funding.

3.9 Federal funding for clean energy technologies is supported by other federal, provincial, and territorial measures, such as regulations and standards that limit emission intensity, government procurement policies that promote the purchasing of low-carbon goods and services, and carbon-pricing mechanisms for the use of carbon-emitting energy.

3.10 Several federal organizations are involved in supporting clean energy technology demonstration projects:

• Environment and Climate Change Canada. This department is the lead for developing Canada’s strategy for meeting greenhouse gas reduction targets, and for developing and implementing regulations aimed at reducing emissions. Environment and Climate Change Canada also develops and submits data on Canadian greenhouse gas emissions to the United Nations.
• Natural Resources Canada. This department is responsible for supporting and promoting the production and use of clean energy. Natural Resources Canada supports research, development, and demonstration of clean energy technologies through several programs.
• Sustainable Development Technology Canada. This organization is a federally funded arm’s-length foundation, created in 2001 and operated as a not-for-profit corporation. Its mission is to fund the development and demonstration of sustainable development technology projects. From 2001 to 2016, Environment and Climate Change Canada and Natural Resources Canada were responsible for overseeing the activities of Sustainable Development Technology Canada. In 2016, Innovation, Science and Economic Development Canada assumed this responsibility.
• Innovation, Science and Economic Development Canada. This department is responsible for strengthening the economy, enhancing Canada’s innovation performance, and promoting sustainable development. Innovation, Science and Economic Development Canada also works alongside other departments, including Environment and Climate Change Canada and Natural Resources Canada, in making strategic investments in Canada’s clean technology sector. The Department’s portfolio includes Sustainable Development Technology Canada and several other organizations that support clean technologies.

Focus of the audit

3.11 This audit focused on whether Natural Resources Canada and Sustainable Development Technology Canada managed demonstration projects in three federal funds for clean energy technologies in compliance with the conditions of the funds. It also focused on whether Natural Resources Canada and Sustainable Development Technology Canada articulated how selected funded projects were contributing to reducing greenhouse gas emissions.

3.12 We looked at projects funded with the expected long-term outcome of contributing to greenhouse gas reductions. The funds we examined also had projects with other environmental and socio-economic objectives. The audit examined clean energy technology demonstration projects in three funds:

• the Clean Energy Fund, administered by Natural Resources Canada;
• the ecoENERGY Technology Initiative, also administered by Natural Resources Canada; and
• the SD Tech Fund, administered by Sustainable Development Technology Canada.

3.13 The scope of our audit included all commercial-scale CCUS projects in Canada, with one exception. The CCUS demonstration project at the Boundary Dam coal-fired electricity plant in Estevan, Saskatchewan, was not included, because it received funding through the 2008 federal budget and not through any of the funds we examined. Under the provisions of the federal budget, $240 million was transferred from the Government of Canada to the Government of Saskatchewan for this project.

3.14 This audit is important because clean energy technologies are a key means of reducing greenhouse gas emissions from energy production and use.

3.15 More details about the audit objectives, scope, approach, and criteria are in About the Audit at the end of this report.

Findings, Recommendations, and Responses

Assessing, approving, and monitoring projects

Projects were funded through rigorous and objective processes

Overall message

3.16 Overall, we found that both Natural Resources Canada and Sustainable Development Technology Canada (SDTC) had rigorous and objective processes in place to assess, approve, and monitor projects.

3.17 This finding matters because the government spent significant amounts to fund clean energy technology projects. It is important for the federal organizations involved to demonstrate due diligence in assessing and approving projects.

3.18 Our analysis supporting this finding presents what we examined and discusses the following topics:

• Proposal submission processes
• Sustainable Development Technology Canada’s project assessment and approval
• Natural Resources Canada’s project assessment and approval
• Processing times
• Monitoring and payments

3.19 Clean Energy Fund. The Clean Energy Fund, administered by Natural Resources Canada, had two demonstration program components: one for large-scale carbon capture, utilization, and storage (CCUS) projects and one for small-scale renewable energy and clean energy systems.

3.20 The main objective of the Clean Energy Fund was to support the development of new technologies that would reduce greenhouse gas emissions from energy production. This included co-funding two or three large-scale CCUS demonstration projects, in partnership with the private sector and provinces, and generating new knowledge about the performance and operational characteristics of small-scale demonstration projects. The Shell Quest carbon capture and storage project was one of the projects funded (Exhibit 3.2).

3.21 EcoENERGY Technology Initiative. The ecoENERGY Technology Initiative, also administered by Natural Resources Canada, had two demonstration components, including one dedicated to CCUS projects, which we examined. This fund was intended to accelerate the development and market readiness of technology solutions in clean energy.

3.22 SD Tech Fund. The SD Tech Fund, administered by Sustainable Development Technology Canada, supports the development and demonstration of clean technologies that address climate change, air quality, clean water, and clean soil. We examined only projects that had climate change as a primary environmental benefit, such as the development of zero-emission fuel cells for vehicles (Exhibit 3.3).

3.23 For the three funds we examined, the total amount allocated from 2006 to 2017 for clean energy technology demonstration projects that had climate change as a primary environmental benefit was $1.4 billion. The three funds spent almost $714 million on demonstration projects over that period (Exhibit 3.4). A large portion of the allocated money was not spent, including three quarters of the CCUS portion of the Clean Energy Fund. This was because some of the projects were cancelled, and because the government reduced the amount available to the program and reallocated some funds to other programs.

3.24 Each of the funds was established with standard steps for calls for submissions, assessment of proposals, and recommendation or approval of projects by key committees. After the initiation of a contribution agreement, the funding organizations would monitor projects and provide payments in response to the recipient’s progress against milestones and incurring of eligible costs.

3.25 Our recommendations in this area of examination appear at paragraphs 3.34 and 3.39.

3.26 What we examined. We examined processes for proposal submission, assessment, approval, and support of clean energy technology demonstration projects in three funds. We examined 65 projects from these funds. We looked at how Natural Resources Canada and Sustainable Development Technology Canada solicited, assessed, and approved projects. We also looked at whether appropriate conflict of interest mechanisms were in place, and whether controls were used to ensure that payments were made in compliance with funding conditions. We looked at processing times, from initial project submission to the first payment, to see whether financial support was timely. Finally, we looked at the monitoring of funded projects and the management of payments.

3.27 Proposal submission processes. We found that, in most cases, the funds held public calls for submission of proposals. At the SD Tech Fund, until July 2016, project submissions were accepted twice a year; after this date, the Fund accepted submissions continuously.

3.28 Natural Resources Canada also used public calls for proposals, with the exception of CCUS proposals, for the Clean Energy Fund. These proposals were subject to a separate solicitation process, which targeted companies that had already applied to the ecoENERGY Technology Initiative or to the Government of Alberta’s Carbon Capture and Storage Fund. Natural Resources Canada officials told us that this approach ensured that federal funding could be combined with existing provincial and other types of funding, such as Alberta’s Carbon Capture and Storage Fund, to target companies that had expertise in large-scale CCUS demonstration projects.

3.29 We did not find evidence of this type of targeted submission process for any other type of technology at the demonstration stage. We found that Natural Resources Canada had planned to spend $784 million on CCUS projects out of the nearly $1 billion initially planned for demonstration projects. Of the $368 million actually spent on demonstration projects, $243 million was spent on CCUS projects. We did not find parallel plans for other types of technologies, such as fuel cells or geothermal initiatives.

3.30 Sustainable Development Technology Canada’s project assessment and approval. We found that Sustainable Development Technology Canada (SDTC) had a comprehensive process in place for proposal review and approval for the SD Tech Fund, against predetermined criteria. This process included reviews by internal and external experts, followed by review and recommendation by the SDTC Investment Committee (comprising SDTC executives, select Board members, and external advisers), review and recommendation by a subcommittee of the Board of Directors, and approval by the full Board.

3.31 We found that SDTC had measures in place to mitigate potential conflict of interest for all those involved in assessing and approving proposals. Board and committee members involved in decision making about funds were subject to a trading policy that prohibited them from disclosing information and from buying or selling shares from companies that were applying for funding.

3.32 For the 28 projects we examined—all of which aimed to have greenhouse gas emission reduction as a primary environmental benefit—internal SDTC experts and external reviewers from industry assessed proposals against several criteria, including intended emission reductions, technological capability and feasibility, and financial leverage and risk. We found evidence of substantial review and challenge at this stage, including verification of environmental benefit forecasts by a specialist on staff. Since 2012, SDTC had also used a standardized ranking tool to ensure consistent assessment of the potential benefits and performance of proposals.

3.33 The reviewers also provided summaries of their assessments, including assessments of the intended environmental benefits, such as emission reduction forecasts, to the SDTC Investment Committee. However, for 18 of the 28 projects we reviewed, we did not find documented evidence of the Investment Committee’s consideration of environmental benefits. Two projects that were funded had received low ratings on their environmental benefits by some of the internal and external reviewers, but were nevertheless recommended by the Investment Committee and approved by the Board, with no documented rationale related to environmental benefits.

3.34 Recommendation. Sustainable Development Technology Canada should clearly document the assessment of potential greenhouse gas emission reductions that it undertakes when approving projects that have this as an intended long-term outcome.

Sustainable Development Technology Canada’s response. Agreed. Sustainable Development Technology Canada (SDTC) assesses and challenges the greenhouse gas emission reduction performance of project proposals at several steps in the evaluation process. Summaries of greenhouse gas reductions are provided to the SDTC Investment Committee for consideration in the final project selection process. The SDTC Investment Committee will document, in the committee minutes, its assessment of potential greenhouse gas emission reductions that it undertakes when approving projects that have this as an intended long-term outcome. The President and Chief Executive Officer will ensure that the Investment Committee implements this approach immediately, as part of the permanent minute-taking procedure.

3.35 Natural Resources Canada’s project assessment and approval. We found that Natural Resources Canada had comprehensive processes in place to assess proposals against predetermined criteria. Both the Clean Energy Fund and the ecoENERGY Technology Initiative had technical committees that reviewed and rated projects in terms of their technical merit, their expected environmental benefits (including emission reductions), and their economic impact and risk. The technical committee for each fund made recommendations to a panel of assistant deputy ministers from Natural Resources Canada and other federal science-based organizations. This panel in turn advised the Deputy Minister of Natural Resources Canada on which projects to fund.

3.36 To mitigate potential conflict of interest, all participants in the technical committees and the panel were, as public servants, subject to the Values and Ethics Code for the Public Sector and were required to sign conflict of interest declarations.

3.37 We found some inconsistencies between the funds’ long-term expected outcomes for emission reductions and the way assessments were carried out. Proponents were required to submit estimates of potential emission reductions in their proposals, which were to be considered as part of the assessments. We found evidence that these estimates were submitted and considered for CCUS projects in both funds, and for the small-scale project applications to the Clean Energy Fund that we examined. However, for half of the ecoENERGY Technology Initiative projects that were expected to lead directly to emission reductions in the longer term, information on emission reductions was incomplete. Despite this lack of information, the projects were approved for funding without any explanation in the project files.

3.38 We found that files for three other CCUS projects, on which Natural Resources Canada spent $83 million, were not adequately documented. For one project, Natural Resources Canada officials were unable to locate the signed risk assessment, the financial due diligence documentation, or the approval of the amended contribution agreement. Appropriate documentation of project analysis, review, and key decisions is important to supporting decisions to allocate these large sums of money. We found that the lack of adequate documentation in these cases made it difficult for Natural Resources Canada to demonstrate due diligence clearly.

3.39 Recommendation. Natural Resources Canada should clearly document its project assessment and approval decisions, to show due diligence in the assessment of potential greenhouse gas emission reductions for demonstration projects that have this as an intended long-term outcome.

Natural Resources Canada’s response. Agreed. Natural Resources Canada has developed and implemented a clear and rigorous proposal assessment and approval documentation process that demonstrates due diligence, and that has been in place for programs that followed the ecoENERGY Technology Initiative and the Clean Energy Fund. Natural Resources Canada will further strengthen this process by including supplementary information on the assessment of potential greenhouse gas emission reductions for demonstration projects that have this as an intended long-term outcome for new programs starting in the 2017–18 fiscal year.

3.40 Processing times. Timely financial support is key for companies entering fast-moving market sectors such as clean energy technology. Timely diffusion of new technologies is a key objective of the SD Tech Fund. Funding recipients told us that processing time was especially important for small and medium-sized companies that might not have the resources to operate for long periods before receiving funding.

3.41 We found that the processing times were long for both the SD Tech Fund and the small-scale component of the Clean Energy Fund. For the 28 SD Tech Fund projects we reviewed, we looked at the time elapsed from initial project submission to the first payment, and found that the process averaged 22 months. We found that this was partly attributable to SDTC’s extensive due diligence process, and to the time required for applicants to secure additional funding and meet other conditions. At the end of the period covered by the audit, SDTC was taking action to shorten timelines by up to 4 months.

3.42 We also found that the process for the small-scale component of the Clean Energy Fund took 16 months on average. This fund also required applicants to go through an extensive due diligence process.

3.43 Monitoring and payments. Once a demonstration project was launched, recipients had to meet certain conditions to continue to receive funding for the full term of the project. Both Natural Resources Canada and Sustainable Development Technology Canada (SDTC) were required to monitor the projects against milestones and objectives. We found that Natural Resources Canada and SDTC had adequate mechanisms in place to monitor projects. Both prepared standard contribution agreements for each recipient and modified the contribution agreements appropriately when major changes occurred in the course of a project. Natural Resources Canada and SDTC applied the required 10 percent holdback on payments for all funded projects, when applicable. These final holdback payment sums were released once all conditions of the contribution agreements were met.

3.44 We found that both SDTC and Natural Resources Canada carried out adequate checks and made adjustments, as appropriate, to ensure that claims for payments were made against eligible costs and were based on actual costs incurred. Natural Resources Canada also carried out audits of funding recipients. SDTC assessed the recipients’ achievements against project milestones, made payments based on those assessments, and ensured that funding was directed to eligible project costs.

Measuring and reporting on results

Reporting on estimated greenhouse gas emission reductions for some of the funds we examined was insufficient to provide an overall picture of results

Overall message

3.45 Overall, we found that tracking and reporting on estimated greenhouse gas emissions from some of the funds that we examined was not sufficient to provide an overall picture of estimated reductions. While reductions from the SD Tech Fund and from the carbon capture, utilization, and storage (CCUS) projects in the Clean Energy Fund were reported, results from other projects in the Natural Resources Canada funds were not reported publicly, even though they were tracked internally in many cases.

3.46 This finding matters because tracking and reporting on funded clean energy technologies help to clarify how the funds are contributing to greenhouse gas reductions. Building better data helps to focus these activities and ensure that they achieve intended results.

3.47 Our analysis supporting this finding presents what we examined and discusses the following topics:

• Project-level reporting
• Fund-level reporting
• National reporting

3.48 Since the 1990s, the federal government has had a goal of reducing greenhouse gas emissions to mitigate the impacts of climate change. To meet Canada’s most recent commitment under the 2015 Paris Agreement, Canada must reduce its emissions to 523 megatonnes by 2030. In 2015, Canada’s emissions were 722 megatonnes.

3.49 Canada reports its progress toward greenhouse gas emission reduction targets internationally through various means, including a biennial report and a national communication report. Environment and Climate Change Canada submits these reports to the United Nations Framework Convention on Climate Change. The reports list key policies and measures addressing emissions, including the funds we examined.

3.50 The Pan-Canadian Framework on Clean Growth and Climate Change, released in December 2016, sets out the various levers available to government to work toward greenhouse gas emission reductions. The Framework identifies investing in “clean technology, innovation, and jobs” as one of its pillars; it also highlights the need for clear measurements of the effects of government activities.

3.51 Our recommendations in this area of examination appear at paragraphs 3.59 and 3.61.

3.52 What we examined. We examined whether the results of selected federal clean energy technology funds were adequately measured, tracked, and reported. We looked at how this was done by project, by fund, and at the national level.

3.53 Project-level reporting. Proponents were required to submit annual reports that included annual estimates of greenhouse gas emission reductions after project completion. Natural Resources Canada did not require this for projects that were not expected to reduce emissions directly (for example, smart grid technologies that enable better integration of renewable electricity into the electric grid).

3.54 We found that both Natural Resources Canada and Sustainable Development Technology Canada (SDTC) had difficulty obtaining these post-completion reports for many of the projects we reviewed. In some cases, there was little incentive for companies to report after receiving all the funding. For SDTC, most of the project reports we expected to find were missing. For Natural Resources Canada, reports were missing for a quarter of the companies funded.

3.55 We found that SDTC had additional processes in place to estimate greenhouse gas emission reductions as projects progressed. SDTC required funding recipients to provide environmental benefit reports, both at the beginning and at the end of a project, to estimate the potential contribution to greenhouse gas emission reductions. We found that this requirement was met for all of the SD Tech Fund projects we reviewed, where applicable. Funding recipients used the services of specialized third parties to prepare these reports. SDTC also contracted consultants to conduct a review of these forecasts upon project completion. We found that, in response to our 2006 audit, SDTC modified its approach to calculating the emission reduction estimates attributable to projects funded through the SD Tech Fund, to improve clarity in its reports to Parliament.

3.56 We found that Natural Resources Canada verified estimates provided by companies and modified estimates that were not realistic. However, its approach was not consistent for all projects. In 2016, Natural Resources Canada hired a specialist to improve consistency in verifying estimates. By the end of the period covered by the audit, it was too early to assess whether results had improved.

3.57 Fund-level reporting. For the SD Tech Fund, we found that Environment and Climate Change Canada and Sustainable Development Technology Canada included greenhouse gas emission reduction estimates in their annual reports to Parliament. In 2015, projects funded through the SD Tech Fund were credited with over six megatonnes in emission reductions, of which approximately two megatonnes were within Canada.

3.58 We found that there was no overall figure for emission reductions for the Natural Resources Canada funds we examined. We found that the Department tracked and reported internally on the emission reductions achieved for all projects funded through the Clean Energy Fund, but these figures were not reported publicly, with the exception of estimates for one large CCUS project. We found that the Department did not track the emission reduction estimates for all projects in the ecoENERGY Technology Initiative, and that it reported this information for only two of eight projects on its website.

3.59 Recommendation. Natural Resources Canada should report publicly on greenhouse gas emission reductions resulting from all the demonstration projects it funds that are intended to achieve emission reductions.

Natural Resources Canada’s response. Agreed. Natural Resources Canada already reports publicly on greenhouse gas emission reductions resulting from large demonstration projects that it funds, in program evaluation reports and on its website. Natural Resources Canada will supplement this information by publicly reporting on direct greenhouse gas emission reductions resulting from smaller demonstration projects that it funds, where such reductions exceed 0.01 megatonne per year per project, aggregated at the appropriate program level, for new programs starting in the 2017–18 fiscal year.

3.60 National reporting. Environment and Climate Change Canada’s national biennial report provided a consolidated list of greenhouse gas reduction measures in Canada and an estimate of their effect on emissions in 2020. This report listed all three funds we examined. We found that the report included greenhouse gas emission information for CCUS projects, but not for other clean technology projects we examined. Officials told us that these reports did not include all projects in their overall emission estimates because of the uncertainty of the potential results in some cases, and because of the interaction of different measures. Given that funding clean energy technologies is one of the federal government’s key levers in contributing to emission reduction targets, reporting nationally on the results of these funds would help to focus efforts and ensure that they achieve their intended results.

3.61 Recommendation. Natural Resources Canada and Innovation, Science and Economic Development Canada, in consultation with Environment and Climate Change Canada, should create a plan to measure and report on outcomes for funded clean energy technology demonstration projects that aim to reduce greenhouse gas emissions.

The departments’ response. Agreed. Natural Resources Canada and Innovation, Science and Economic Development Canada (which is responsible for Sustainable Development Technology Canada), in consultation with Environment and Climate Change Canada, will develop an approach to measuring and reporting on expected outcomes for funded clean energy technology demonstration projects that have as a goal reducing greenhouse gas emissions for new funding received as of the 2017–18 fiscal year.

Conclusion

3.62 We concluded that Natural Resources Canada and Sustainable Development Technology Canada (SDTC) managed selected clean energy technology projects in compliance with the conditions of the funds. They both had rigorous and objective processes in place to assess, approve, and monitor projects.

3.63 We also concluded that Natural Resources Canada and SDTC had articulated the environmental benefits of their funds. SDTC tracked and reported estimated greenhouse gas emission reductions. Natural Resources Canada tracked and reported on the results of completed carbon capture, utilization, and storage projects that it funded but did not consistently track and report this for other projects. Despite the greater uncertainty involved in tracking these results, reporting nationally on results would help ensure they achieve their intended results.

Subsequent Event

3.64 On 22 March 2017, the federal government released Budget 2017, which identified clean technology and clean energy as one of the government’s innovation priorities. New funding for clean technology companies, notably at the demonstration stage, included

• $400 million over the next five years for the SD Tech Fund; and
• $200 million to Natural Resources Canada and other departments to support the development, demonstration, and adoption of clean technologies related to the natural resource sectors.