Royal Bank’s NetZero Decarbonization Estimate is Severely Underestimated

June 9, 2022

RBC – Royal Bank of Canada
ATTN: David McKay, CEO

Kindly forward inhouse to:
John Stackhouse, Senior Vice President
Colin Guldimann, Economist
Ben Richardson, Research Associate
Steven Frank, Consulting Editor
Darren Chow, Senior Manager, Digital Media
Carolyn King, Senior Managing Editor
Farhad Panahov, Research Associate

RE: Open Letter Critique of Royal Bank of Canada’s “The $2 Trillion Transition” – Findings Indicate Costs of NetZero Decarbonization are Severely Underestimated

Friends of Science Society is a non-profit society made up of earth, atmospheric, solar scientists and Professional Engineers which has been assessing climate and energy policies since 2002. We offer climate and energy insights to the public and policymakers based on our two decades of operation and our contributors’ decades more of professional industry and scientific research knowledge and experience.

Regarding your recent Thought Leader publication, the elephant in the room is right in the title: The $2 Trillion Transition. RBC’s estimate of the cost to go net zero on the electrical grid with wind and solar backed up with batteries is $5.4 billion which includes $3.6 billion for batteries. Friends of Science Society’s report “The True Cost of Wind and Solar Electricity in Alberta” puts the cost of batteries at almost $2 trillion just for Alberta. Alberta has approximately half of the fossil fueled power generation in Canada so the cost would scale up to about $4 trillion for all of Canada, just for the batteries to back up wind and solar power.

While Friends of Science Society applauds RBC for analyzing net-zero on a cost-benefit basis and there is much to agree with in the text in the RBC report, unfortunately the RBC authors understate the cost of getting to net-zero and overstate the benefit of getting to net-zero which of course makes the conclusions irrational. It should be noted that the area of electrical power generation is extremely complex; even industry experts struggle with the scope of impact of changes to the system, therefore bankers can be excused for missing the important aspects in their analysis.

The RBC report features a heavy dependence on new, emerging technology to get to net-zero, particularly carbon capture and storage. While this is promising, it does not make good business sense to go all in on it until it proves itself as being commercially viable and scalable.

Electrifying the grid is widely seen as the first step in getting to net-zero because it appears to be the easiest. There is more detail in Pathway 1: Electricity in the RBC report so that is the focus of Friends of Science Society’s comments.

Specific Notes:

Page 7 – The cost of inaction. “If we keep emitting at the same pace, we would need to save $40 billion annually to cover the costs of future disasters made worse by climate change.”

Damages of $40 billion per year seems high. The source for this figure is not given. The present value of $40 billion per year to the year 2100 discounted at 5% is approximately $800 billion. RBC states that Canada’s emissions are currently 730 million tonnes per year. Therefore, RBC figures put the saving from reducing Canada’s emissions to zero at approximately $1,100/tonne. This is at least 50 times higher than IPCC estimates.

IPCC has valued the costs of future damages to our environment as follows:

• In IPCC AR5 WG II Fig 9.4, the IPCC projected that projected global temperature rise of up to 3 degrees C would negatively impact the global economy in 2100 by 3 percent or less. This translates to a decrease in the annual growth rate of 0.04% per year (3% divided by 80 years). [Source: “Unsettled” by Steven Koonin]. Global GDP in 2019 (pre-covid) was $87,390 billion USD and global emissions were 43 billion tonnes. This equates to $0.81/tonne.
• The IPCC commentary on this is the first point in the Chapter 10 Executive Summary: “For most economic sectors, the impact of climate change will be small relative to the impacts of other drivers (medium evidence, high agreement). Changes in population, age, income, and many other aspects of socioeconomic development will have an impact on the supply and demand of economic goods and services that is large relative to the impact of climate change.”
• The IPCC Special Report: Global Warming of 1.5 Degrees C references the DICE Model which values the Social Cost of Carbon (SCC) (the mean net present value of the costs of damages from warming in 2100 for 1.5 °C and 2.0 °C (including costs associated with climate change-induced market and non-market impacts, impacts due to sea level rise, and impacts associated with large-scale discontinuities) relative to 1961–1990) at $15/tonne and up to $116/tonne when large scale singularities or tipping elements are incorporated. These large-scale singularities or tipping elements are mostly associated with the extreme worst-case scenario (RCP 8.5) which the IPCC deemed unlikely to occur in AR6. See Roger Pielke, Jr.’s plain language discussion of the IPCC abandonment of RCP 8.5 and his peer-reviewed study with Justin Ritchie on “Distorting the view of our climate future: The misuse and abuse of climate pathways and scenarios.”
• Another peer reviewed SCC Model, the FUND integrated assessment model projects an SCC of $6/tonne at a 5% discount rate, or $12/tonne at a 3% discount rate. When the benefit of higher emissions and warming on agriculture are included, SCC is net negative $6/tonne meaning that higher CO2 emission levels are a net benefit to the planet.
• In summary, there are a number of studies valuing SCC and the value equivalent of $1,100 per tonne shown by RBC is orders of magnitude higher than the $15/tonne DICE model shown by the IPCC. Any emissions reductions projects which cost more than this would not have any scientific or economic justification. We all want to protect the planet, but at the end of the day, money matters!!

Pathway 1: Electricity

• RBC states that wind and solar are often 30% cheaper than natural gas. This claim is often made, and it may be true if the comparison is made right at the generator site, but it does not reflect the full cost to make that power reliable and get it to market. This is like comparing apples and elephants. There are a number of hidden costs to wind and solar generation which are not always apparent to the public, but we certainly do pay for them either through our electricity bills or our taxes, or both [1]. The full cost of wind and solar generation is far in excess of the cost of natural gas fired generation for the following reasons:

1. Back-up generation. Wind and solar are intermittent (electrical power is only generated (kinetically captured) when the wind blows or the sun shines) therefore they need back-up generation to make them reliable. The grid must be designed to meet peak demand. Peak demand is often in the dead of winter after the sun has gone down and often the wind does not blow on those cold winter nights. Therefore, the addition of wind and solar does not appreciably reduce the amount of reliable generation capacity required to power the grid. The only saving to the wind/solar project owners is that no fuel is required as an operational input by their companies when the wind or solar generator is operating. However, this ‘fuel-saving’ is nullified by the requirement to use inefficient back-up generators to offset the extreme variability of wind and solar power. High efficiency combined-cycle gas generator can’t usually be used as backup for wind and solar due to excessive thermal stress caused by the rapid output changes required, so less efficient single-cycle gas generators are used which consume 57% more fuel than combined-cycle generators. There are also higher maintenance costs incurred by the back-up generators due to the increased number of starts and stops. In some geographic locations, there will not be a substantial reduction in carbon dioxide emissions, as reported by a power industry expert on Alberta:
   “The problem with wind is its randomness, wind is completely uncorrelated with demand. If the Alberta gov’t adds another 5,000 MW then the total wind capacity would be ~6,500 MW. Typically, this amount of wind would randomly experience 80% or higher ramps one or more times per week. This would be the equivalent of ramping 6.5 Shepard* natural gas plants from off to full to off again. These plants are unable to do this over the long term. They may end up having to put in simple cycle units instead which, from a CO₂ perspective, would pretty much defeat the purpose of adding wind. But it’s never really been about reducing CO_2, it’s all about building wind. And now solar with the new government statement about going 50% solar.” [*Shepard is a Combined Cycle 800MW natural gas plant located in Calgary, built at a cost of $1.4 billion. This workhorse operates at near capacity virtually every day.]
2. Stranded costs. The run time on the back-up generators is reduced, but their fixed costs do not change. These costs still need to be recovered by the grid.
3. Transmission line costs. Wind projects typically have a capacity factor of about 0.4 which means they only generate 40% of their nameplate capacity over the course of a year. This means that when they are running at capacity, they will be delivering twice their average annual generation compared to a typical natural gas fired generator. Therefore, the transmission capacity to accommodate the wind project is twice that of a typical natural gas fired generator which in turn means twice the cost. For a solar project with a 0.2 capacity factor the transmission cost is 4 times greater than a natural gas fired generator with a 0.8 capacity factor. In addition, wind and solar power generation incurs higher transmission costs since the distance travelled from the generation site to the market is longer (as in the case in Alberta where the wind and solar projects are almost exclusively in the southern part of the province, away from the Calgary, Edmonton, and oil sands markets all further to the north. The cost of the 500 kV line from Calgary hub to southern wind farms was $2.2 billion for 4-7% of unreliable power generation from wind.]
4. Market value of wind and solar generation. Wind and solar generation often takes place when demand is low and therefore there is an oversupply in the market and the pool price drops. Power generation must be constrained, shut in or power exported to other regions at a discount. Former international banker Parker Gallant has an on-going series of articles on the financial devastation being wrought upon Ontario industry, consumers, and taxpayers due to this phenomenon. This phenomena becomes more prevalent as the market share of wind and solar power becomes significant. Lazard states: “Increasing occurrences of low or negative pricing have been observed across various energy markets corresponding to rising levels of renewable penetration and a greater number of curtailment events.”

The cost of electricity has risen significantly in regions where wind and solar generation have significant market share. An analysis of European electricity prices shows that the cost of electricity increase with increasing wind and solar generating capacity such that the effective cost of solar and wind electricity is almost six times that from other sources.

Lower Costs Make Wind and Solar ‘Competitive’… but not Batteries

RBC shows the cost of replacing fossil fuel powered generation with wind and solar backed up with batteries at $5.4 billion. RBC cites Lazard as the basis of their estimate. Friends of Science was not able to find the exact reference but found a similar estimate in the 2021 Lazard Levelized Cost of Storage Analysis 7.0. We believe RBC made the error of assuming that only 2 or 4 hours of battery storage are required. As shown in [1], approximately 30 days (720) hours of storage are required for battery back-up in Alberta at a cost of approximately $1.9 trillion. Similar storage is required for battery back-up in the United States. [2] It is reasonable to assume that the rest of Canada would also have similar storage requirements. Alberta has approximately half of the fossil fuelled power generation in Canada so the cost would scale up to about $4 trillion for all of Canada, just for the batteries to back up wind and solar power. One Alberta power generation expert noted that: “The cost to provide enough storage for one cold winter day in Alberta would be C$69 billion. Unfortunately, this wouldn’t be nearly enough. We would need weeks, if not months, of storage to maintain a reliable grid. The costs would be in the C$100’s of billions if not trillions of dollars.”

Also, at the presumed cost of wind and solar generation shown by RBC (approx. $30/MWh avg for wind and solar) it would cost approximately $5.4 billion per year to replace the approximate 20,000 MW of existing fossil fuel generated electricity. The Alberta Electricity System Operator (AESO) forecasts 20 million tonnes per year of CO₂ emissions from the Alberta system in 2023. According to Statistics Canada, Alberta has 56 TWh of fossil fuel power generation in 2020 and in total Canada’s generation in 2020 was 116. Assuming Canada averages approximately the same CO₂ emissions per TWh, Canada’s CO₂ emissions from fossil fuel powered generation is approximately 40 million tonnes per year.

The battery back-up cost of $1.9 trillion for Alberta assumes that ONLY batteries are used, but that is not a realistic scenario. The cost of using natural gas fired electrical generators with CSS for providing most of the wind and solar back-up power would be much less than using only batteries. However, Shell’s Quest CCS project has been running for six years, sequestering a net 0.82 MtCO₂ per year at a cost of $110/tCO₂. This cost might be reduced in the future but considering the huge scale of CSS required for net zero emissions, the lack of good injection sites may increase the storage costs. Alberta’s 2019 emissions of 275 MtCO2e is 335 times the annual net CO₂ storage of the Quest project. The storage costs of the Quest project are more than 7 times the IPCC estimate of the social cost of CO₂, so it is very uneconomic. The CCS process is a lot less costly than using batteries if framing an operation as ‘net zero.’

It should be noted that in the JP Morgan analysis by Michael Cembalist, he has pointed out that:

One of the highest ratios in the world of energy science: the number of academic papers written on carbon sequestration divided by the actual amount of carbon sequestration (~0.1% of global emissions at last count). The infrastructure required for meaningful geologic carbon sequestration would be enormous. In addition, the energy and materials requirements for direct air carbon capture are essentially unworkable. Here’s a quick summary of our conclusions on the topic from last year.

• To sequester just 15%-20% of US CO₂ emissions via traditional carbon capture and storage, the volume of US carbon sequestration (1.2 billion cubic meters) would need to exceed the volume of all US oil production in 2019 (858 billion cubic meters). That’s a LOT of infrastructure that does not exist.
• Gathering and storing 25% of global CO₂ through direct air carbon capture could require 40% or more of global electricity generation, even when assuming the presence of waste heat to power the carbon capture, requiring ~1,200 TWh per Gt of CO₂. This is clearly an absurd proposition. To quote one of the researchers we worked with, “direct air carbon capture is unfortunately an energetically and financially costly distraction in effective mitigation of climate changes at a meaningful scale.”

It should be noted that although the IPCC Summary for Policymakers has made policy suggestions on decarbonizing (despite claiming the IPCC claiming they are policy neutral) which are not supported by any evidence:

The essence of recommendation – a suggestion about what should be done –is self-evident in the following example passage from the April 2014 Working Group III – Mitigation – report found in the Summary for Policy Makers (SPM).

SPM.4.2.2. “Decarbonization…” Decarbonizing (i.e. reducing the carbon intensity of) electricity generation is a key component of cost-effective mitigation strategies in achieving low-stabilization levels …” http://www.ipcc.ch/pdf/assessment-report/ar5/wg3/ipcc_wg3_ar5_summary-for-policymakers.pdf

Why would any party to the Conference of the Parties, or signatory to Kyoto, or member of the UNFCCC, government or ENGO address the issue of decarbonizing their society, unless it had been brought to their attention that this was “a suggestion about what should be done?”

This SPM.4.2.2. paragraph clearly supports the phase-out of fossil fuelled electricity generation while falsely and not objectively (contrary to Article 2) stating that such a move is a “cost-effective mitigation strategy.”

We ask you to please send us evidence that this is a “cost-effective mitigation strategy.”

[Friends of Science Society did not receive any such evidence from the IPCC.]

In fact, there is substantial evidence to show this ‘cost effective mitigation’ claim is incorrect.

Handling the Peaks

RBC states: “Lazard suggests costs at some projects are getting closer to natural gas peaking plants as technology improves”. Lazard also warns that the cost of battery technology may rise as the demand for minerals used to make the batteries increase.

RBC states: “Another way to improve the system is to better connect provincial grids”.

From [1] This argument follows the often-heard reasoning that; “It is always windy/sunny somewhere, so we can green the grid by building lots of transmission and moving power from where it is being generated to where it is needed.” This won’t work. To use a simplistic example, assume regions M and N have identical electrical demands and 100% renewable generation. If M must be supplied by N when its own renewable generation is low, N must carry enough resources to meet both its own needs and those of M (and vice versa). While there is some benefit from demand diversity (not all jurisdictions are likely to reach peak load at the same time), the existence of synoptic – scale weather systems spanning 1000 km and more can cause wind and solar generation to simultaneously be low over large regions of a continent. Moreover, there are some hours every night in which all of North America, with the exception of the extreme north in the summer, is dark.

Kent Zehr, Professional Engineer, has provided a thought experiment on the concept of an east-west grid, and some general cost evaluation based on real market experience. Note that public opposition to power lines is often more virulent than opposition to pipelines, suggesting that short term deadlines like NetZero 2030 or 2050 are extremely unlikely to be achievable, even if optimal conditions exist for finance, planning and commissioning, competitive market price for components and commodities, and prompt approval of land rights-of-ways [rare]. The recent rejection of Hydro-Quebec’s line by Maine residents is an important example of how public opposition can stymie best efforts.

RBC writes: “Future energy technologies, like small nuclear reactors and green hydrogen, could provide new solutions but they’re a ways off from being commercialized. Storing electricity for the future will be the world’s critical energy challenge.”

Firstly, storing electricity might make economic sense to deal with hourly fluctuations, but it has not been proven to economically deal with longer duration seasonal and daily fluctuations, so it does not make good business sense to just go down that path and hope it works out.

Secondly, nuclear power is an established technology with the best safety record of any power generation technology. Small scale technology such as that used in the nuclear-powered submarines have also been around for a long time. There are certainly technology improvements to be gained in the future, but successful nuclear technology is nothing new. The unit cost of power from older nuclear power plants is the cheapest available. New safety regulations and the delays, uncertainty of getting permits and being able to build and operate uninterrupted are driving up the costs. However, it will take time and effort to change people’s perception of nuclear power.

Renewables have dominated new installations.

This should not be surprising given the size of direct and indirect subsidies given to wind and solar projects which electricity consumers and taxpayers ultimately pay for. It should be noted that renewables can not be counted on to generate electricity during peak periods, therefore the need for reliable generation does not decrease as a result of new renewable installations.

Summary: Pathway 1: Electricity

If carbon capture and utilization and storage (CCUS) works as per the cost estimate in [2] to use natural gas fired electricity with CCUS in place of wind and solar, a similar cost reduction of 95% could be possible.

Benefit Comparison Pathways 2-6

In all cases the cost of reducing emissions is greater than the IPCC estimate of the benefit at $15/tonne by factors of 60 to 200. In the case of electricity with wind and solar backed by batteries, the cost of reducing emissions is greater than the IPCC estimate of the benefit by a factor of over 6,000 although there is the possibility to drop that down to a factor of about 300 if CCUS works out.

It does not make sense to proceed with projects where the cost outweighs the benefit.

Regarding Carbon Capture and Storage (CCUS)

Friends of Science Society’s president, Ron Davison (signatory to this letter), was the lead engineer for one of the first commercial Carbon Capture and Underground Storage (CCUS) projects in North America (Zama Lake, Northern Alberta, 1995). His insights helped inform our view that CCUS is useful for the oil industry as a method of increasing recoverable conventional oil reserves in depleted wells, but as a climate mitigation method, it is complex, costly and the results in terms of CO₂ reduction are nominal.

These views are shared by Michael Cembalist of JPMorgan in the latest 2022 Annual Energy Paper “The Elephants in the Room”. Cembalist also comments on the elusive nature and unlikely short-term possibility of hydrogen as a solution, which RBC had also touted in “The $2 Trillion Transition.”

Robert Lyman, energy economist and former federal public servant of 27 years, diplomat of 10 years, has done an analysis of CCUS in Canada in his latest report “The Carbon Capture and Underground Storage Trap…for taxpayers.”

In Conclusion

We hope these insights help inform public policy in Canada in a manner that reflects proper cost-benefit analysis and thoughtful use of public funds. We’d be happy to answer any questions.

Sincerely,
Ron Davison, P. Eng.
President
Friends of Science Society

[1] The True Costs of Wind and Solar for Alberta

[2] The Cost of Net Zero Electrification of the U.S.A.