TD Notes Have a $49.00 target. GLTA
2024 FEDERAL BUDGET: MODEST UPDATE ON CARBON CONTRACTS FOR DIFFERENCE
THE TD COWEN INSIGHT
Yesterday's Federal budget included what we view to be modest updates regarding carbon contracts for difference (CCFDs). We view a CCFD or similar carbon assurance mechanism as an essential prerequisite to any final investment decision on a potential carbon capture investment at CPX's Genesee 1+2 facility.
Impact: NEUTRAL
CCFD references in the budget suggest the government recognizes the need for carbon pricing certainty to advance decarbonization investments. CPX has described its project as "near shovel-ready" from a technical perspective, however, it lacks carbon pricing certainty. CPX's May 8 Investor Day could provide more colour regarding management's view on the best path for achieving sufficient certainty to make this investment. We continue to view projects of this nature as essential if Alberta's electricity system is to be decarbonized. Despite a steady increase in renewable power capacity in recent years, thermal power provided 80%+ of Alberta's electricity generation in 2023.
Details
Canada Growth Fund (CGF) is assessing the opportunity to expand its carbon contract offerings. CGF is developing an expanded range of CCFD offerings tailored to different markets. CGF will continue to offer bespoke CCFDs and carbon offtake agreements (recall the Dec. 2023 Entropy agreement), while potentially developing off-the-shelf contracts for certain jurisdictions.
CGF has approximately $6 billion remaining for CCFDs and carbon offtake agreements (of an original $7 billion). The budget states the government will ensure CGF continues to have the resources to fulfill its role as federal issuer of CCFDs. The government is also evaluating options to enhance CGF's capacity to offer CCFDs, including exploring a government backstop of certain CCFD liabilities of CGF.
Project Background. CPX previously outlined a potential $2.3 billion investment to capture up to 3 million tonnes of CO2 annually (95% capture rate) from the repowered Genesee 1+2 units. After considering ITCs and other government funding, CPX previously suggested approximately $670 million in capital costs would be funded by CPX and potential indigenous ownership. CPX previously targeted making an FID in late 2023
for a 2027 startup. CPX stopped spending on the technical side of this initiative in July 2023, pending a commercial agreement regarding carbon pricing. We believe Genesee CCS is among the most advanced potential large scale CCS projects in Canada (along with Heidelberg's Edmonton cement CCS project).