7. Potential Price Differential Between Low and High Sulphur Fuel Oils

A number of US states, particularly in the northeastern states, have requirements for sulphur in HFO ranging 0.5 % wt. to 2.8% wt.³² (refer to Figure 3.1). Accordingly, low sulphur HFO (1% wt. sulphur level or lower) is a standard fuel available in the US and co-exists in the market place with regular HFO (sulphur level greater than 1% wt.). This section examines price history for HFO to assess the price differential between low sulphur and regular HFO in the northeastern US.

The historical monthly price difference data since January 1995 for the northeastern states³³ are shown in Figure 7.1, summarized in Table 7.1, and listed in full in Appendix 4. Since 1995, the average market price of low sulphur HFO available to end users in the northeastern states was about 3 cents per litre more expensive than regular sulphur HFO, or about 16% more expensive. This is in line with the higher-end unit cost estimates based on U.K. cost data.

Figure 7.1: Historical Price Difference Between Regular HFO and Low Sulphur HFO in US Northeastern States

It is expected that there would be a cost increase to Canadian users of fuel oils following the implementation of low sulphur requirements. Users of fuel oils will likely assess whether to replace fuel oils with other sources of energy. Such options include switching to natural gas, low-sulphur fuel oils or coal.

In its assessment of the EU Directive, the European Commission recognized that there "will be significant differences in the additional costs faced by industrial sectors in different parts of the Community if they continue to use heavy fuel oil for heat and power. However, a very strong trend over previous years has been the shift away from solid and liquid fuels to gas. The present proposal will reinforce that trend."

The US Energy Information Administration reports a similar switch from fuel oil to natural gas for manufacturers in the US. "When they have flexibility in their fuel choices, manufacturers have favored natural gas over fuel oil ... despite fluctuations in relative average prices between fuel oil and natural gas."³⁵ It also reports that "One of the problems of fuel oil relative to other fuels is that manufacturers must maintain large storage tanks. This can prove to be an added expense beyond the price of the fuel. Manufacturers must also guard against the environmental hazards brought about by faulty underground storage tanks."

Fuel switching can have a significant impact on air pollution as well as on the emissions of greenhouse gases such as carbon dioxide and methane. These are important environmental issues closely linked to the use of the selected energy source.

Environment Canada considers that "Energy generation from coal, oil and natural gas sources contributes to virtually all of the current environmental air quality priorities for North America - climate change (CO₂, methane), acid rain (SO₂, NO_x), smog (NO_x, [VOCs]), air toxics (trace elements, mercury, particulate). The combustion of coal and heavy oil tends to emit the highest amounts of all of these emissions, much higher than their contribution to total output energy demand." ³⁶

It is widely recognized³⁷ that "Global climate change is being driven by human emissions of greenhouse gases, and is most evident as a warming trend in global average temperature. ...Climate change will include not only a change in average temperature, but also changes in many aspects of weather, such as wind patterns, the amount and type of precipitation, and the types and frequency of severe weather events that may be expected to occur in an area."

Most greenhouses gases are emitted as a result of the production of fossil fuels and their use. Activities from these two areas together account for 30% of Canada's greenhouse gas emissions³⁸. The greenhouse gas emissions of a specific fuel is directly related to its carbon intensity. The carbon intensity of energy supply is "a measure of the amount of carbon associated with each unit of energy produced. It directly links changes in carbon dioxide emissions levels with changes in energy usage. Carbon dioxide emissions vary by energy source, with coal being the most carbon-intensive fuel, followed by oil, then natural gas."³⁹

Accordingly, fuel switching to lower carbon-intensive fuel is one measure to reduce emissions of greenhouse gases as well as air contaminants. To achieve significant environmental benefits, it is thus important that when fuel switching occurs it is towards a "cleaner" and less carbon-intensive fuel. If the reduction of sulphur in fuel oils in Canada promotes fuel switching from fuel oils to natural gas, the reduction in emissions of greenhouse gases is a very important co-benefit.

Switching to more carbon-intensive fuels, such as coal or liquid fuels with similar or higher sulphur content, may result in further environmental degradation. It is not expected that switching from HFO to coal will occur due to the significant investment required to convert combustion facilities. However, switching to a bitumen emulsion (a bitumen-water mixture) is an economically feasible possibility. For example, the New Brunswick Power Corporation is planning to switch from HFO to crude emulsion at its Coleson Cove plant starting in 2004, but is planning to install anti-pollution controls.

³² Environment Canada, A review of international initiatives to accelerate the reduction of sulphur in light and heavy fuel oil, September 2001.
³³ Energy Information Administration, based on average monthly data for PADD 1A and PADD 1B including the states of Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, Vermont, Delaware, District of Columbia, Maryland, New Jersey, New York and Pennsylvania.
³⁴ Energy Information Administration, based on average monthly data for PADD 1A and PADD 1B including the states of Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, Vermont, Delaware, District of Columbia, Maryland, New Jersey, New York, Pennsylvania.
³⁵ U.S. DOE's Energy Information Administration, Fuel Oil Use in Manufacturing - website: www.eia.doe.gov/emeu/consumptionbriefs/mecs/fueloil/mecs_fueloil_use.html
³⁶ Environment Canada, Climate Change and Cleaner Energy Sources, Combustion and Global Climate Change Conference, Calgary, May 1999.
³⁷ Government of Canada, Canada's perspective on climate change, science, impacts and adaptation.
³⁸ Government of Canada, Action Plan 2000 on Climate Change.
³⁹ Energy Information Administration, International Energy Outlook 2001.