Electricity in Canada: Who needs it? Who's got it?

Eric Beauchesne, CanWest News Service, 08 Mar 2005
TD Bank news release, 07 Mar 2005
Electricity in Canada: Who needs it? Who's got it?

Eric Beauchesne
CanWest News Service
March 8, 2005

OTTAWA -- Provincial and territorial governments should charge domestic businesses and consumers more for their electricity to encourage energy conservation and investment in new energy sources to ensure an adequate supply of power in the future, the TD Bank warned Monday.

All provinces still have an adequate supply of electricity but most are already encountering problems keeping up with demand, or soon will, it says in the report -- "Electricity in Canada: Who Needs it? Who's got it."

"The challenges don't stop at merely scouting out new sources of supply, but investing heavily in transmission and distribution infrastructure," it says.

Above all, provincial and territorial governments need to encourage conservation by raising prices to eliminate the current gaps that persist between what it costs to produce electricity and what Canadians are charged for it, it said.

"Addressing these hefty challenges on the supply and electricity infrastructure fronts will be necessary to ensure that Canadians continue to enjoy a reliable electricity system down the road," said TD economist Derek Burleton.

But that won't be cheap, it warns, citing one estimate of $150 billion in needed investment over the next two decades, or $7.5 billion per year.

To help cover those costs, it suggests governments open the door more to private sector involvement in the generation and transmission of power.

"And, here, we're not just talking about private ownership of assets, but in areas where it makes sense, governments partnering with the private sector to design, build, operate, and/or finance projects," Burleton said.

Most governments have been moving in the right direction towards achieving the goal of ensuring adequate power supplies, such as developing strategies to tap into new supplies of so-called clean energy, it said.

However, it argued governments haven't gone nearly far enough to address the key issue which is their practice of pricing electricity below cost.

Historically, governments have opted to heavily subsidize electricity prices, in part as a strategy to help their industries compete, it noted. Although the gaps between price and cost have narrowed, they remain significant in many parts of Canada.

It has been estimated if Quebec consumers had paid what the province charged foreigners for electricity in 2003, their hydro bills would have been $8 billion higher.

But it's not just Quebec subsidizing domestic consumers, said Burleton, who added price subsidization remains the rule rather than the exception in Canada.

Raising electricity prices to market levels would initially reduce the competitiveness of domestic industries but that would ultimately force them to become more efficient, would attract investment in new generation capacity, and ultimately help avert a full-blown power crisis in the future, it said.

Jay Myers, economist with Manufacturers and Exporters Canada, agreed that over time prices should better reflect the costs of providing electricity but warned increases must be implemented cautiously and with a clear plan of how energy demands will be met.

"Sure in the long-term everything might be OK, but it's the short-term damage to the economy that we have to look at as well," Myers said.

However, the TD report argued some short-term pain may be necessary, noting that in Alberta, energy deregulation in the late 1990s led to a painful 60 per cent increase in prices.

However, since then there has been a wave of new private-sector investment and a sharp pull-back in prices, it said.

Even if prices rise over the next few years, Canada will continue to enjoy a competitive advantage on energy pricing internationally, it added.

© The Vancouver Sun 2005

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News release
TD Bank
07 Mar 2005

• All provinces in this country currently enjoy an adequate supply of electricity – even Ontario, where challenges have captured considerable attention over the past few years.
• At the same time, however, most regions are already confronting, or are likely to encounter, deteriorating supply-demand positions.
• The challenges don’t stop at merely scouting out new sources of supply, but investing heavily in transmission and distribution infrastructure.
• Above all, provincial and territorial governments need to encourage conservation by eliminating current gaps that persist between the cost of producing electricity and the price levied. Further moves toward market-based pricing would help to achieve this end.

TORONTO – Although electricity supplies across the country are currently sufficient to meet demand, most provinces are facing a growing electricity squeeze, say TD economists in a special report entitled Electricity in Canada: Who Needs It? Who’s Got It? The report is available at www.td.com/economics. “To alter the status-quo, governments will need to ramp up efforts to encourage conservation, in part through smarter pricing policies, and achieving new supplies of power, led by ‘green sources’,” remarked Derek Burleton, a senior economist with TD Bank Financial Group.

Ontario has captured the most attention

Among the regions, Ontario’s challenges on the power front have been the most well-documented in view of the power blackout with eight U.S. states in 2003 and a recent election promise by the provincial government to shut down its coal-fired generation units by 2007, which together account for about one-quarter of the province’s supply.

Yet, the TD study shows that Ontario is far from alone in facing electricity supply
constraints over the next several years. Most regions – even hydro-rich Quebec andBritish Columbia – have experienced weakening supply-demand positions in recent years, as evidenced by a combination of declining exports, rising imports and dropping reserve margins of electricity.

$150 billion in investment required

Addressing these hefty challenges on the supply and electricity infrastructure fronts will be necessary to ensure that Canadians continue to enjoy a reliable electricity system down the road. And, assurance of reliability will come with a price tag. The Canadian Electricity Association has estimated the combined cost across Canada’s regions at $150 billion over the next two decades, or $7.5 billion per year. “With governments already facing rising health-care costs and high debt burdens, moves by governments to throw the door open more widely to private-sector involvement could assist greatly in covering these huge investment requirements,” said Burleton. And, here, we’re not just talking about private ownership of assets, but in areas where it makes sense, governments partnering with the private sector to design, build, operate, and/or finance projects.

Prices may need to rise before they fall

The report acknowledges that many governments have been moving in the right direction in many respects. Most have developed long-term strategies that aim to achieve, among other goals, new supplies of “clean” power. Ontario, for example, has been looking at requests for proposals (RFPs) for renewable and gas-fired projects, and exploring the possibility of working with other provinces, such as Manitoba and Newfoundland & Labrador, to develop hydroelectric projects in their regions. Above all, there is an acknowledgement that some of the solution rests in demand-side management, which entails shifting power use from peak to off-peak periods.

Still, despite the moves, there have been only limited efforts made at dressing one of the key barriers – namely, the practice of pricing electricity below its marginal cost.

Historically, many governments across the land have opted to heavily subsidize
electricity prices, in part as an implicit industrial strategy. Although gaps between price and cost have narrowed in recent years, as many provinces have worked to address theprice side of the equation, they remain significant in many parts. “Case in point is Quebec, where it has been estimated that if domestic consumers had paid the export rate in 2003, their bills would have been $8 billion higher,” said Burleton. Applying a similar methodology to other provinces would almost certainly show that price subsidization remains the rule rather than the exception in Canada.

Further progress in realigning prices with cost, and in moving to a more market-based pricing system in general, would appear to be a competitive strike against business.

However, to the extent that prices increase in the short run, they would ultimately help to raise efficiency, attract investment in new generation capacity, and hence assist in averting a full-blown power crisis in the future. “In Alberta, the move to deregulation in the late 1990s created some short-term pain, as prices rose by about 60 per cent. Since then, there has been a wave of new private-sector investment and a sharp pull-back in prices,” added Burleton. In any event, even if prices rise over the next few years, Canada will continue to enjoy a competitive advantage in this area on an international scale.

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For more information, please contact:
Derek Burleton Don Drummond
Senior Economist Chief Economist and Senior Vice President
416-982-2514 416-982-2556

This news release is at www.td.com

Electricity in Canada: Who Needs It? Who’s Got It? (including charts and detailed
tables), is available in PDF format on TD Economics’ Home Page at:
www.td.com/economics.

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