ELECTRICITY IN CANADA – WHO NEEDS IT? WHO’S GOT IT?

Executive Summary

A reliable electricity system and an abundant supply of power have been important drivers of Canadians’ standard of living and overall quality of life. Yet, recent highly-publicized events have cast some doubt about the ability of the country to maintain its solid track record down the road. The power blackout in Ontario and eight U.S. states in August 2003 sent shock waves from coast to coast. And, if that wasn’t enough to elevate concerns, the Ontario government has issued warnings that if current trends prevail, underlying demand for electricity will outstrip supply in the province as early as 2007. These developments raise the question of whether other regions are experiencing similar challenges on the power front.

Some of the key findings in this study by TD Economics include:

• All provinces in this country – even Ontario – currently enjoy adequate supply of electricity, as evidenced by almost 100 per cent availability of distribution systems and very low rate of power interruptions.

• At the same time, however, most regions are already confronting – or are likely to encounter – deteriorating supply-demand positions. This fact has been reflected in a combination of declining exports, rising imports, and dropping reserve margins of electricity in recent years.

• What might surprise some is that the risk of weakening supply-demand positions appears to be the case even in provinces such as Quebec and British Columbia, which rank as leaders in the area of hydroelectricity potential.

• The challenge facing electricity sectors across the country doesn’t stop at merely scouting out new sources of supply. Following a decade of under-investment, major outlays in transmission and distribution infrastructure will be required to upgrade aging fleets in most regions, while in some areas, sizeable amounts of spending will be needed just to accommodate booming growth, such as in Alberta, Newfoundland & Labrador and the NWT.

$150 billion investment needed

Addressing these hefty challenges – a shortfall in supply and inadequate transmission/distribution infrastructure – will be necessary in order to ensure that Canadians continue to enjoy a reliable electricity system down the road. And, an assurance of reliability will come with a big price tag. The Canadian Electricity Association (CEA) has estimated the combined public and private cost across Canada’s regions to be $150 billion over the next two decades, or $7.5 billion per year – hardly chunk change.

Governments edging in the right direction

In recent years, there has been widespread recognition among provincial-territorial governments of the need to turn the tables around on the power front. Most jurisdictions have developed long-term strategies that aim to achieve – among other goals – new supplies of power, led by “green” sources. For example, in addition to looking at requests for proposals (RFPs) for renewable and natural gas energy projects within its own province, Ontario has been exploring the possibility of developing a large hydroelectricity project in northern Manitoba in partnership with the neighbouring provincial government and may be interested in participating in a development at Lower Churchill in Newfoundland & Labrador. Above all, there is an acknowledgement by governments – and in some cases backed up by initiatives – that a good part of the solution to eliminating emerging gaps between power supply and demand rests in demand-side management (DSM). The objective of DSM is to reduce demand for electricity and/or shift demand from peak to off-peak times.

Prices may need to rise before they fall

Still, despite the recent moves by governments, there have been only limited efforts to address one of the key barriers that remains in place – namely, the practice of pricing electricity below its cost. Historically, many governments across the land have opted to heavily subsidize the price of electricity, in part as an implicit industrial strategy. Although the gap between price and cost has narrowed in recent years – in lockstep with price increases engineered in provinces such as Quebec, Manitoba and Ontario – there is still a good argument that the size of the gap remains significant in a number of jurisdictions.

The authors acknowledge that the extent of the subsidy offered in Canada is difficult to calculate precisely. Research by Pierre Fortin at the Universite du Quebec a Montreal has shown that if Quebecers would have paid the export rate tied to the province’s U.S.-bound shipments on the power they consumed at home, they would have paid roughly $8 billion more in 2003. TD Economics extended Professor Fortin’s methodology to Manitoba, and found that a subsidy also exists, abeit a smaller one on a per-customer basis. And, while these were the only provinces assessed in this regard, we believe that similar results would be obtained in several other jurisdictions.

Further progress in realigning prices with cost, and in moving to more market-price systems 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 longer run. And, the emergence of a crisis would almost certainly entail a more painful adjustment and more significant economic impacts. Case in point is the experience in Alberta, where deregulation and the removal of the artificial price ceiling in the late 1990s initially drove up prices by about 60 per cent. Since that time, prices have fallen back close to their pre-deregulation levels, spurred by a surge in private-sector investment in new generation. Even if prices rise over the next few years, Canada will continue to enjoy a competitive advantage in this area on an international scale.

Include the private sector

Finally, there is a need to throw the door open more widely to private-sector involvement in the area of electricity. Already, there is significant private sector involvement across the provinces, although amounts vary widely from jurisdiction to jurisdiction. Still, with governments facing the growing tab for health care and large debt burdens, moves to take further advantage of the deep pockets and expertise of the private sector could go a long way in covering the huge investment requirements. And, here, we are not just talking about private ownership of assets, but in areas where it makes sense, government ownership augmented with private-sector partnerships to design, build and/or finance power projects.

Derek Burleton, Senior Economist
416-982-2514

Priscila Kalevar, Economist
416-982-2555

Return to the top