Canada’s transmission infrastructure is showing its age

Expect higher electricity rates, observers warn, as a half-century-old bill comes due

October 07, 2011

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If you spent any time in Ontario over the summer, you likely caught an early glimpse of the tenor of the province’s then-upcoming election. It wasn’t very pleasant, with attacks setting the tone of the September campaign long before it actually launched. Among the most widespread was an early gambit by Conservative leader Tim Hudak to woo voters by arguing that the Liberal government of Dalton McGuinty was driving up electricity prices.

Among Hudak’s targets was a cluster of policy measures including 2009’s Green Energy Act, which provides for above-market feed-in tariffs to stimulate investment in renewable electricity generation, and the harmonization of sales taxes, which slapped a new 13 per cent levy on previously untaxed electricity bills. Hudak vowed to eliminate both policies and bring in a host of other measures to reduce bills in what was a blatant attempt to put pocketbooks ahead of policy.

Whether or not the attempt proved persuasive is only now becoming known, with results from the Oct. 6 vote coinciding with the publication of this edition of Alberta Oil. But it’s telling that Hudak would target electricity pricing early in the campaign: on that count, at least, Ontario is at the forefront of an issue that’s simmering across the country.

The response Hudak attempted to provoke will be familiar in many provinces. BC Hydro, for example, incurred the wrath of the public late last year with the announcement of plans to increase electricity rates by 10 per cent in each of the next three years. Public outcry ensued, and provincial Energy Minister Rich Coleman retreated, initiating a review of BC Hydro’s proposal in April. A subsequent report, released in mid-August, recommended holding increases to eight per cent in the first year and 3.9 per cent in each of the following two years, measures BC Hydro adopted through a program of operating cost reductions and capital project deferrals.

Other provinces are watching these battles with interest – andwith good reason. Electricity prices across the country are heading upwards and have become political footballs. It’s impossible to say when and by how much they will rise. Those questions are complicated by the rate policies and market practises in individual provinces, as well as the forms of generation that feed their respective grids. But the general trends are clear; demand is increasing and aging infrastructure is coming due for replacement or refurbishment. Add in the potential impacts of looming regulatory requirements, notably around the issue of carbon emissions, and Canadians should brace themselves. We’re going to be paying more.

“In the last couple of decades, we’ve not invested a lot in making the system grow and renewing the system,” says Pierre Guimond, president and CEO of the Canadian Electricity Association (CEA), a national industry group representing firms engaged in all aspects of generation, transmission and distribution. “Essentially, the Canadian electricity system was built for 20 million people. We’re now pushing past 35 million with a whole bunch of new uses for electricity. There’s a growing list of products that we readily plug into the grid that are taking up a lot more electricity than in the past.”

If Canadians can take comfort in at least one fact, it’s that we continue to enjoy lower electricity prices than most developed countries. According to the CEA, residential prices averaged less than US13 cents per kilowatt hour in 2009, putting us roughly on par with the U.S. and far below countries like Italy, Hungary, Ireland, the United Kingdom and Austria, where residential rates are well above US20 cents per kilowatt hour. Canada holds a similarly advantageous position when it comes to industrial rates, which averaged around US9 cents per kilowatt hour in 2009.

Still, the growing need for infrastructure investment will put considerable upward pressure on pricing in the coming years. A recent report by the Conference Board of Canada, entitled Canada’s Electricity Infrastructure: Building the Case for Investment, concludes that $293.8 billion is required nationwide — generation, transmission and distribution — to maintain services at current levels through to 2030.

Of that investment, about two-thirds are accounted for in the refurbishment or replacement of generating capacity, along with investment in renewable sources and new capacity to accommodate market growth. “We’re talking about a level of investment over the next 20 years that is at a higher level than we’ve seen sustained over any period in the past,” says Len Coad, director of energy, environment and transportation policy for the Conference Board of Canada and co-author of the report.

The driving force in the demand for infrastructure is a historical one. In the post-war era, Canada enjoyed a steady development of its electrical system, growing outwards from regionally based grids to the modern system that crosses provincial borders as well as into the United States. Investment remained strong up into the 1990s, when the system became overbuilt. What followed was a lull in infrastructure spending that, despite increasing through the past decades, has only caught up with earlier peaks in the past couple of years.

Adding to the pricing pressure is the fact that infrastructure costs have, in many instances, been rising as new and better technologies become available. How much are rates poised to increase? That’s a difficult question to answer, says Toronto-based electricity consultant Tom Adams. “The story of electricity prices in Canada is really 10 different stories, a unique story for each province.” Indeed, multiple factors influence final costs, starting with resources available to generate power.

Pocketbook values: Ontario conservative party leader Tim Hudak, left, and his liberal counterpart, Dalton Mcguinty, traded barbs over electricity policy this fall

Saskatchewan and Alberta, for example, are experiencing load growth on their grids. Adams says this will require expensive upgrades. Potentially offsetting at least some of those costs, however, are local access to natural gas supplies and the relative cost-efficiency of gas generation infrastructure. Provincial policy and political goals also play major roles.

Quebec, Adams notes, enjoys some of the lowest electricity rates in the country, owing not only to its long history of investment in hydro generation but also to deliberate measures that keep prices to users artificially low. In neighboring New Brunswick, the governing Conservative party has implemented a three-year rate freeze, following through on an election promise inspired by concerns over increases due to $1 billion in cost overruns in the refurbishment of the province’s Point Lepreau Nuclear Generating Station.

Provincial differences in pricing and policy won’t be reconciled anytime soon. But policy drivers likely to affect pricing aren’t limited to these jurisdictions, especially when it comes to future demand to reduce carbon emissions. “Governments around the world, including our government, are asking us to reduce our environmental impact as an industry,” Guimond says. “That usually means emitting less carbon dioxide. We are prepared to do that, but there are a lot of economic and technology challenges.”

Some provinces enjoy commanding head starts, notably British Columbia, Manitoba and Quebec, which enjoy substantial hydro resources. Hydro capacity, however, is a limited resource in terms of appropriate locations for development, and even these provinces will eventually be required to invest in new technologies. In the meantime, other provinces are bearing the brunt of fostering development and implementation.

Ontario, home to one of the oldest electrical systems in the world, is a prime example. Within the next two years, it is scheduled to shut down the last of its coal-burning generation plants, facilities that once supplied the province with about 15 per cent of its electricity. In their place, the provincial Liberal government, under the Green Energy Act, introduced a system of feed-in tariffs guaranteeing rates for 20 years ranging from 13.5 cents per kilowatt hour for new wind-power installations up to 80 cents per kilowatt hour for small rooftop solar panels generating less than 10 kilowatt hours.

The program has been subject to criticism for its contribution to rate increases that, according to the province’s own estimates, are likely to rise more than 40 per cent over the next five years. And the fallout from the policy, one Hudak’s Conservative party vowed to end during the election, is instructive for other provinces that will eventually wrestle with similar challenges.

But will new focuses on renewable sources inevitably lead to higher prices? Maybe not, at least in the longer term, according to a recent study by the Pembina Institute. The study, released in July under the title Behind the Switch; Pricing Ontario Electricity Options, models price projections over the next 20 years under two scenarios. The first is based on the province’s existing commitment to renewable generation. As expected, it shows a steady increase in electricity prices up to about 2022.

The second scenario assumes Ontario abandons its renewable programs and focuses more on fossil fuels, particularly natural gas. Electricity prices continue to increase and do so, perhaps surprisingly, at only a slighter slower pace than they would under renewables. Moreover, they become more expensive after 2022, based on the assumption that gas prices will rise due to increased demand and the impacts of future carbon pricing policies. When the projections get past 2026, investment in renewable energy today actually starts to cost less. In other words, accepting higher prices today saves money tomorrow.

That finding may offer little comfort in the medium term as increases driven by infrastructure needs work their way through provincial systems across the country. But the debate over electricity pricing offers an opportunity for provincial and federal governments to collaborate on improvements to regulatory processes, especially when it comes to how provincial and federal policies mesh.

After all, investments are most efficient when they are made in climates of certainty. That alone won’t prevent electricity prices from increasing in the next 20 years. But improvements today will sting less over time, provided Canada can overcome its scattershot approach to electricity. “We need certainty in terms of regulatory process,” Guimond says. “We need clarity. Most of all we need coherence

More posts by Cooper Langford Jr.

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