Power to the People (If They Pay for It)

Sergio Marchi, CEO of the Canadian Electricity Association, on Canadian electricity markets

December 14, 2016

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Sergio Marchi, CEO of the Canadian Electricity Association
Photograph Fred Cattroll

Power can be explosive, at least in the political sense. From Muskrat Falls, NL, to B.C.’s coal export terminals, battles rage over costs, carbon and communities. The vastness of Canada’s political and geographical landscapes creates incongruities. We export 10 percent of our power to the U.S. while remote northern communities have to truck diesel across ice roads. We have one of the world’s cleanest power sectors, yet we are ground-zero for climate change protests. Alberta has one of the most expensive transmission tariffs in North America, yet it is home to a wealth of energy sources. The decisions we make can reach far into the future—from 150-year hydro dam projects to the climate that future generations will grow crops in. Yet, those decisions are often based on fickle public opinion and four-year political terms. Sergio Marchi is the CEO of the Canadian Electricity Association. The job puts him front-and-center in many of these discussions, as did his former roles as a federal cabinet minister and ambassador to the World Trade Organization.

How does electricity investment vary across the country?
The system needs $350 billion over 20 years to upgrade, averaging $10 billion to $12 billion per year just to keep the status quo. Typically, capital needed for investment is provided by the utility and recuperated based on a rate of return that is determined by the provincial regulatory authorities. In Alberta, the return on investment for generation assets is market-based and financial risk rests solely with the asset owner. In Ontario, some assets are market-based, some are under long-term contract and some are guaranteed a reasonable rate of return by the provincial regulator.

How is our aging system challenged by technological demands?
We need something very different technologically from the utility poles that hold up the wires today. Canadian utilities are some of the most innovative and resourceful in the world. But great innovation requires risk taking. If we are to find the next game-changing technology, and not just rebuild but reinvent our aging system, companies need a real-world sandbox in which technologies and innovations can be tested and refined.

Unfortunately, the current policy and regulatory environment does not stimulate utility innovation, encourage risk-related R&D investments, or enable utilities to pursue projects that address challenges such as those faced by off-grid northern and remote communities.

Provincial regulators are necessarily focused on maintaining low electricity rates or compelled to find cost savings through incentive-based regulatory rate-making regimes. Decoupling rates from actual operating costs forces utilities to make up the difference through stringent savings, which reduces or eliminates opportunities to invest in R&D. It also creates a sizeable gap between what regulators permit utilities to do and governments’ strategic aspirations.

What are the political risks that keep power firm executives up at night?
Shifts in public opinion. Rightly or wrongly, the opposition parties use power as a club to beat governments with. When you have volatile public opinion which pressures governments and then regulators, the government’s priority becomes keeping rates low, for example.
The challenge in a world of changing technology and innovation is ensuring that we get that through the regulators, but whenever we go to them with a pilot, such as renewable energy, the resounding response is a flat ‘no.’ But the governments tell us to do it, so there’s a gap between the messages. Another real challenge is that we can’t always fund it through shareholders.

We can’t allow ourselves to race to the bottom. If we only go for the cheapest options, it runs the risk of affecting reliability and we will pass onto our children a lower quality system. It’s a complicated dance. We need to combine the best with frugality. This is missing in the discourse. Fifteen years back, the government with the blessing of the public decided to phase out coal. It was an expensive move, and the public today forgets that yesterday’s public opinion wanted that change. If kids don’t show up with asthma puffers in the same numbers they did before, then mission accomplished.

What’s the solution for connecting remote communities?
When I’ve talked to federal governments they’ve done a good job in listening. When we talk about taking northern communities off diesel they say give us the business case. There is no good business case. It is costly to wire and connect the north. We did it for cities, then rural communities, so now let’s do it for the north—there is a nation-building rationale. It’s 2016, we should offer modern infrastructure. Mining investment will go elsewhere—they can’t pick up the tab for all infrastructure. Maybe there wasn’t a great case for railways, pipelines and TV, but it was nation-building. The cost of diesel relative to wiring is cheap, but whenever there’s a spill or healthcare cost it’s in a different budget, not the one for diesel. If you consolidate all the related expenses there is a business case. We’re hoping that in the next budget the government will make a dent and take totally dependent communities off diesel.

What’s the impact of carbon pricing on the electricity system, broadly?
The CEA has consistently supported an economy-wide—and continent-wide—price on carbon, which would maximize low-cost emission reductions while protecting the competitive position of Canadian companies, including electric utilities responsible for Canada’s $3.1 billion electricity trade surplus with the U.S. Look, our sector today is 83 percent GHG free. It’s got to be competitive across the continent—it’s only 41 percent GHG-free in the U.S. We are concerned that we are at a disadvantage. We think there’s a real, real potential to export: The Obama clean power plan, which sets more ambitious targets for states and companies; and the recent North America agreement to produce 50 percent clean energy by 2025. We think this will have real economic benefits, helping U.S. to shrink its GHG emissions.

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