Electricity in Canada: Smart Investment to Power Future Competitiveness

Transcription

1 Electricity in Canada: Smart Investment to Power Future Competitiveness January 2013

2 As Canada s largest and most influential business association, the Canadian Chamber of Commerce is the primary and vital connection between business and the federal government. It continually demonstrates impact on public policy and decision-making to the benefit of businesses, communities and families across Canada. Experience the power of a network of over 420 chambers of commerce and boards of trade, representing 192,000 businesses of all sizes in all sectors of the economy and in all regions.

3 Table of Contents Executive Summary 3 Introduction 5 Infrastructure Investment 7 A Transition in Generation Technologies 12 Energy Conservation and Demand Management 19 Interprovincial Electricity Interconnections 20 Conclusions 25

4 Executive Summary As Canada continues to define its place as a responsible energy producer, the product of one of its significant resource endowments electricity and the sector responsible for its production, transmission and distribution will play a significant role in Canada s energy future. The availability of reliable, abundant and comparatively inexpensive electricity that has minimal environmental impacts both as an input to economic activity and as an export commodity will have a direct impact on Canada s future economic growth and competitiveness. Electricity, along with other forms of energy, is easily taken for granted. In nearly every instance when people flip the switch, the lights come on. There is no need to give thought to the generation, transmission and distribution infrastructure that is required to deliver stable, reliable and affordable electricity, virtually uninterrupted, to homes and businesses. This paper will illustrate the necessity of continued investment in electricity generation, transmission and distribution systems to ensure long-term economic growth and competitiveness as well as the need to define the ground rules for energy trade, including electricity, within Canada. Canada s electricity sector is at the leading edge of a decades-long transition towards cleaner sources, smarter transmission and distribution systems and better informed and educated consumers that will demand a measure of control over their energy costs. The infrastructure investments over the coming decades will ensure this transition takes place in a manner that enhances competitiveness and limits negative impacts, and responds to North American energy legislation and regulations in a coordinated manner that enables the gradual de-carbonization of the electricity system. The Canadian Chamber of Commerce 3

5 Introduction In its 2009 Review of Energy Policies of IEA Countries Canada, the International Energy Agency (IEA) describes the Canadian electricity system as part of a contiguous North American electricity grid, with the industry being highly integrated and the bulk of generation, transmission and distribution services provided by a few dominant utilities. Although some of these are privately controlled, most are Crown corporations owned by provincial governments. Ownership of the resource and regulatory oversight rests with provincial governments except in areas of federal responsibility transborder and nuclear power related activities. The generation, transmission and distribution of electricity in Canada fall primarily under provincial jurisdiction. Canada s electricity system is a significant contributor to all aspects of the Canadian economy: a direct commodity input to business and industry; a participant in trade and export markets; an enabler of technology development and deployment and innovation; and, The electricity sector, by ensuring a secure, reliable and affordable supply of electricity, has been a main contributor to Canada s competitive advantage. The electricity sector is once again at the beginning of a period of continued investment and reinvestment in generation, transmission and distribution infrastructure during which high-emitting, fossil fuel-based thermal generation should gradually be replaced by low- or non-emitting electricity sources. How the forecasted investment of nearly $350 billion in Canada s electricity system will be allocated will be determined by demand projections and forecasts, environmental and other regulations, public pressure and capital availability. These strategic investments represent a major decision point for Canada s electricity sector. These choices, combined with the magnitude of the investment required to embark on the transition, provide the Canadian electricity sector with an opportunity to rethink Canada s electricity system and make investments that will meet the needs of Canadians, businesses and the export market while ensuring the sustainability of the sector, the Canadian economy and the environment. a high-skills employer. Governments at all levels are increasingly being called upon to deliver the same level of service for their constituents while scaling back their budgets across the board. Partnering with the private The Canadian Chamber of Commerce 5

6 sector in the development of electricity generation and transmission infrastructure projects provides an opportunity to leverage greater investment at reduced cost to ratepayers. These investment decisions will be made on the basis of sound business cases, and provide an opportunity to marry government-backed stability with private sector efficiency. The traditional Canadian competitive advantage that was based on reliable and abundant electricity, as well as competitive tariffs can be maintained through investment choices. Both brawn new capacity and brains technological upgrades to existing infrastructure are required to enhance the efficiency of Canada s electricity system. In order to ensure the large-scale generation projects necessary to complete the transition away from fossil fuel-based thermal generation are economically feasible, they must be connected to markets where demand exists. Despite the fact that there are not currently any clear and compelling business reasons supporting its construction, an interconnected, regional, province-to-province transmission grid would likely accelerate the pace of the transition and increase the likelihood of new sources of large hydro potential being developed. An interconnected provincial transmission grid would be crucial for opening up new sources of electricity to new markets and to maintain Canada s place as the leading provider of secure, clean, reliable and affordable electricity. There are certainly political, regulatory, environmental and economic impediments to an interconnected grid project. However, ongoing calls for a national energy strategy by both government and non-government players consistently include recommendations for modernizing and expanding energy infrastructure to strengthen intra-regional connections and diversify markets. At a minimum, sustained calls for a national energy strategy could finally lead to the tipping point where federal, provincial and territorial governments set the ground rules for energy trade within Canada by completing negotiations on an Energy Chapter in the Agreement on Internal Trade a necessary condition before serious discussion of an interprovincial grid could be contemplated. This report will examine ways in which the Canadian electricity sector could take advantage of the opportunities presented by a period of significant and necessary capital investment to reconfirm the importance of electricity to Canadian competitiveness as well as look at how those investments might impact the long-term sustainability of the sector and of interprovincial and international trade relations. 6 Electricity in Canada

7 Infrastructure Investment In order to set the context for this discussion paper, it is imperative to outline a few underlying assumptions: Canada is an energy nation and will continue to be one for the foreseeable future. In order to capitalize on its remaining significant resource opportunities (including those in the electricity sector), Canada must recognize and embrace energy s importance to national and provincial economies. Canada boasts sufficient untapped supplies of electricity, primarily large hydro, to meet its future needs. The contribution of renewable electricity forms like biomass, solar and wind will grow but remain a small portion of the total energy system unless breakthroughs in storage technologies are achieved. New thermal technologies (such as CCS) and new discoveries (primarily of natural gas, and particularly in the United States) are putting pressure on higher-cost renewable sources. Federal and provincial governments must foster a business environment that encourages open and competitive capital investment in energy projects. Demand for energy is likely to at least double between now and 2050 less than 40 years away. From the history of energy systems, this is not a lot of time in which to change energy production practices. Oil, natural gas, coal and hydro will continue to power our energy systems for the immediate future. Demand Side Management (DSM) should play a role in mitigating this increase, but infrastructure investments should be calibrated to prepare for that reality while at the same time position electricity systems for the transformation that is underway. Providing reliable electricity to business, industrial and residential customers requires a robust and integrated electricity generation, transmission and distribution system. Traditionally, Canada s electricity system has emphasized regionally-based hydro, coal, nuclear and natural gas generating stations that require substantial transmission infrastructure to move electricity to markets. The development of Canada s electricity system has also relied heavily on publicly owned assets to assume the capital and market risks associated with the large-scale investment required to deliver the reliable and affordable electricity supply being driven by public demand. 1 1 Canadian Electricity Association, How Will We Power Canada s Future: Our Electricity System in Transition, 2011 The Canadian Chamber of Commerce 7

8 Canada has seen periodic and significant investments in its electricity system, most recently in the 1970s and 1980s. Those investments allowed the electricity sector to meet growing demand without any ongoing investment in generation or transmission infrastructure. For the most part, ongoing infrastructure upgrades were put off. Those major investments that were put off due to earlier overbuilding of the system are now overdue. Investments are now necessary to replace and renew aging generation, transmission and distribution assets that will allow Canada to keep pace with future demand and for the continued efficient, reliable and economic operation of the Canadian electricity system. An efficient electricity system is a significant direct contributor to the Canadian economy (Conference Board of Canada estimates nearly $25 billion in 2010) and can impact Canadian competitiveness. In its World Energy Outlook, 2008 the IEA projected that required investment in Canada s electricity sector by 2030 to be in the order of $240 billion (CAN). More recently, a 2012 report by the Conference Board of Canada estimated that $347.5 billion (current dollars) will need to be invested in Canadian electricity infrastructure (including electricity generation, transmission and distribution) from 2011 to This identified need for significant investment in electricity infrastructure over the next two decades could provide an immediate opportunity for Canada s energy system to continue providing a competitive advantage for the Canadian economy. With an expected cumulative investment in Canada s electricity grid of nearly $350 billion between 2011 and 2030, the Conference Board of Canada indicates that this investment will be beneficial for the Canadian economy: that for every $100 million (inflation adjusted) invested in electricity generation, transmission and distribution infrastructure, real Gross Domestic Product (GDP) will increase by $85.6 million. 2 The new capacity investments identified by the Conference Board can be characterized as adding brawn to the system capital investments to construct additional capacity to meet projected demand and deliver power. Specifically, an estimated $35.8 billion is expected to be invested in known transmission upgrades and new build during this time period based on announced projects in each province and territory. 3 This figure likely underestimates future levels of investment as it does not speculate on potential future projects. Investment in transmission infrastructure is required to accommodate growing stresses on the system that include: greater electrical loads; an increased number of remote (mostly hydro and renewable) generation facilities; enhanced trade between provinces and with the United States; and, increasing reliability demands. 2 The Conference Board of Canada, Shedding Light on the Economic Impact of Investing in Electricity Infrastructure, February Ibid. 8 Electricity in Canada

9 The addition of increasing amounts of emerging renewable electricity resources (such as wind and solar) to an existing transmission system designed for stable, baseload electricity presents unique challenges. Intermittent energy is any source of energy (often renewable forms) that is not continuously available to be dispatched to meet power system demands. The increasing desire for significant amounts of renewable, but intermittent, energy from disperse sources in Canada s electricity mix is raising some caution flags about the existing electricity system s ability to operate at peak efficiency given a shifting generation mix. In an effort to avoid an overbuild scenario and mitigate the risk associated with potentially inaccurate demand forecasts, using technology to add brains to the current electricity system could reduce both risk and capital costs. Except in markets where the need for new infrastructure is clearly identified, it will likely be less costly to invest in technological improvements to existing infrastructure adding brains to the system to increase efficiency through the adoption of smart grid technologies. Smart grids add communication and automation technologies to the existing electricity grid that integrate the behaviour and actions of all connected supplies and loads through dispersed communication capabilities to deliver sustainable, economic and secure power supplies. 4 According to the Canadian Electricity Association (CEA), a smart grid can ease the incorporation of intermittent electricity sources (predominantly renewable) into the current transmission system and allow for continuous monitoring of the full system to limit energy losses, improve the dispatch of power to where it is needed, enhance the stability of the system and extend the useful life of existing infrastructure. Smart grid technology also offers a way to manage the myriad of standards that currently exist between provincial electricity systems and are prohibiting a coherent interconnectivity approach. Managing data In addition to the new infrastructure required over the coming years and the technology that can be added to existing transmission and distribution infrastructure, much thought and care must be taken to ensure that the massive volume of data is not only collected but analyzed such that it can be turned into useable and actionable information. Such information can be used, for example, to better predict the likelihood that generation assets will fail through condition based maintenance/ monitoring, and thus help plan for capital investments and equipment replacement and ultimately better manage supply. Information can similarly be provided to consumers in real time so they better understand their energy consumption and its impact on the environment, which can be used to instill a sense of conservation and assist shifting loads during periods of peak demand. Predicting and optimizing the impact of renewables (specifically wind and solar) will enable more renewable generation assets to be integrated into the grid by predicting their variability and being able to optimize whether particular loads should be dispatched or other loads turned on to compensate. There is a significant need for systems integration to make sure the data gets to the right systems (and that data is accurate and valid clean and correct) in order to make best and most effective use of the data and so that the systems can talk to one another and have a consistent and accurate view of the overall power grid. 4 Canadian Electricity Association, How Will We Power Canada s Future: Our Electricity System in Transition, 2011 The Canadian Chamber of Commerce 9

10 Maintaining Competitiveness in Alberta s Forest Sector: A Case Study in Electricity Choices A 2011 report prepared by Mike Hogan of Enact Power for the Alberta forest sector entitled Power Challenges in the Forest Sector sets out a number of challenges, with respect to electricity supply and costs, facing Alberta s forest sector as it looked to secure a sustainable and profitable future. The report analyzes options that would enable the forest sector in Alberta to remain competitive as the sector s electricity costs are set to increase significantly due to electricity policy decisions made by the provincial government. The bulk of the rising electricity costs are associated with a $15 billion transmission build, coupled with growing costs associated with accommodating growth in wind generation supported by both price and policy incentives. Power Challenges in the Forest Sector sought to identify the challenges and opportunities for Alberta s forest sector based on the new policies and practices set forth by the Alberta government. Within the existing policy framework, what could the forest sector do to maximize flexibility while also ensuring access to long-term economic, reliable and stable electricity supply given that the province s transmission and wind developments could have an impact on the competitiveness of electric rates in Alberta for many years? According to the report, the Alberta government s decision to change the planning and development process in the electricity sector was driven by a belief that a significant transmission build is critical to ensure the electricity market works properly. According to the Government of Alberta, the $15 billion planned transmission build will ensure low, long-term costs for consumers. Notwithstanding higher transmission costs, total delivered costs to consumers and industry in Alberta are and will be competitive, says the Government. Industrial consumers concerns about deteriorating competitiveness are understood, but the Alberta government believes that without the transmission 10 Electricity in Canada

11 build, long-term costs will be much higher given challenges securing rights of way, the availability of skilled labour in the province and increasingly complex stakeholder relations. The transmission build is required to secure a reliable supply of electricity to facilitate Alberta s continued growth. The Alberta government also recognizes that in some instances on-site generation, especially cogeneration, should be pursued for both economic and environmental reasons and has established policy and directives which provide a substantial incentive for industrial and other large loads to build attractive generation facilities. At the same time, the $15 billion transmission build will facilitate an efficient market in which these and other generators can participate. Given that the policy decisions made by the Alberta government are likely to result in increased electricity costs that will have a direct and negative impact on the forest sector s integrity and the increase in wind power that is expected to comprise a growing share of Alberta s electricity profile, circumstances in Alberta may be aligning themselves to provide an unprecedented incentive for forestry and other industrial sector consumers to build on-site generation. Low natural gas prices, increasing policy and financial incentives for biomass and other environmentally attractive generation technologies, and dramatic increases in transmission costs are steering the forest sector into generating electricity for their own needs and also into becoming providers of renewable energy to the Alberta electricity grid. It should be noted that in Alberta industrial energy users pay the lion s share of transmission costs due to their high proportion of loading on the system. The only way to avoid these costs is to develop on-site generation and supply one s own back-up requirements. However, if industrial customers build large-scale on-site generation, the remaining consumers in the electricity system will be required to pay out ever increasing transmission costs. The bulk of these remaining consumers are likely to be residential and small commercial consumers. In an effort to shield itself from higher electricity costs that would have rendered the sector uncompetitive, the Alberta forest sector is now examining cogeneration options that will ensure both a secure, stable and relatively low-cost electricity supply as an input to its own operations and also a potential new revenue stream from electricity sold to the Alberta electricity grid. Conclusion While it is easy to argue that if these projected investments in Canada s electricity sector are not made the impact on Canadian competitiveness will be negative, the Alberta example above illustrates that there is a delicate balance of policy, investment and incentive that must be maintained. Investments are necessary to revitalize existing infrastructure, reduce maintenance costs, maintain system reliability and build a transmission and distribution system that is capable of managing the transition to a more carbon efficient energy future. These investments will also support the ongoing training of Canada s next generation of skilled electricity workers. While there is concern that the necessary amount of attention, incentives and training are currently in place to attract individuals into the sector, a prolonged period of investment in electricity infrastructure that is creating jobs is a is an attractive way to address Canada s skills crisis. Investment in smart grid technology as a way to improve the efficiency and extend the life of existing infrastructure is a clear example of using technology to make Canada competitive. The Canadian Chamber of Commerce 11

12 A Transition in Generation Technologies Canada s electricity sector is in the midst of a decades-long transition that will alter the manner in which electricity is generated and delivered to the grid. Aiding this transition are a number of federal and provincial policies and regulations that will set limitations on the type of new generation being built in Canada and alter the end-of-service dates for existing infrastructure. These changes are likely to result in a cleaner electricity supply mix in Canada but will also have an effect on the business of electricity and could affect electricity affordability and reliability. The National Energy Board (NEB) projects that total generation capacity will increase by 27 per cent between 2010 and 2035, with natural gas-fired and renewable-based capacity showing the largest increases. Total installed capacity is projected to increase from 133 GW in 2010 to 170 GW by NEB Electricity Generating Capacity, Reference Case Source: National Energy Board 12 Electricity in Canada

13 One of Canada s economic competitive advantages has traditionally rested on access to reliable and affordable electricity generated from different sources across the country. The composition of this diverse mix of electricity sources is changing. We are in the midst of a transition period where fossil fuel-based thermal generation (primarily coal) is slowly being phased out to be replaced by an increase in natural-gas fired generation, potential large hydro developments and increased use of non-hydro renewables such as wind, solar and biomass. This transition in generation fuels is well underway. According to the NEB s latest forecast for the electricity mix out to 2035, hydroelectricity remains a dominant source of Canadian electricity. As a result of projected hydro-based capacity expansion, annual hydroelectricity production increases from 346 TWh in 2010 to 430 TWh in The share of wind-based generation triples from less than two per cent of total generation in 2011 to six per cent in Biomass, solar and geothermal energy will account for nearly four per cent of total capacity by In addition, over 9,000 MW of coal-fired capacity will be retired over the 2010 to 2035 period, or about two-thirds of the total coal-fired capacity in Much of the reduction in coal-fired generation capacity can be attributed to Environment Canada s recently outlined performance standard that will be applied to existing coal-fired electricity generation and new units of 10 MW or greater. This standard is planned to come into effect by mid-2015 and is expected to promote the replacement of coal-fired units at the end of their economic life and will encourage investment in cleaner generation technologies (e.g. high efficiency natural gas generation and renewable energy), as well as the use of carbon capture and storage. 6 5 National Energy Board, Canada s Energy Future: Energy Supply and Demand Projections to 2035, November Environment Canada, News Release: Key Elements of Proposed Regulatory Approach. Retrieved May 15, 2012 from: The Canadian Chamber of Commerce 13

14 NEB Canadian Generation Mix in 2010 and 2035, Reference Case Source: National Energy Board The next cleanest thermal option available to the Canadian electricity system in the transition phase is natural gas. Natural gas-fired electricity generation stations, as a replacement for coal-fired plants, are expected to increase in number in the next decade. Natural gas is a cleaner burning fuel compared to coal: for the same amount of electricity, gas-fired power generation typically produces 40 to 50 per cent fewer greenhouse gas emissions than a coalfired facility. 7 The production of natural gas facilities are also associated with lower investment costs and shorter construction periods compared to coal-fired generating plants. 8 Recent natural gas discoveries in both Canada and the U.S. that are resulting in an over-supply of natural gas and historically low prices are causing utilities to rethink investment in natural gas electricity generating stations. Based on these factors, the NEB projects the share of natural gas-fired generation in Canada will increase from nine per cent in 2010 to 15 per cent in In terms of environmental impact, cost and capital 7 National Energy Board, Coal-Fired Power Generation: A Perspective Energy Briefing Note, July National Energy Board, Canada s Energy Future: Energy Supply and Demand Projections to 2035, November Electricity in Canada

15 risk, increased electricity generation from natural gas appears to be the immediate next step in the transition away from coal-fired generation. Natural gas is a cleaner burning fuel, and generating stations can, in most cases, be built in three to five years provided that public pressure and environmental concerns do not impede siting decisions. A well developed natural gas supply infrastructure in Canada and recent low natural gas prices have also enhanced the attractiveness of natural gas as a generation fuel. While natural gas provides the most logical next step in the transition to a reliable and reduced emission electricity system in the short-term, there are those who suggest that the natural gas step in the transition be ignored altogether in favour of a much more rapid move to an electricity system that is predominantly based on renewable electricity. For the purposes of this paper, renewable energy generation encompasses a variety of unique sources, including large hydro and run-of-river, wind, ocean (tidal and wave), solar, geothermal, and biomass. The only distinction that the paper makes between renewable types of energy is in their ability to deliver reliable, dispatchable power to the grid. For these reasons, hydro generation is looked at separately from other renewable sources. Canada is a world leader in hydroelectricity generation with roughly 60 per cent of its total electricity output generated from hydro sources. Hydro power is a flexible, low operating cost, non-emitting source of baseload electricity, which contributes to maintaining competitive and stable electricity prices due to the fact that the output from hydro generating stations can be adjusted quickly with variations in demand and because it is not subject to fuel cost volatility. By taking into account provincial utility planned projects, the reference case assumes significant hydropower expansion. Hydro-based capacity, including small hydro, increases from 75 GW in 2010 to 87 GW in This capacity expansion reflects a number of large hydro projects currently under construction as well as utility-planned projects in Newfoundland and Labrador, Quebec, Manitoba and British Columbia. Despite this increase, the projected hydro capacity in 2035 remains roughly half of the untapped potential of 163 GW identified by the Canadian Hydropower Association. Given all of its positive attributes, and despite that fact that environmental opposition to large hydro projects is growing, there is a strong case to be made for policies and initiatives that support the realization of Canada s untapped hydro resources, both for economic and environmental reasons. Canada is a net exporter of electricity. Exports originate mostly from hydro-based provinces and generally account for less than 10 per cent of total generation. Levels of annual exports are largely influenced by hydro conditions as well as local supply and demand balances. In the 2005 to 2010 period, annual exports fluctuated in the range of 43 TWh to 56 TWh. Canada s electricity imports have fluctuated in the range of 17 TWh to 24 TWh. Most imports occur during off-peak periods when prices in neighboring markets are low and in accordance with pricing in export markets, due in large part to the emergency of unconventional natural gas as a fuel stock for electricity generation. NEB projections indicate that the net electricity available for export has the potential to increase significantly. This is largely due to the projected growing surplus of clean and competitively-priced power from hydro-based provinces. By 2035, the net electricity available for export is projected to reach 44 TWh annually, compared to 25 TWh in The Canadian Chamber of Commerce 15

16 NEB Net Electricity Available for Export and Interprovincial Transfers, Reference Case Source: National Energy Board In addition to abundant hydro resources, Canada has significant non-hydro renewable resources including wind power, biomass, solar, tidal and wave power. These technologies have grown in the last few years, despite challenges relating to availability and cost. Policy and incentives have helped their growth, such as Ontario s feed-in tariff and specific purchase programs in other provinces. Wind power has experienced strong growth in recent years. Over the projection period, it makes the largest contribution to non-hydro renewable growth. The availability of large hydro storage capacity in Canada facilitates the development of wind power as hydro may be used as a back-up source of power when intermittent wind resources are not available. Total installed wind power capacity quintuples over the projection period, reaching 23 GW in The largest capacity additions are in Quebec, Ontario and Alberta. The share of wind-based generation triples from less 16 Electricity in Canada

17 than two per cent of total generation to six per cent by Total combined capacity of biomass, solar and geothermal is also expected to grow, with net capacity additions over the projection period of over 5,400 MW, accounting for nearly six per cent of total generation by As projected in NEB s outlook, wind power has the greatest non-hydro based renewable contribution potential to Canada s electricity mix. According to the Canadian Wind Energy Association (CanWEA), wind energy is generating affordable, clean electricity to the extent that Canada is now the ninth largest producer of wind energy in the world with current installed capacity at 5,511 MW representing about 2.3 per cent of Canada s total electricity demand. In 2011 alone, 1,267 MW of new wind energy capacity was added to provincial grids, representing an investment of $3.1 billion and creating 13,000 person-years of employment. More than 6,000 MW of wind energy projects are already contracted to be built in Canada over the next five years. Although renewable sources of electricity are starting from a small base, they have been growing very quickly globally. The IEA states that global photovoltaic (PV) capacity has been increasing by 40 per cent a year since Global energy generated by renewable sources is set to grow by 40 per cent by In Canada, wind energy has grown an average of 60 per cent a year since The environmental appeal of renewable energy is substantial, and renewable sources will comprise an increasing amount of Canada s generating mix over time. However, without major advancements in battery and storage technologies, it is unrealistic to assume that renewables can shoulder baseload generation for Canada s electricity system for some time. The exception to this conclusion could lie in Canada s ability to partner significant wind generation with expanded hydro generation so that the benefits of both types of generation are interconnected. In addition, there are also 20 nuclear power reactors operating at five different facilities in Canada. In 2010, these reactors generated 15 per cent of all electricity in Canada. However, as a result of higher growth in other types of generation, such as wind and gas-fired power, the NEB projects that the share of nuclear in total electricity generation will decline to 12 per cent by Ibid. 10 Ibid. The Canadian Chamber of Commerce 17

18 Germany A Case Study in Electricity Policy, Investment and Competiveness An ongoing case study examining the competitive implications of energy/electricity policy choices is currently occurring in Germany. While not directly comparable to the Canadian situation, what is occurring in Germany provides some insight into the possible competitive implications of energy policy choices. Germany s objective is for 80 per cent of its energy to be produced by renewable sources by Biomass, wind and solar currently make up about 25 per cent of the country s electricity supply. Despite this significant investment in wind and solar power, Germany faces an energy shortfall due to a lack of transmission lines to supply its industrial centres and also due to the intermittent nature of both wind and solar power. According to numerous newspaper stories, academic studies and government reports, German electricity prices are on an upward trend as a result of the phase out of nuclear power and government mandating of renewable energy. Because renewable technologies are not yet economical compared to traditional fossil fuel technologies, Germany will have to continue to pay a premium for a highly renewable electricity system. These higher electricity prices are affecting German industry to the point that its competitiveness is deteriorating. According to a recent survey by the Association of Industrial Power Industry, Germany ranks fourth in terms of having the highest industrial electricity prices in the world. Electricity is more than 30 per cent cheaper for industrial companies in many Asian and European countries, and it is more than 50 per cent less in the United States and Russia. Persistent higher energy costs in Germany, and throughout Europe, could see energy-intensive manufacturers divert investments that might have gone into Europe to other lower-cost alternatives. Conclusion A significant percentage of Canada s energy resources will be required to meet projected demand increases over the next three decades. While there are barriers (environmental impact, cost, reliability) to all generation types, there is also opportunity to enhance Canadian competitiveness by attracting skilled workers, innovators and entrepreneurs to help us solve the challenges associated with the development of our resource base. Finding solutions that will allow the Canadian electricity sector to generate low-impact, low-cost electricity from all of our country s diverse and plentiful sources for both the domestic and U.S. markets will improve Canadian competitiveness. These solutions will result in jobs for skilled workers, better regulations, investment in research, development, deployment, technology and infrastructure, and a reduced environmental footprint. 18 Electricity in Canada

19 Energy Conservation and Demand Management Traditionally, the business case for energy conservation has been based on the ability of both industrial users and consumers to lower costs through reduced usage and for energy companies to forego the costs of adding supply due to the reduction in demand. While conservation programs have met with some success, they have often hinged on the ability of the utility to pass through higher costs to consumers. There is virtually a consensus view that demand management is an important factor in meeting long-term electricity demand with most advocates holding to the view that it is often cheaper to save a unit of electricity than it is to purchase or generate an additional unit. Demand management includes energy conservation programs, such as energy audits and subsidies for high efficiency equipment and appliances that are typically funded by utility companies and/or governments. Traditionally, demand management activity has been driven by higher electricity prices, the emergence of new energy-efficient technologies and government programs to encourage the adoption of those technologies. For the most part, energy efficiency technologies are versatile and can be implemented in residential, industrial and commercial settings. Industrial and commercial users have typically benefitted from energy efficiency investments through reduced energy input costs and a reasonably quick return on the capital invested in the efficiency technologies. For residential consumers, return on capital outlay often takes too long for cost savings to be an effective incentive. Demand response utilizes time-of-use metering to provide customers with the flexibility of reducing consumption during peak power periods. By shifting electricity usage to off-peak periods, industrial consumers see the benefits of demand response in reduced electricity costs. Advances in metering technology are making demand response and time-of-use billing cost-effective for residential consumers as well. The benefits associated with energy efficiency and demand management include supply security, improved reliability and indirect environmental gains via emission reductions. Improved management of energy loads through efficiency and reduced demand could lessen the need for infrastructure investment in both generating stations and transmission lines. The CEA estimated that demand management has the potential to reduce electricity use across Canada by MW by The energy savings from these programs can result in surplus generation capacity, and energy that can be sold in export markets. Demand management and energy efficiency programs will become more effective when the argument for conservation moves from cost savings for consumers (even though this is an important driver) to an articulate business case that demonstrates that reduced electricity demand in the domestic market creates surplus electricity that can be sold to the export market for profit. Utility companies are often skeptical of efficiency programs due to fear of potential income losses as a result of decreased demand and the cost of marketing the program; in fact, in some provinces, energy efficiency programs are starting to become costly at current electricity price levels. A reframing of the argument in favour of demand reduction as a way to increase export supply would alleviate some of this concern. 11 Canadian Electricity Association, Power Generation in Canada: A Guide, 2006 The Canadian Chamber of Commerce 19

20 Interprovincial Electricity Interconnections Interconnected power systems form the backbone of a competitive market that allows jurisdictions and companies to import power during peak periods and export excess power to the market during off-peak periods. Interconnections in Canada are primarily North-South because utilities have configured grids to ship power north-south rather than east-west. This north-south configuration is strengthened by the fact that the majority of Canada s electricity resources are located in the northern part of the country while population centres and electricity markets are located in the south near the U.S. border. The lines shown on the map below represent major (345 kilovolts and above) transmission lines in North America. The map clearly illustrates that major transmission lines that could transmit electricity across the country on an east-west basis do not currently exist. It also illustrates that the significant hydro potential that exists in north-western Canada is unlikely to be developed unless it can somehow connect to a power grid that can deliver electricity to markets where demand exists. Source: Canadian Electricity Assoication 20 Electricity in Canada

21 Canada, the world s second largest exporter of electricity, is an active participant in North American electricity trade. Electricity exports from Canada to the United States range, on average, between six to 10 percent of overall production. 12 Most provinces are connected with their nearest U.S. states and also with their neighbouring provinces. This cross-border trade allows generators to operate more efficiently as they can continue to generate electricity even when local demand is low. With open markets and interconnections, power can be sold across hundreds of kilometres. Outside of the ability to trade surplus power and bring companies additional revenue, the interconnected electricity grid enhances the reliability of each country s transmission network and is a safeguard during times of emergency outages or periods of high demand. 13 While all provinces are connected in some capacity, the majority of interconnections between provincial grids have small transfer capacities, meaning that one province cannot be dependent on electricity supply from an adjacent province during times of large deficits. 14 The north-south structure is so prominent that provinces with the largest external transmission connections, including British Columbia, Manitoba, Ontario and Quebec, have a greater number of interconnections with the United States than neighbouring provinces. 15 Looking towards the near future, a recent report published by the Conference Board of Canada identified that investments in north-south transmission will continue to be made. In fact, three new United States-Canada interconnection projects under development were identified, including the Montana-Alberta Tie, NU-NSTAR-Hydro- Quebec and Champlain Hudson Power Express. In comparison, significantly fewer proposals for east-west interconnections were identified from the investment plans examined in the report. 16 With an increasing focus on energy security and environmental concerns, coupled with the advancement of high-voltage transmission technology, greater attention has been focused on the advantages and disadvantages associated with eastwest transmission connectivity in Canada. Greater interprovincial transmission capacity would allow for additional export flexibility between provinces. It is proposed that this increased interprovincial trade would not necessarily diminish electricity trade between Canada and the United States; rather, it would increase trade opportunities by reinforcing the reliability of the Canadian transmission grid. Recommendations in a recent Canadian Academy of Engineering report support the development of a pan-canadian electricity market, 17 suggesting that an interprovincial network would provide both economic and environmental benefits to Canadians in a number of ways. Firstly, a national grid would enable the interconnection of new sources of hydroelectric and tidal energy. The report identified approximately MW of untapped hydroelectric and tidal power across Canada, a generating source with relatively low cost and environmental impact. Adding these generating sources of electricity would enable the phasing-out of older and environmentally-harmful thermal sources of electricity generation (e.g. coal and nuclear) that would normally need to be upgraded or replaced. 12 The Conference Board of Canada, Canada s Electricity Infrastructure: Building a Case for Investment, April 2011 and Canadian Electricity Association, Canada s Electricity Industry, Canadian Electricity Association, Canada s Electricity Industry, Canadian Electricity Association, Power Generation in Canada: A Guide, The Conference Board of Canada, Canada s Electricity Infrastructure: Building a Case for Investment, April Ibid. 17 Canadian Academy of Engineering, Canada: Winning as a Sustainable Energy Superpower, Volume 1, June 2012 The Canadian Chamber of Commerce 21

22 Furthermore, interconnecting provincial networks could facilitate the addition of intermittent renewable sources (e.g. wind and solar) to the grid, allowing these generating facilities to gain access to a wider market. The increased use of these resources would work towards improving Canada s environmental footprint. Finally, this transmission network could improve the management of regional peak loads, enhance energy storage capability, help correct the high variability in electricity prices across Canada and provide security to the overall system. 18 A second report by Pineau also outlined the expected benefits and challenges associated with an integrated Canadian electricity market. 19 Eight potential benefits associated with electricity integration initiatives were identified, including improved reliability, increased diversity in demand, a decreased need for provinces to invest in new generating capacity and improved supply security. 20 With the ability to access neighbouring generation facilities, each province/ territory would have access to a reserve power supply in the event of an emergency or to satisfy peak demand, ultimately improving the overall reliability of the system. 21 Access to this surplus power would be possible because of the variation in the timing of peak loads between provinces. 22 As a result of this pooling, additional investments in new generating capacity (investments that would normally be needed to meet increased demand) can potentially be avoided in certain provinces. 23 Furthermore, with access to a greater variety of generation technologies, the grid is less affected by events that impact a particular source of energy (e.g. fuel shortage, low rainfall, etc.) and, consequently, is more secure. 24 Greater integration would also give provinces lacking access to hydroelectricity a relatively clean and plentiful source of electricity and allow them to gain access and become less reliant on higher emitting sources of electricity. It is apparent that integrating electricity grids between provinces could translate into economic and environmental benefits. However, it is important to consider the problems associated with a province-by-province transmission system. Firstly, each province independently operates its own electricity sector, meaning that unique technical and operating structures have developed province-by-province. Since the grid would need to be coordinated across multiple systems and time zones, it does present logistical challenges in terms of pricing, regulations and infrastructure. 25 There is also a growing amount of participation in electrical generation and transmission from private sectors, increasing the complexity and difficulty of developing a coordinated national strategy and plan. 26 The Canadian Academy of Engineering also points out that real-time adequacy, security and reliability may be at risk without the development of appropriate system control technologies. 27 High construction costs and significant line losses (averaging about seven percent) associated with long transmission lines also need to be considered, leading to speculation as to whether east-west sales will ever be as lucrative as north-south sales. The use of high voltage transmission lines or direct current to transmit power over long distances can reduce line losses. Regardless of these prospective advantages and disadvantages, several major obstacles exist in the path towards pan-canadian electricity cooperation. 18 Canadian Academy of Engineering, Canada: Winning as a Sustainable Energy Superpower, Volume 2, June Pineau, P.O. Integrating electricity sectors in Canada: Good for the environment and for the economy. The Federal Idea, Montreal: Ibid. 21 Ibid. 22 Ibid. 23 Ibid. 24 Ibid. 25 Ibid. 26 Canadian Academy of Engineering, Canada: Winning as a Sustainable Energy Superpower, Volume 2, June Canadian Academy of Engineering, Canada: Winning as a Sustainable Energy Superpower, Volume 1, June Electricity in Canada