Canadians are in the enviable position of living in a country richly endowed with raw resources for generating electricity, at a time when the world is struggling with the challenges of meeting energy needs in ways that are both economically and environmentally sustainable. Most countries, including the United States and most of Europe and Asia, import much of their generating fuel or electricity, Canada is self-sufficient and a net exporter of both energy resources and electricity. But though most countries tackle electricity on a national basis, Canada does not and we suffer as a result.
Because energy is a provincial matter under the Canadian Constitution and, like the country at large, most provinces can be self-sufficient in electricity, our electricity supply has grown up as a collection of provincial systems, each independently designed and operated. Typically a province has developed generation based on its own sources of raw energy, with the result that nationally we have an electricity supply that does not take full advantage of the country's resources.
Provincial compartmentalization constrains the diversity of the generation technologies that we use. Wind and solar power are emission-free but are available only at nature's whim. In contrast, nuclear and gas-fired generators are available on demand; nuclear provides steady output that is emission-free, while gas can respond more nimbly to changes in customers' requirements. Hydroelectric generators with dams and reservoirs can store energy but cause flooding, whereas run-of-river hydroelectric plants have no storage and a smaller environmental footprint. These various generating technologies work more effectively together than alone.
If we all thought outside our provincial boxes, we would probably be doing things such as developing the massive hydroelectric sources in Labrador to offset the reductions in coal-fired generation planned for Ontario and the Maritimes. Alberta's electricity system is an ideal dance partner for B.C.'s hydroelectric storage reservoirs, because Alberta relies more heavily on intermittent wind generation than any other province. In fact, Alberta has taken a leadership role in the North American electricity industry in integrating wind into electricity supplies and also leads in new coal technologies, including carbon capture and storage. B.C.'s recently announced drive for electricity self-sufficiency would probably make more sense if it were planned in concert with the many innovative new investments being made in its neighbouring province.
Canadian provinces could achieve the benefits of greater electricity integration through interprovincial trade. This approach would avoid twin bogeymen: on the one hand, a federal electricity policy, anathema in the wake of the massive political and economic disruptions of the 1980 national energy program; and on the other, selling, merging or disbanding provincial utilities. There is certainly room to grow, because discretionary interprovincial electricity trade is at present less than a quarter the size of international trade with the U.S. In 2008, the Canadian electricity industry sold $26-billion worth of electricity, of which 10 per cent was net sales to the U.S. but only 2 per cent was interprovincial sales.
All other things being equal, the relative ease of interprovincial co-ordination compared with international co-ordination should result in east-west trade being more attractive than north-south trade. The fact that the north-south trade is much larger indicates that other things are not equal. U.S. prices for electricity are generally higher than in Canada, but even if factors such as this are encouraging trade across the international border, they do not detract from the economic advantages that could be simultaneously available from increased interprovincial trade. The fundamental east-west synergies are waiting to be more fully exploited; doing so need not mean diminished north-south trade.
Canada is a big country with large distances and obstacles such as the Great Lakes and the Rocky Mountains, which drive up the cost of transmission facilities. But each province has at least one next-door neighbour, and many provincial pairings, such as B.C. and Alberta, Ontario and Quebec, and New Brunswick and Nova Scotia, offer electricity synergies sufficient to support investment in the necessary transmission lines. Interprovincial electricity trade would most logically develop as a series of regional initiatives among neighbouring provinces; there is no imperative to move electricity between St. John's and Victoria, and the economics of such a national grid would not be good.
The cause of the meagre levels of interprovincial electricity trade lies in the fundamental differences among the various commercial structures the provinces have adopted. When neighbours have different business philosophies, they will have difficulty realizing mutual benefits from trading with each other. Both Ontario and Alberta and, to a lesser extent, New Brunswick and Nova Scotia have disbanded their century-old generation-transmission-distribution monopoly utilities in favour of more open systems, in which customers are free to choose their electricity suppliers, who must then compete for their business. The other provinces have stayed with the monopoly structure, and most have retained public ownership of their utilities. The result is that we have an almost perfect checkerboard pattern across the country of monopolies beside competitive systems.
If we had wanted to design a system to frustrate interprovincial electricity trade, we couldn't have done much better. In addition to the inherent mismatch between the aims of monopolists and free marketers, all provinces bordering on the U.S., except Alberta and Ontario, have taken the easy way of getting access to the lucrative U.S. electricity markets, by simply adopting U.S. rules for the operation of their transmission systems. These rules take control out of the hands of the owners of the transmission facilities by creating access rights to use the system. The rights can be bought and sold, with the theoretical result that anybody can use anybody else's transmission system if they have purchased the appropriate rights.
But in Canada that doesn't happen, because, unlike in the U.S., there is no overarching federal policy of encouraging nationwide competition in electricity and consequently no enforcement framework to prevent the stifling of competition by amassing transmission rights in the marketplace.
Had the recently proposed sale of New Brunswick's utility to Quebec not been called off by mutual agreement, Hydro-Québec would have wound up owning rights to 970 megawatts of the 1,000-MW capability to the U.S. via the transmission link between New Brunswick and Maine. As it is, with the sale now abandoned, Hydro-Québec still owns long-term rights to 300 MW of that link.
The situation between Ontario and Quebec is even more counterproductive for interprovincial trade, because the power-trading arm of Hydro-Québec has bought the rights to 100 per cent of the capacity of the recently built link into Ontario for the next 50 years. So in spite of interest by both Ontario and Newfoundland and Labrador in arranging supply from the proposed Lower Churchill hydroelectric project in Labrador to downtown Toronto, and in spite of the theoretical possibility of doing this under Quebec's transmission rules, any long-term arrangement is thwarted at the Ontario border.
Similar frustrations have occurred at the Alberta-B.C. border, where the only access Albertans have to buy and sell in U.S. markets is through B.C., which has a U.S.-style transmission access system. This U.S. approach doesn't necessarily serve the interests of the provinces that have adopted it. For example, it complicates expansion and reinforcement of the electricity system. It is notable that major investment in much-needed transmission infrastructure is happening primarily in Alberta and Ontario, the only two provinces bordering the U.S. that have their own homemade approach to electricity transmission.
We need a new, "Made-in-Canada" approach to managing access to transmission links between provinces, an approach that recognizes both the provincial character of our electricity system and the fact that it is a patchwork of different commercial and ownership arrangements. It needs to be designed to eliminate commercial barriers at provincial borders rather than erecting them as the current arrangements do.
So what to do? One first step would be to adopt a 50-50 reciprocity system. In return for allowing half of the transmission capacity to operate under its neighbour's rule, one province would forgo its ability to block trade at the border and be allowed to set the rules for the other half. This arrangement is used between some countries in the European Union; applied in Canada, it would equalize the bargaining power between provinces.
Another alternative would be for the federal government, through the National Energy Board, to force a transmission line to run through a recalcitrant province that blocks another province's access to markets beyond; for example, Newfoundland and Labrador to Ontario through Quebec or Alberta to the U.S. through B.C. The legislation to do this exists but this power has never been exercised, in part because the decision is entirely the prerogative of a federal minister and therefore clearly needs many stars to be aligned in the sky of federal-provincial politics.
Man-made rules and policies, which have evolved on a province-by-province basis, impede interprovincial electricity trade and Canadians are the poorer for it. Fixing some of the seams in this administrative patchwork will help us take better advantage of nature's gifts.
Jan Carr is a corporate director and is the former CEO of the Ontario Power Authority. His C.D. Howe Institute Commentary, "Power Sharing: Developing Inter-Provincial Electricity Trade," is available at www.cdhowe.org