Ending the Electricity Monopoly
Posted December 6, 2013
New legislation allows independent suppliers of renewable energy to sell directly to customers. The government admits that this is unlikely to save ratepayers any money. A different route is required to end the utility’s monopoly.
Getting this right is extremely important. Hydro Quebec’s most recent survey shows Halifax (and by implication the province) continuing to have the highest rates in Canada. The Maritime Link is forecast to further increase them while fuel prices for thermal generation are staying low. Expensive electricity makes it very difficult for energy-intensive industries such as paper mills to be competitive.
Paying for the initial capital investment makes up much of the cost of electricity, almost all in the case of renewables. With the approval of the Maritime Link project Nova Scotia already has more generating capacity than it needs and will be idling coal plants well before the end of their useful lives.
If even more capacity is created by independent suppliers it will not change the amount of existing capacity that still has to be paid for by ratepayers. If the primary system has fewer customers it will drive rates up.
In about ten years’ time we will start needing new capacity and planning will have to proceed well before then. In the absence of a policy change that planning will be done by Emera and its affiliates and presented to the UARB for approval. No ratepayers’ representative will be part of the development process.
When new transmission or generation infrastructure is needed the necessary funds are provided by borrowing and by shareholder money from Emera and its regulated subsidiaries such as Nova Scotia Power Inc. (NSPI). They seek a rate of return of about 9%. The only way they can maintain and grow profits is by proposing new infrastructure projects.
So one can be highly confident that any future proposals will involve new capital investment by Emera/NSPI. But these may not be the best outcome for customers.
For example it may be better to increase imports from other jurisdictions, without the convoluted process to let Emera in on the investment that was created for Muskrat Falls. Or we may by then have one or more viable tidal technologies for which the right supplier is one of the companies specializing in that business, and currently investing in small scale experiments.
Emera is unlikely to champion either of these possibilities. It will work hard to establish a context in which its proposal is the most favourable. As things stand that will be followed by an expensive UARB review in which those arguing for customers are involved only at the end, and are heavily outgunned.
Emera has financial interests that go well beyond Nova Scotia, including its investment in Muskrat Falls as well as generation and transmission capabilities in New Brunswick and New England. There are numerous potential conflicts of interest which are very difficult for the UARB to supervise.
It would be better if a competitive process for new generation was managed by a body that had no financial interest in where or how the power was being generated.
The first step would be to separate the transmission assets from power generation, which would continue to be owned by NSPI.
The transmission assets would be spun off into a new company and Emera would be required to sell all of its interest in that company. The transmission company would have no investment in power generation, but would be rewarded by an investment return on transmission assets, perhaps adjustable for performance in transmission reliability and rate competitiveness. It would continue to be supervised by the UARB.
This is not simple. The new company would be accountable for the continuous process of matching demand and supply. It would be responsible for negotiating various rate agreements with commercial users willing to accept interruptible power.
Having customers buy directly from producers as well as from the transmission company would add complications, but the need for this should largely disappear if the transmission company is independent.
In Ontario, Alberta, and New England there are independent energy system operators which manage markets between various independent generation and transmission companies. This model may also be helpful, but it would still require ownership of transmission to be separated from generation.
What needs to happen today? The government should commission an expert review of the various ways that this issue could be approached and recommend a way forward. By the time the report is received, considered, and acted upon it will be time to begin the planning process for new sources of electricity. That planning should be done by a new and independent entity.
The government campaigned on a worthy promise to dismantle the Emera/NSPI monopoly. This will be a long journey. It should start now.
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