Canada's dysfunctional electricity system costs Canadians dearly

Provincial isolationism creates pollution and drives up costs

by Barrie McKenna, The Globe and Mail

The oil sands’ big carbon footprint is a source of much national angst.

It stirs East-West rivalries, riles environmentalists and sours relations with some trading partners.

A lot less attention is paid to Canada’s hopelessly inefficient and highly politicized electricity business. That’s unfortunate, and costly.

The fragmented market wastes billions of dollars every year and produces millions of tonnes of extra greenhouse-gas emissions, according to Pierre-Olivier Pineau, associate professor at the University of Montreal’s HEC business school and author of a new study, Integrating Electricity Sectors in Canada: Good for the Environment and for the Economy.

“We could save money and reduce our carbon emissions,” Prof. Pineau said in an interview. “But politically, it’s difficult.”

No kidding. Provincial monopolies, powerful entrenched bureaucracies and regional jealousies have created a balkanized energy system that serves the few at the expense of the national interest.

Consider Quebec and Ontario. Three-quarters of Quebeckers heat their homes with electricity, generated from a vast network of hydroelectric dams.

Meanwhile, Ontario is ramping up production of electricity made from natural gas and subsidizing purchases of wind and solar power as it scrambles to shut down dirty coal-fired capacity.

Here’s the catch: Hydroelectricity is a wonderful and clean source of energy, but not a very efficient heat source. Natural gas, on the other hand, is a great source of heat, but an inefficient way to make electricity.

In essence, Quebec is force-feeding wasteful hydro consumption with low electricity rates, and Ontario is paying too much and polluting more because it can’t buy enough cheap and clean hydro, Prof. Pineau argues.

In a more rational economic world, Quebec would use inexpensive and abundant natural gas to heat homes. And Ontario would buy more hydro power from neighbouring Quebec or Manitoba to power its factories.

“[Hydroelectricity] … should be shared, as with other energy sources and other consumer goods, according to economic criteria,” Prof. Pineau says in his study, published by Federal Idea, a Montreal-based think tank. “In other words, discrimination based on their province of residence must stop, to allow production companies to sell to the highest bidder.”

Hydro-Québec isn’t alone. The other hydro-rich provinces – British Columbia and Manitoba – operate in a similar fashion, selling cheaply to local consumers, rather than offering that power to other provinces.

The misallocation of gas and hydro resources isn’t the only costly anomaly in Canada’s electricity landscape. Quebec and Ontario overspend to produce wind power, creating an underused backup to other sources of supply. If Canadian utilities were serious about wind power, they would instead join forces to build vast wind farms where it makes the most economic and climatic sense – the Saskatchewan prairies.

Then there’s Newfoundland. Still stinging from the perceived bad deal it made decades ago to sell all the power from Labrador’s Churchill Falls project to Hydro-Québec, the province now wants to tap the Lower Churchill River’s hydro potential. The best way to get the power out, of course, is through Quebec.

But Hydro-Québec is apparently demanding too steep a transmission price. So Newfoundland is planning to reroute the power via a costly and circuitous subsea cable back to the island, across to Nova Scotia, and eventually to markets in New England. Only a federal subsidy makes the $6.2-billion megaproject feasible.

Newfoundlanders could wind up paying dearly for power they don’t really need.

Last year, heavily indebted New Brunswick came close to selling Crown-owned New Brunswick Power Corp. to Hydro-Québec. But the deal fell apart, at least partly because of bruised provincial pride. While deeply unpopular with ordinary New Brunswickers, the takeover was economically and environmentally sound. Quebec would get a new market for its cheap hydro, allowing New Brunswick to curb its use of oil and coal for generating electricity.

Instead of cheaper rates, New Brunswickers will pay more and pollute more.

And so it goes. Provincial electrical utilities operate in a strange netherworld. They compete in a free market of deregulated oil-and-gas markets, and cross-border electricity markets. But at home, they’re slaves to provincial mandates and political pressures.

There’s plenty of opportunity for the provinces to co-operate. Too often they don’t, and Canadians are paying a steep financial and environmental price as a result.

It’s no way to make sensible national energy policy. Maybe environmentalists should get a little more exercised about inefficiencies in electricity markets, and lay off the oil sands.