July 3, 2003
Meeting for policy experts
Frontier Centre for Public Policy
Date: July 10, 2003
Place: Oxford Conference Room, Main floor
Trizec Building, Portage and Main, Winnipeg
Time: 2:00 P.M. to 3:30 P.M.
Guest Speaker: Tom Adams, Executive Director, Energy Probe
Manitoba’s low cost hydroelectric power represents a major economic opportunity for the province but currently only a fraction of this potential benefit is being realized. The province borders on regions with liberalizing markets for power, resulting transparent prices and enhanced opportunities for beneficial trading. Manitoba’s economy is one of the least electricity efficient in the world. Each Manitoban consumes more than two and a half times the amount of power used by citizens of the OECD.
How best to unlock the potential represented by this inefficiency? Conventional conservation subsidies have proven ineffective in tapping more than a small fraction of this potential. Building new generation and transmission resources for export is a slow strategy that creates commercial risks, like the risk of contract cancellation. Construction benefits are transitory and limited.
An alternative approach is to borrow a concept that has proven successful at achieving low cost emission reductions in sulphur dioxide in the US and other pollutants elsewhere – Tradable Electricity Permits (TEP). These would grant individual Manitobans rights to a predetermined quantity of power, with the cost of the permit based on the existing Manitoba Hydro rate structure. If these permits were granted on the basis of historical usage, consumers using their historic amount would see no change in their costs or service level. However, consumers using less than their permitted amount would have the opportunity to sell their surplus in the market. Rising prices in neighbouring markets, due to supply constraints, rising fossil fuel prices, or tighter environmental rules, would increase the economic advantage to consumers to find more ways to save power, thereby freeing up more power for exports.
The energy conservation potential in the Manitoba economy is so large that we expect a large amount of cross-border sales might result, bringing very significant dollar flows into the province. As an example of the conservation potential, a large portion of the residential heating demand is based on electric resistance heating, so the potential for fuel switching to alternative fuels like ground source heat pumps and pelletized biofuels is significant. In addition, insulation and winterizing appear to have substantial potential.
TEP, if introduced, would provide a more reliable, market-based method of testing the economic value of new generation investments than now applies in a regulated regime. Consumers would have an interest in ensuring that their portfolio of permits is only increased if the cost of the new supply exceeds the expected value of that supply, either directly to the consumer or indirectly through the market.
Under a system of TEP, the role of Manitoba Hydro is fundamentally unchanged. The utility would generate the same power from the same facilities and it would receive the same revenue as it does now. The only change in its role would be related to accounting – the utility would track each customer’s usage relative to its entitlement in the same way that a bank tracks credits and debts. TEP, which would privatize the output of the publicly-owned power system rather than the means of production, represent an opportunity to unlock the potential of Manitoba’s electricity system for the benefit of individual citizens.
Tom Adams is Executive Director of Energy Probe, a charitable organization that promotes resource conservation, environmental sustainability, democratic decision-making processes, and economic efficiency for Canada’s energy sectors. He also works for the consulting firm Borealis Energy Research Association. In the period 1998-1999 he was appointed by the Ontario Government to the Ontario Market Design Committee, charged with developing the initial rules for Ontario’s new competition-oriented electricity market. He was then appointed as an independent director of Ontario’s Independent Electricity Market Operator, responsible for coordinating the operation of Ontario’s power system, and served from 1999 until 2001. Mr. Adams specializes in environmental and economic analysis of the electricity and natural gas sectors. His research interests include competition and privatization options for electric power utilities, nuclear safety issues, efficient conservation and renewable energy policies, incentive regulation for water, gas and electricity monopolies, and expansion of natural gas deregulation.