Thomas Adams
Energy Analects
April 23, 1996

February 27 was a black day for the environment this year. Destec Energy, a prominent U.S. power producer and marketer, had arranged a perfect deal. Destec had access to idle cogeneration capacity in Ontario, had secured an NEB export license, and had U.S. customers lining up. Destec’s cogenerated power would have displaced dirty coal-fired power in the U.S. and improved the energy efficiency of refinery operations in Ontario. The only piece missing in Destec’s plan was transmission access. On February 27, Ontario Hydro wrote to Destec Energy, "just saying no" to a request from Destec for wheeling service.

In seems intuitively obvious that public ownership of the power industry ought to mean better protection for the environment than would prevail in a private, competitive arrangement. However, the actual experience of public ownership fails to meet this expectation. Experience with the environmental effects of competition elsewhere and the logical implications of the customer choice belies any intuitive preference for public ownership.

Destec’s disappointment just one of a multitude of cases where the Ontario public power monopoly’s interests have won out at the environment’s expense. Secret deals with Sunoco, Amoco, and Imperial Oil have quashed the development of energy efficient industrial cogeneration. Cogenerating district heating, one of the most environmentally responsible means of producing energy, has been killed in Kingston, stalled indefinitely in Toronto, and is under threat of legal harassment in London. Cogeneration is a threat to Ontario Hydro because the energy efficiency of cogeneration translates into lower cost power than the monopoly produces at its inherently inefficient coal and nuclear plants.

There is an alternative to Ontario Hydro’s self-interested, efficiency-killing monopoly abuse. Although ecology was the last thing on Margaret Thatcher’s mind, the U.K.’s power privatization has been a stunning environmental winner. Before Thatcher’s privatization, the U.K. power monopoly relied on coal and nuclear production and was justifiably dubbed one of Europe’s worst polluters. Now, coal use is plummeting, replaced mostly by new, highly efficient natural gas-fired generators. Cogeneration and wind power, stalled in Ontario, are surging there. Privatization killed previously planned nuclear expansion. Instead, many nuclear stations are getting early retirement.

One key to the environmental turnaround in the U.K.’s power system has been financial accountability. Inefficient megaprojects favoured by the former public monopoly are being replaced by smaller scale, efficiency-oriented alternatives to meet the private sector’s needs for flexibility and cost effectiveness. Although none of the nuclear plants have yet been privatized, the private market has provided a clear benchmark to test the worth of nuclear investments. The private sector comparator has proven an unsurpassable hurtle for nuclear investments, whether in new stations or even life extension for aging stations. The environmental gains from financial accountability have been inadvertent but substantial.

Financial accountability has not been the sole reason for the cleanup. Environmental regulations were also strengthened in the U.K. where tightening pollution rules proved easier once government was no longer in a conflict of interest as both regulator and polluter. When the U.K. government no longer owned that country’s coal stations, it imposed tough new rules requiring scrubbers on many stations. As an example of the results, PowerGen, one of the largest fossil-fired power producers has cut sulphur dioxide emissions by 23% and nitrogen oxides emissions by 27%.

The regulation of Ontario Hydro’s environmental performance is deplorably lax. The limit for radioactive tritium emissions into the environment is set at a level for some stations that Ontario Hydro could not exceed even if it released its entire inventory. The Ontario government sanctions drinking water standards that allow the risk of cancer from tritium to exceed by thousands of times the risk possed by some chemical carcinogens. The provincial emission cap for acid gas emissions from coal plants that allows Ontario Hydro to import coal-fired power from upwind U.S. stations with impunity. Ontario Hydro has defacto permission to let production concerns prevail over environmental damage in the operation of ecologically sensitive hydraulic units. The weak state of environmental regulation of Ontario Hydro largely results from government’s conflict of interest as both an owner and regulator of the monopoly.

Far from acting in the interests of its owners, Ontario Hydro vigorously lobbies and litigates in favour of low environmental and public-health standards. Examples include Ontario Hydro’s aggressive defence its nearly complete exemption from nuclear accident liability and its ongoing efforts to minimize emergency planning for nuclear accidents.

In submissions to the Ontario Advisory Committee on Competition in Ontario’s Electricity System headed by Donald C. Macdonald, several individuals and organizations expressed concern that the introduction of open competition in electricity generation could impede renewable energy development in Ontario due to the end of Ontario Hydro’s Renewable Energy Technologies Strategy (RETS). The submission of the Independent Power Producers Society of Ontario (IPPSO) recommended a formal "regulatory set-aside" for renewable energy to guarantee it some market share of new generation in a competitive electricity system. The unspoken assumption behind IPPSO’s proposed set-aside is that renewable electricity generators could not compete on a "level playing field" and would need preferential treatment.

The possibility that an open market and thorough application of the principle of polluter pays, instead of subsidies and special protection, could provide the best mechanisms to promote development renewable seems to have escaped IPPSO. Empowering individual consumers to choose their power supplier would promote renewable energy development in Ontario more effectively than the RETS program or IPPSO’s proposed set-aside. Customer choice will promote renewable supplies without making suppliers dependent on government or regulatory intervention. Too often, formal set-asides create perverse incentives that encourage unsustainable development. As in the case of Ontario Hydro’s existing non-utility generation contracts, renewable power options can become stigmatized due to public contempt for excesses fostered by special protection from competition.

There are many reasons to be optimistic about the future of renewable supplies in an open market. One obvious reason is that many technologies for renewable electricity production have made, and are making, tremendous progress in cost and efficiency. Meanwhile, the efficiency of the least environmentally attractive options—coal and nuclear—is stagnant or even deteriorating. In addition, the costs of the least attractive options in many cases are escalating. These comparative trends are likely to continue to favour renewable options well into the future.

Admittedly many environmentally appealing renewable generation technologies cannot yet deliver electricity at the very low costs achievable with natural gas-fired combined-cycle, cogeneration, and trigeneration (combining production of power, heat, and cooling). Although these gas options are highly efficient and clean relative to other fossil-fired options, they are not renewable. At least in the near future, gas options will likely be the price setters for new electricity supply. Despite the attractiveness of gas options, renewable technologies could compete very effectively in an open marketplace that empowers all customers to choose their supplier.

Empowering consumers to directly control their power purchases will boost renewable supplies through customer choice. Given a chance, many customers will be willing to pay a premium for renewable supplies. Perhaps even more will be willing to pay a smaller premium for "ABCAN" (i.e., Anything But Coal And Nuclear), thereby bidding up the price of greener, more efficient sources, and depressing the price of "black energy". Customer choice will encourage the most customer-preferred options, while tending to retire or phase out less preferred options.

Despite the institutional status quo, there is already some market indication of a premium value for green power in Ontario. In February, the chair of Toronto District Heating Corporation (TDHC), Councillor John Adams, appeared before the Advisory Committee on Competition in Ontario’s Electricity System at a public hearing in Toronto. Mr. Adams indicated that a U.S. power marketer offered TDHC a premium price for cogenerated district heating-derived power.

Some businesses and corporations, given the chance, might incorporate a preference for "green energy" into their own business plans, and into their publicity. Consumers would expect that The Body Shop, Mountain Equipment Co-op, most health-food stores, and camping establishments would not light their stores with coal-fired and nuclear power if an affordable alternative were available.

One cannot enter a supermarket or look down an urban street on "Blue Box" day without seeing ample evidence of the eagerness of ordinary citizens to incur costs or inconvenience to minimize their negative impact on the environment. Similarly, mutual funds with environmental "screens" have made significant inroads in the investment field. Public opinion polls of consumer interest often show a willingness by members of the public to pay a premium to buy "environmentally friendly" products.

The quickest and most sustainable way to start cleaning up our environmental mistakes in the power sector is by privatization and competition coupled with thorough application of the principle of polluter pays. Financial accountability is a critical first step. In addition, we must break up the conflict of interest that prevents government from properly executing its responsibilities as a regulator. The environment will heave a sigh of relief when clean producers lobby for tougher pollution controls for their dirty competitors.