Energy Probe

Peter Holle
Winnipeg Free Press
July 15, 2003

A new analysis by Tom Adams, executive director of Energy Probe, a Toronto-based think tank, shows that each of us uses two and a half times more electricity than the average person in other developed countries. Adams is also proposing a unique method of solving the problem, a distribution model called tradable electricity permits.

Our high consumption rates are no accident. Highly politicized and dominated by a Crown monopoly, energy policy in Manitoba operates within narrow boundaries. Consumption is artificially high because prices are kept artificially low. As its owner, the province takes little in dividends from Manitoba Hydro, exempts the utility from income taxes and guarantees low rates for its debt. The low prices indicate no Fabian miracle of public ownership. Any business that failed to recognize its cost of capital, paid no taxes and had a government-subsidized mortgage would have the lowest prices in town.

Manitoba’s high tax rates and heavy dependence on federal transfers give us slow economic growth. They invite a somewhat desperate political bias toward mega-projects like large dams subsidized by low government guaranteed interest rates. We end up with policies that encourage excess generation of electricity, surplus supply, low prices and the highest consumption in the world.

To look “green,” the government makes symbolic, if ineffectual efforts to reduce consumption like the Power Smart program, with its token subsidies for upgrading windows and insulation. This recalls the perverse incentives provided by ridiculously cheap power prices in the old Soviet Union. People in public housing would simply throw open their windows in the middle of winter if things got too warm.

Why bother with mundane items such as thermostats or insulation when energy was essentially free? Nominally, an energy economist at heart, Tom Adams is a sophisticated environmentalist who understands the power of incentives. He is proposing a new model to reward consumers for conserving electricity.

His concept is especially attractive because there is no change in status for Manitoba Hydro, which remains a Crown corporation.

His model adopts a concept that has proven successful in achieving low-cost reductions in sulphur dioxide emissions in the U.S. and other pollutants elsewhere – permits with market value. Tradable electricity permits (TEP) would grant individual Manitobans rights to a predetermined quantity of power, with the cost of a permit determined by existing rate structures. With the size of the permit dependent on historical usage, consumers using their usual amounts of power would see no change in costs or service levels. Consumers using less than their permitted amount, however, would have the opportunity to sell their surpluses in the market. If prices rose in neighbouring markets due to supply constraints, rising fossil fuel prices, or stricter environmental rules, the economic incentives for consumers to find ways to save power would increase. In turn, this would free up more electricity for export.

Adams maintains that the potential for conservation in the Manitoba economy is so large that a large market in cross-border sales would result and bring significant dollar flows to individual consumers across the province. A reduction in power consumption down to the OECD average would give Manitoba room to increase power exports by over 184 per cent without adding new dams. Put another way, the conservation gains from lowering energy use to the OECD norm are the same as building about 2.3 Conawapa dams (see www.fcpp.org), minus the inevitable time delays, environmental destruction, complicated politics and large subsidies.

TEPs would pay consumers to conserve. A large portion of residential power demand is based on electric heating. With TEPs, Adams anticipates considerable switching to alternative fuels such as ground source heat pumps and pelletized biofuels, as well as major moves to improve home insulation and winterize buildings.

Tradable permits would also provide a more reliable, market-based method of testing the economic value of new investments in generation.

Consumes 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. An expensive new dam would therefore receive community support only if the cost of power added to the system was truly below existing levels.

Manitoba Hydro’s role remains the same under a TEP regime. The utility would generate the same power from the same facilities and it would receive the same revenue as it does now. Ideally, the province would remove hidden subsidies by consistently deducting dividends to recognize capital costs and charging a special tax levy equivalent to private rates. The only change in Hydro’s role would happen on the accounting side. The utility would track usage relative to consumer entitlements in the same way that a bank tracks credits and debts.

TEPs would transfer the benefits of creating more efficient outputs in the power system to individual consumers while leaving the means of production in public hands.

Smarter and greener, with Manitoba as a world pioneer in innovative energy policy, Adams’ idea is a winner.

Peter Holle is president of the Frontier Centre for Public Policy.

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.