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Outlook for Electricity Markets
2005-2006
Questions and Answers
Report: Outlook for Electricity
Markets 2005-2006 - June 2005
[PDF: 6326 KB]
Why did the NEB prepare this report?
This report was undertaken as part of the Board's regulatory mandate.
The Board monitors the Canadian supply of all energy commodities, including
electricity, and the demand for Canadian energy commodities in both
domestic and export markets. The Board also has a mandate to keep the
Canadian public informed about energy developments in Canada. Also,
this EMA was produced in response to a Board survey and discussion with
stakeholders that revealed a need for more short- and medium-term energy
market assessments to supplement the NEB's longer term energy analysis.
What is the content of the report?
The report provides a discussion and analysis of Canadian electricity
markets, with an emphasis on the main drivers influencing current trends
in generation, demand, prices, infrastructure additions, and inter-regional
and international trade. It also includes an update of electricity industry
restructuring activities by province. While the focus of the report
is on the short term (2005-2006), current issues that may have a long
term effect on the Canadian electricity sector are identified and discussed.
It also acknowledges the close links between the American and Canadian
electricity sectors due to the integrated nature of the North American
power grid.
What were the conclusions of the report?
The Board has identified a number of issues and challenges facing the
Canadian electricity sector. The analysis developed in this report leads
to the following conclusions:
a) Supply is adequate in all regions during the 2005-2006 period;
however, tight supply conditions could emerge as early as 2007
There will be adequate supply to meet domestic demand in all Canadian
regions in the time frame of this report. However, actions must be taken
soon to ensure supply adequacy in the future. Longer term solutions
are likely to include a diversity of generation options, including renewable
energy, as well as increased inter-regional trade, and actions to change
and/or reduce demand. Along with natural gas-fired generation, generation
options also include nuclear refurbishments and new nuclear plants,
and clean coal developments.
b) Alternative and renewable resources and demand management are becoming
more important in addressing air quality issues and supply adequacy
Growth in alternative and renewable resources, particularly wind, is
accelerating. Apart from the direct environmental benefits of green
power, the potential also exists for the development of equipment manufacturing
and service industries. Currently, most alternative and renewable energy
sources are more costly than thermal-based generation; however, this
comparison does not take into account environmental costs associated
with thermal-based generation, which are not fully reflected in energy
prices. In addition, the cost for many alternative and renewable resources
continues to decline as the result of technological innovations. There
is also increasing recognition by the public and the electric industry
that managing energy demand is part of addressing supply adequacy issues.
c) Uncertainty could delay timely investment and development of new
infrastructure
Several provinces face uncertainty that could affect longer term supply
adequacy. Uncertainty is related to evolving market structures, the
lack of clear pricing rules, fuel costs and the impact of environmental
initiatives. As well, the general resistance from parties that might
be impacted is often cited as a reason for delays in obtaining approvals
to construct new facilities. From the standpoint of facilitating infrastructure
development, these uncertainties add risk, cause delays and increase
the cost of making investments in new technologies and infrastructures.
d) In all regions, there are forces that will exert upward pressure
on electricity prices
Canadian consumers will face continuing upward pressure on electricity
rates. Factors influencing rate increases include fuel prices, development
of higher-cost generation resources, and the cost of enhancing transmission
and distribution systems.
Since electricity is often perceived by consumers to be an essential
service, there is a political motivation to ensure entitlement to electricity
at acceptable prices through regulation. Such prices may or may not
be sufficient to induce the appropriate responses by investors and consumers.
Decisions as to what may constitute acceptable or reasonable prices
are influenced by the need to ensure supply adequacy and environmental
sustainability. Informing consumers about these objectives, and the
choices that are implied, may assist consumers in understanding why
prices will be rising.
e) Exports and imports continue to benefit Canadians; interprovincial
energy transfers should be further explored
Under normal operating conditions, transmission interconnections between
regions provide opportunities to engage in trade and contribute to reliability
of the interconnected systems. For geographic and economic reasons,
the strongest ties have been north-south, between the provinces and
adjacent American states. These have enabled the exporting provinces
to earn revenue during periods of supply surplus and have enabled power
purchases during off-peak times or when required to supplement domestic
generation.
While there are important interprovincial power transfers in some regions,
the historical tendency for provinces to supply their own markets has
limited the extent of interprovincial transfers. The concept of expanded
east-west interconnections, or an "East-West Grid" in Canada,
was raised a number of times in the past, but typically was not considered
economically attractive.
What are the Board's recommendations?
The Board found an opportunity to make recommendations in five areas.
- Given the concerns about supply adequacy and the need for some
major investments, governments and regulators should strive to provide
clarity and predictability in the investment environment. Clarity
of rules is necessary to encourage investment that is required to
meet the goals of supply adequacy, environmental integrity and acceptable
prices.
- While there is considerable potential for demand management, electricity
prices paid by most Canadian consumers are below the incremental cost
of supplying electricity, muting incentives to use electricity efficiently.
Some provinces, such as Ontario, are phasing in time-of-day pricing
and other strategies to encourage more efficient use of electricity.
Governments, regulators and load serving entities should promote the
use of clear price signals to encourage efficiency in electricity
consumption.
- Governments, industry and consumers recognize the benefits of clean
generation. Policy makers should continue to support diversity in
the generation mix, particularly with respect to clean generation
options. For example, Canada has large coal resources and further
investigation of and support for clean coal technologies may be warranted.
- Governments should strengthen their partnerships with industry
and other stakeholders in the development of alternative and renewable
energy resources. Resources should focus on public awareness, incentive
programs such as the federal Wind Power Production Incentive, and
financial assistance to support research and development of promising
technologies.
- East-west transmission expansion needs to be considered in the
context of alternative markets for the resources to be developed and
alternative generation options for the target markets. Policies or
incentives in support of east-west transmission development should
be considered from a multi regional perspective.
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