Evidence of meeting #65 for Natural Resources in the 42nd Parliament, 1st session. (The original version is on Parliament’s site, as are the minutes.) The winning word was interties.
A recording is available from Parliament.
Liberal
The Chair Liberal James Maloney
Good afternoon, everybody. Happy Monday. Thank you for coming back after the weekend.
We're going to get under way. We have three witnesses in the first hour.
We have Mr. Marc Brouillette, principal consultant for Strategic Policy Economics. I also learned today that he lives in my riding, which I didn't know, but more importantly, he didn't know I was his MP—
Liberal
The Chair Liberal James Maloney
I have some work to do, clearly.
Nicholas Martin is a policy analyst with Canada West Foundation, and Tom Adams, who is principal at Tom Adams Energy, is joining us by video conference.
Thank you, gentlemen, for taking the time to be here today.
If you don't know the process, we give each of you up to 10 minutes to make a presentation. You will all make your presentations, following which the floor will be open to members around the table to put questions to any or all of you. We run a tight clock here. It's up to 10 minutes and then the question periods are timed as well, so if you see me waving, that's my polite way of saying, “Please try to wrap it up”.
Without any further ado, I'll start with Mr. Brouillette.
Marc Brouillette Principal Consultant, Strategic Policy Economics
Thank you, Mr. Maloney.
I was told to give a brief write-up of what I'm going to say. I don't know if it's been distributed or not. I've entitled it “Enhancing Canada's Energy Endowments with Interties: A National Competitive Advantage in a Decarbonizing World”. I'm going to give you some perspectives that I hope you may not have heard.
Liberal
The Chair Liberal James Maloney
We have only the speaking notes and they're in English only. They're not bilingual so they weren't circulated.
If there is consent, we can distribute the English version.
Principal Consultant, Strategic Policy Economics
On the overview, in making investment decisions on interties, the main consideration is whether electricity will flow through those interties and how much of the intertie capacity will get used. It's essentially a demand-and-supply question.
In the context of this committee, the demand question, I think, involves a lot of crystal-ball gazing to a future where we expect decarbonization and fuel switching to impact on electricity. The supply question is what kind of generation should or will get built, and more importantly for interties, where. I think the cost question is paramount in that.
The concept I'm bringing to the committee is that eastern Canada, which in my view includes Manitoba, has three distinct energy endowments. These endowments could represent a national competitive advantage for this country. Interties could augment this competitive advantage, and this opportunity is predicated on three factors.
The first is the demand and the associated impact on the economics of interties. Today, demand for electricity has a daily and a seasonal profile that inherently reduces the transmission and distribution asset utilization and hence their economic use. Today the interprovincial intertie investments are not warranted for Ontario. I've written about that. However, in the future, demand will not only grow but will also change the daily and seasonal load profile that is presented to those transmission assets and the requirements on new supply. That's factor number one.
Factor number two is the energy assets that eastern Canada has. That's hydro and natural gas storage, and it equates to electricity—in a minute, I'll explain—and they're both akin to grid-scale seasonal batteries. Ontario's nuclear advantage could be the generation that supplies the batteries and cost-effectively optimizes the development and/or leverage of those batteries with the interties.
The third factor is the U.S. Demand in the northeastern U.S. will rise with emission reduction, much as Ontario's will, and the U.S. has fewer supply options than what we have up here. Collectively viewing the requirements of new supply, the transmission asset optimization, and the U.S. need for clean energy could enable a unique low-cost source of electricity both for domestic use and for exporting electricity and gas-from-electricity to the U.S., if Canada is smart about it.
Now I'm going to talk about each of those factors in a little more detail. The nature of the existent demand and supply balance can dramatically shape whether an investment in interties makes economic sense. My study showed that after the next eight years, due to surpluses in both Ontario and Quebec, there was no domestic energy cost advantage for intertie development or even enhancing any trade agreements between those two provinces.
I agree with climate analysts that fuel switching will lead to electrification. My analysis shows meeting Ontario's 2030 targets will require 60% more electricity than it currently has, even while taking advantage of all the efficiencies that come out of innovation. Much of this demand is in winter.
Demand for electricity has two inherent characteristics that are counter to optimizing value-added interties. One is a daily demand. The IESO in Ontario has stated that because of the daily demand profile, the value of interties for emission reduction purposes is limited to only a few hours a day, and that is only 25% of that capacity of the interties productively used for GHG reduction. At such low utilization rates, that can add up to 60 bucks a megawatt hour, almost doubling the cost of power that will go across those interties. That's challenge number one.
Challenge number two is seasonal demand. In an electrified world, seasonal variation in demand for electricity is significant. In Quebec, where most buildings are electrically heated, you can see that the winter demand for electricity is approximately 65% higher than in the summer. The only clean electricity supply that matches this new winter heating, which will happen in Ontario at some point, is the large reservoir of hydro, which Quebec has. However, Quebec does not have enough capacity to supply the new winter heating that Ontario will require by 2030, so the issue is going to come down to who's going to build it. Are you going to build it in Quebec, where you need interties, or in Ontario, where you won't need interties?
The supply choices could hurt or help interties being a good idea, and whether interties make sense in the future depends on whether the new demand to the grid will justify the acceptable utilization of assets. If the grid demand says fill up the transmission pipes, it will be a good idea; otherwise, it might not be.
Two of the most talked about clean energy alternatives have opposing benefits with regard to interties. One is wind, and one is the solar-battery distributed energy concept you've heard about.
The intermittent supplies that have been and are being built are counter to the efficient use of an intertie because of their intermittency. Wind generation also needs a backup capacity. That backup capacity extends into the nature of the interties as well. The wind in Ontario has reduced the utilization of the interties between Ontario and Quebec by 15% to 20%, but it still needs the full size of the pipe.
Distributed energy resources alter the daily demand profile. That's a good thing. The most significant advantage of DERs is that they can be managed in concert with controllers from a local distribution company. That can peak shave. It can flatten the demand. It can smooth everything out and increase the utilization of all the transmission and distribution assets.
Most studies on decarbonization include a significant amount of new hydro and nuclear in the supply mix. I'm referring to the ones in Canada's mid-century report. The model in the Trottier report was around picking the lowest costs. Their model was built over the next 20 years: all the economically feasible hydro, and then following that up with nuclear. In their view, the nuclear was a bit more expensive. Whether hydro is a lower cost to nuclear remains to be seen. We have the Muskrat Falls, Site C, and Keeyask dam issues that have increased costs.
The public acceptance of nuclear in this country is an endowment. Canada's energy endowments of hydro and the natural gas storage systems all provide a potential competitive advantage to our economy.
In terms of hydro, it's well understood that potential remains for further development of hydro capacity in eastern Canada. Large hydro's ability to respond to both daily demand with fast ramping as well as the winter season peak makes it extremely highly desirable.
In terms of nuclear, Canada's nuclear advantage includes two significant factors. One that I've mentioned already is the public acceptance that allows us to build it out quickly, more quickly than other jurisdictions, and Canada's nuclear supply chain is large. It's actively engaged in a megaproject. It's a well-oiled machine today.
In terms of natural gas storage, which is less widely discussed, it is an important role that Ontario's natural gas capacity can play in decarbonization. The large storage caverns accumulate natural gas all year. We use it in the winter for heat. Those assets also feed Michigan, so we have an export channel for those natural gas assets. These storage assets can be used to collect renewable natural gas and/or hydrogen, both of which require electricity.
Combined, hydro, nuclear, and natural gas assets are a unique capability. Hydro is a battery that can provide daily and seasonal flexibility. Natural gas is a battery that can address the winter season. Nuclear could be the thing that charges them all up. When you have a future-flattened demand with distributed energy resources, you can flatten the system immensely and get the utilization of those interties up very high. That drives out to low cost.
The last factor is the U.S. I believe the topic that's most relevant to the intertie decision is whether there will be an export opportunity. The U.S. will be challenged to find supply options to meet the long-term emission reduction objectives that they're going to have.
The northeastern U.S. and the Great Lakes region have far fewer options at their disposal than has eastern Canada. Their options are mostly around wind, solar, and batteries. The high latitude makes the solar option far less economic in the northeastern U.S. than in the south. To meet their climate objectives, they're going to need some baseload solutions. Baseload solutions that fill up transmission pipes are a good idea.
Canada's hydro, nuclear, and gas advantage is likely a lower cost and perhaps even the only option for these U.S. jurisdictions. How Canada's assets get developed to provide a competitive advantage for us to export to them should be a key consideration in how you strategize around interties.
In closing, eastern Canada has a unique triad of energy endowments. If we plan in a holistic manner to optimize the demand on the grid, this can create an energy advantage to Canada both domestically and as an export of energy to the United States.
Liberal
The Chair Liberal James Maloney
Excellent. Thank you very much.
Mr. Adams, why don't we move on to you?
Tom Adams Principal, Tom Adams Energy
Thank you, Mr. Chairman, and members of the committee.
Federal electricity policy must be grounded in Canada's Constitution. Electricity is provincial jurisdiction, not federal. Historically, electricity policy oversteps of the federal government beyond its constitutional authority have almost always harmed our prosperity. I'll address an ongoing example, the federal loan guarantee subsidizing the Muskrat Falls project in Labrador, in a moment.
There are positive actions the federal government can and should take to enhance the long-term efficiency of electricity service to Canadians. The federal government ought to exercise its authority to promote interprovincial trade so that we can have free trade in electricity within Canada, with fair rules around transmission pricing and open access. The federal government ought to end the current discriminatory effect of the federal income tax rules that favour government-owned utilities over privately owned utilities by restoring something called the Public Utilities Income Tax Transfer Act repealed by the Chrétien government in its 1995 budget. The federal government should also commit to enhancing the availability, timeliness, and quality of economic data on the energy sector generally across Canada. This is an area where Canada lags badly behind the U.S. and the EU.
The committee asked for input on regional electricity independence. There's already significant regional electricity interdependence, mostly between provinces and the respective U.S. neighbouring states, but also between provinces where opportunities exist. Policies forcing increased east-west electricity exchange run the risk of reducing the efficiency of overall electricity trade. The major trends now in electricity generation technology are toward smaller-scale distributed generation. Power supply is naturally a local business. Where inter-regional power transmission is justified, it's mostly for reliability reasons.
Canada has massive transmission investments, but has experienced a long period of declining consumption. Canada's emphasis with respect to transmission should focus on extracting best value from existing assets. There is no need for the federal government to spend any money on transmission.
What about greenhouse gases? The overall greenhouse gas intensity of Canada's electricity sector is low by international comparison. Ontario's coal phase-out program, which turned out to be a much greater net economic penalty than expected, provides a cautionary tale. All of the major capital projects in the power sector in recent years, justified substantially on the basis of their green credentials—I'm talking of B.C.'s Site C, Manitoba's Keeyask Bipole III, Ontario's FIT and nuclear refurbishment programs, Alberta's off-coal program, and Newfoundland and Labrador's Muskrat Falls—will all have punishing impacts on consumers.
With Newfoundland and Labrador's Muskrat Falls there is much harm to be mitigated. Former prime minister Steven Harper's justification for offering the federal loan guarantee, without which this project could never have started, was largely tied to greenhouse gas reductions. Even if the project can be completed on its current officially estimated cost and schedule, the province will require a federal bailout, perhaps as much as forgiving the entire amount of the federal loan guarantee recently topped up by the Trudeau government to $7.9 billion. Without a federal bailout, Muskrat Falls will cause severe energy poverty in Newfoundland and Labrador, and all the social and economic consequences that entails.
In addition, the federal government should act quickly to broker a power storage agreement between Newfoundland and Labrador and Quebec, without which the Muskrat generator will be substantially inoperable. The longer Muskrat proceeds without an energy storage agreement, the greater the risk of interprovincial conflict.
What are the opportunities for aligning federal policy with the Canadian energy strategy issued by the premiers? The CES calls for more federal research. While well-targeted and well-managed basic research would be positive, notice how unsuccessful federal government spending on energy research has been in the last many decades. The largest federal energy research project was, for 50 years and many tens of billions of dollars, the CANDU program, a technology now at its dead end. A smaller example is research on wind power to serve remote users. Decades of research have produced little beyond the need for more research.
What about Canada-U.S. electricity trade? The Canadian federal government appears to be vulnerable to NAFTA suits initiated by U.S. owners of power plants near our border who are forced to compete against subsidized exports from Canadian provincial governments hell-bent on overproducing electricity. Defending such suits would put the federal government in the awkward position of aligning against the interests of Canadian consumers.
In conclusion, in matters related to electricity, the federal government should stick to its constitutional knitting. In addition, it should mitigate the harm it is causing to the future of the people of Newfoundland and Labrador.
Thank you.
Liberal
Nicholas Martin Policy Analyst, Canada West Foundation
Good afternoon, and thank you, Mr. Chair and members of the committee, for inviting me to appear before you here today.
I'm here on behalf of the Canada West Foundation, where I'm a policy analyst specializing in energy and electricity issues. The Canada West Foundation is an independent, non-partisan public-policy think tank that focuses on policies that shape the west, and by extension, Canada. Our CEO, Martha Hall Findlay, also sends her regards.
We at the Canada West Foundation recognize that climate change is a real and significant threat to Canada and the rest of the world and that the cost of inaction is unacceptable. We also know the action we do take needs to be taken in the most cost-effective way possible. For this reason we are supportive of the essential component of the pan-Canadian framework in clean growth and climate change: a price on carbon, which is the most practical and cost-effective way to reduce greenhouse gas emissions.
We're also happy that the committee is undertaking the study on strategic electric interties. The Canada West Foundation recognizes that pricing carbon is not a catch-all solution to achieving Canada's greenhouse gas goals in the most cost-effective manner possible. Complementary measures need to be taken to harness cost-effective emission reductions in instances where a price on carbon is not appropriate or practical. As the committee has heard from witnesses during these hearings already, a more integrated grid to increase strategic electricity interties can be a strong tool in harnessing cost-effective emission reductions by helping to integrate and share Canada's vast clean-energy resources. Yet a carbon price does not mean interties will be built, so it's appropriate this committee is looking at it more closely.
With that said, I think it's important to point out that the idea of investing in a more integrated grid is not new here in Canada, especially in western Canada. There have been many discussions on this for at least the last 40 to 50 years, which is roughly how long Canada West Foundation has been around. There's long been a sense that this would be a good idea, but the question remains, why hasn't it happened yet? Provincial electricity grids are still relatively independent of each other.
There are numerous reasons for why this idea has never gone anywhere, but in talking to folks who have been in this industry much longer than I have, I've learned that over the decades the western provinces have looked at the idea only to reject it time and again. Many of the reasons are related to provincial fears of losing influence over their own electricity grids. At times it was rejected because some provinces feared cheap coal power from Alberta would flood into their markets and harm their own utilities. At other times Alberta rejected the idea because of fears that cheap hydro would put their coal power plants out of business.
Now, with a final twist of irony, we're talking about it again because we have to reduce emissions and phase out coal power plants. This highlights the fact that the climate change imperative has injected new life into the idea of an integrated grid. It is very evident that we need to make big changes to the way we produce and consume electricity to achieve our climate goals.
As Bryson Robertson, from the University of Victoria, and many other witnesses have already said, improving the connectivity of our provincial grids is the key to taking advantage of the diverse energy resources we have across this country, and potentially, a very valuable tool in meeting our climate goals in a cost-effective way. This is particularly true in western Canada, where some of the country's best wind and solar resources reside between some of its best hydro resources—and we include Manitoba as the west for the Canada West Foundation,
For this reason the Canada West Foundation believes an integrated western grid should be pursued in the west, but as the past has shown, the provinces will need to work closely together if an integrated grid is to become a reality. A sustained conversation needs to be held between the provinces to figure out how to share the benefits that an integrated grid can offer. Fears that an integrated grid may wreak havoc on a province's electricity market will need to be addressed, and the full costs and benefits of increasing the trade of electricity will need to be understood and communicated.
The federal government has an important role to play in this. First, it can help provide valuable information in evaluating the costs and benefits of an integrated grid. While a more integrated grid can offer many benefits as Canada works to achieve its climate goals, these benefits are not guaranteed. Transmission infrastructure is expensive, and it gets more expensive over longer distances. Any investment in strategic interties should be made only if the benefits will outweigh the costs of building that infrastructure.
Natural Resources Canada and others are already working to address this information gap. We look forward to seeing the results of the regional electricity co-operation and strategic infrastructure initiative established by NRCan, which is evaluating the costs and benefits of a subset of infrastructure projects, including improved interties between the western provinces.
The second role government can play is with funding. Where strategic interties do make sense, the federal government may have a role in financially supporting the project to the extent the interconnection will drive greenhouse gas reductions. Such projects would be good candidates for the newly created Canada infrastructure bank, which seeks to leverage private and institutional capital to fund green infrastructure. Early indications from conversations I and others at the Canada West Foundation have had suggests there's a good degree of interest from private investors in strategic interties.
In conclusion, in conjunction with a price on carbon, strategic electricity interties and a more integrated grid can be a powerful tool to help achieve Canada's climate goals. The idea is not new, but the climate change imperative makes it all the more important now and the federal government has a key role to play.
With that I conclude my opening remarks. I thank you very much and look forward to your questions.
Liberal
The Chair Liberal James Maloney
Thank you very much, Mr. Martin, and thanks to all of you.
You're going to be asked questions in French, so if you need the earpieces the translation is there for you and available. We'll be starting with Mr. Lemieux, so you will need them.
Liberal
Denis Lemieux Liberal Chicoutimi—Le Fjord, QC
Thank you, Mr. Chair.
My thanks to the three witnesses for their presentations today.
First of all, I would like to know what Mr. Brouillette and Mr. Martin think about the following.
As you know, despite the increase in the volume of exports, electricity values and prices have declined in most of Canada's usual electricity export markets. Volume weighted average export prices peaked at $64 per megawatt-hour in 2008, but averaged $38 per megawatt-hour in 2016.
How do you explain this price reduction of 40% over an eight-year period in our U.S. electricity export markets?
Principal Consultant, Strategic Policy Economics
The reason that price has dropped is all about the price of natural gas and the price of fossil fuel. The markets in North America—and this might be something that Canada might want to dig into—are not set up to make clean, renewable, nuclear, fixed-cost assets competitive in the market. They're based around the price of natural gas right now.
In order to address exports from Canada to the U.S., that pricing mechanism is going to need to be talked about because you won't be able to trade at anything other than the price of natural gas. That's the reason, and that needs to change. Once gas is out of the system, and it won't ever be completely out of the system, there's a market dysfunction. That would need to be addressed.
Policy Analyst, Canada West Foundation
Yes, I do. Natural gas is the main driver of prices. Down in the U.S. it's very cheap. They do not price in emissions in the United States and that has caused a number of problems down there. We're seeing in New York they are implementing large subsidy programs to keep their nuclear power plants from retiring early because of depressed prices based on natural gas.
When it comes to trade between Canada and the U.S., at least at the moment, the differential is a lot less. But I think it is important to remember, as has already been said today, most analyses are showing that as we move toward these climate goals globally, and in Canada in particular, there's going to be a lot of electrification, a lot of fuel switching, and a lot of other changes that will need to be made where those dynamics won't necessarily be the price-setting unit in the long term.
Principal Consultant, Strategic Policy Economics
Can I add one clarification to that? One of the reasons is that the fixed cost of gas plants in the United States is paid for outside the market. Similarly in Ontario, we have fixed costs being paid for outside of the market under contract, and then the only thing that's traded is the actual electricity produced from natural gas. When people talk about a subsidy for another supply, like nuclear, it's not really a subsidy. It's allowing them to not only compete with the variable cost of natural gas, but it's allowing them to compete with the full cost of natural gas.
Liberal
Denis Lemieux Liberal Chicoutimi—Le Fjord, QC
Since the situation is quite set when it comes to interconnections, do you think that the NAFTA renegotiations will have an impact on our electricity trade with the U.S.? If so, how could it affect the development of our electrical energy and our interconnections here in Canada?
My question is for both of you.
Principal Consultant, Strategic Policy Economics
I'm not qualified to talk about NAFTA. There is a negotiation, though, on the subject of interties and electricity exchange that I imagine has to take place because the U.S. will have needs. They will need stuff from Canada, and there will need to be a mechanism.
New England has put forth RFPs that Quebec is bidding into. Maybe that's the mechanism that goes forward. I don't know, but there needs to be something.
Policy Analyst, Canada West Foundation
I'm also not an expert on NAFTA, so I won't comment on that, but I will say that based on some of my research there definitely needs to be some conversations.
Right now a lot of the provinces have open access transmission tariffs or OATTs that are based on the model that FERC in the United States has set up. There's still a lot of work and thought that needs to go into this, but there has been some research out there.
I think there's an article from the C.D. Howe Institute from maybe 10 years ago—I said this is not a new idea—that argues that we need to relook at these transmission tariffs and the way that FERC has set them up. It is impacting the ability for interprovincial trade because we're setting up our tariffs based on what is required for us to trade with the United States, and rules that aren't necessarily within NAFTA but could be discussed there.
Beyond that, I haven't heard anyone actually discussing that idea.
Liberal
Denis Lemieux Liberal Chicoutimi—Le Fjord, QC
Are you suggesting that we wait for the outcome of the NAFTA negotiations to take a position on our new vision for interconnections in Canada?
Principal Consultant, Strategic Policy Economics
Personally, I hope that the NAFTA negotiation team is considering this as a topic, and that the right experts are doing the right thing.
