Thanks, Dr. Tezel.
Members of the committee, the present global initiative to reduce carbon emissions for our energy needs is driving jurisdictions to invest heavily in renewable energy technologies, especially in the electrical sector. Focusing on the North American experience, the introduction of renewable energy in the electricity sector is causing two profound changes to electricity markets.
The first profound change is that wholesale electricity prices are in a state of decline and are approaching a cost of zero. There are a couple of reasons for this decline. One is that renewable energy facilities have a marginal cost—primarily of fuel—of energy production that is close to zero. Another reason is that the wholesale electricity markets are designed to price energy at its marginal cost of production. Consequently, as jurisdictions reduce carbon emissions in their power grids, the average wholesale price for electrical energy will continue to fall and approach zero.
In 2016 the average price of energy on the wholesale market in Ontario was about 1.6¢ per kilowatt hour, approximately one-tenth the retail price. The reduction in Ontario's wholesale market price for electrical energy was the result of the province's successful program to reduce carbon emissions in its power system. As evidence of this, Ontario has already achieved an 80% reduction in carbon emissions compared to 1990 in its electrical sector.
The low wholesale market energy price is causing electricity market design authorities to make a second profound change—that, moving forward, generation capacity will likely be paid for in a separate capacity market. I appreciate that this may sound complicated, so let's unpack it a bit.
The capacity markets, as they currently exist in the United States, are dominated by natural gas-fired generation. Natural gas-fired generation is not low emission. The low emission hydroelectric and nuclear generation capacity, needed to mathematically achieve emission reductions of 80% or greater, are dominant in Ontario. The problem is that Ontario's hydroelectric and nuclear generation cannot compete in a capacity market with natural gas-fired generation unless the carbon price is much higher than currently envisioned by either the Canadian or Ontario government.
What does this mean for Ontario and Canada? As long as American jurisdictions burn natural gas to make electricity and the price of carbon remains low, Ontario's exported zero-emission electricity will be able to recover only a fraction of its total production cost. As the various neighbouring jurisdictions' power grids become cleaner, the fraction of total production costs recovered by exports will decrease as their wholesale market prices also approach zero. The burden to pay for the unrecovered cost of installed capacity will fall on the residents of the exporting province.
So what can we do about it? Canada must recognize the impact of these changes—I'm talking about market changes to the North American electricity markets—and ensure a thorough analysis of the winners and losers before approving any investments in electricity intertie capacity. This analysis must include anticipated changes to the electricity market design during the lifespan of those investments, the exact kind of scenario analysis that professional engineers are most proficient at conducting, and should therefore be utilized to determine best options going forward.
Canada needs to think more broadly about its climate change goals. Reducing emissions across the entire economy requires us to examine and address our thermal energy needs. Canadian residents and businesses use approximately four times more thermal energy to run their homes and businesses than electrical energy. Presently, Canadian jurisdictions have the technology to economically reduce emissions in the electrical sector, because the retail price for dependable, non-interruptible electricity is high enough to pay for the required clean capacity.
Reducing emissions in the thermal energy sector will be much more difficult, because dependable thermal energy is far less expensive than dependable electricity.
Renewable electrical systems produce a significant amount of energy out of phase with electrical demands. Consequently, surplus zero-emission electricity is available at very low energy prices. In 2016 Ontario's surplus zero-emission electricity cost less than one cent per kilowatt hour on the wholesale market, or about one-third the price of natural gas on an energy-equivalent basis for residential customers.
Consequently, if consumers had dual-fuel appliances, such as hot water heaters with smart fuel-switching controllers, surplus zero-emission electricity could be used on an interruptible basis when it was available to reduce natural gas use and carbon emissions at an economical cost.
Additional intertie capacity would then have value, to the extent that it can be used to import low-cost zero-emission electricity from adjoining jurisdictions to reduce fossil fuel use for Canadian buildings, industry, and transportation.
Doctor.