Fragmentation hindering Canada’s electricity market

Poor integration and lack of political collaboration are preventing the Canadian electricity markets from achieving full efficiency, Gillian Carr reports

The Canadian electricity market is being held back by a dearth of political co-operation and a lack of integration between provincial markets, which is preventing efficiency in generation and supply, as well as slowing the development of low-carbon electricity, finds a recent study by the University of Montreal.

Under Canada’s constitution, the development of natural resources, including electricity, falls under the responsibility of each province. Electricity in Canadian markets can be divided into the hydroelectric provinces – Newfoundland and Labrador, British Columbia, Manitoba and Quebec – and the other six provinces that have a more mixed-fuel base. The provinces retain control over the electricity market, except in Alberta and Ontario, where the markets have been deregulated.

Under the current market structure, hydro provinces sell their electricity at regulated prices within their domestic market and then sell the excess to external markets, typically through south-directed interconnectors to markets in the United States (New York, Midwest, PJM markets). With no market-priced competition in these domestic markets, it has caused widely differing pricing across the country and less energy efficiency by consumers.

“Integration is a political issue because it will affect market prices,” says Pierre-Olivier Pineau, professor at the University of Montreal and author of the study. “Because now the price is a regulated, cost-based price and, as the cost of hydro is cheap, the price for consumers is cheap. [The hydro provinces] see that as an endowment that cannot be renegotiated, which introduces a lot of inefficiencies into the Canadian market.”

One example of such inefficiency stems from the lack of integration between the provinces of Quebec and Ontario. Quebec uses hydro-based electricity for heating, which is less efficient than natural gas, instead of importing cheaper natural gas from neighbouring Ontario. In Ontario, on the other hand, a large percentage of electricity production comes from natural gas, which is less efficient in producing electricity than it is in producing heat. While there is interconnection between the two markets, flow only occurs one way, with Quebec exporting power to Ontario. Quebec households use twice as much electricity as those in Ontario, power that could be sold to the industry-intensive eastern US markets, according to the report.

However, in terms of balancing markets, as one area gains in efficiency, prices balance out across the board and the previously regulated prices would rise. “If you’re going to level out prices that way, there would be an impact on consumers,” says Jim Burpee, president of the Canadian Electricity Association. He adds that this is unlikely to happen due to the political benefits that cheaper electricity provides. “However, generally speaking, the concept of using more natural gas for home heating would be a significant opportunity and probably the right thing to do, considering the price of natural gas,” he says.

Burpee adds: “From an efficiency perspective, if you had greater co-operation between Ontario, Quebec and Newfoundland and Labrador, you could create some very low-carbon-intensity electricity that would be very competitive going into the US markets, more so than today.”

The Lower Churchill Falls in Newfoundland and Labrador, one of the last untapped hydro regions in Canada, will come online in 2017, providing 16.7 terawatt hours per year, and would add further low-carbon energy that could be sold in the eastern Canadian and US markets if it passed through the province of Quebec. However, due to a historical energy conflict between Quebec and Newfoundland and Labrador regarding the original development of the Churchill Falls in the 1970s, this is not an option. The plan is instead to build an underwater interconnection to the island of Newfoundland and the province of Nova Scotia.

Reluctance to build more interconnectors is not necessarily confined to hydro-rich provinces such as Quebec, says Pineau. “The paradox is that in the deregulated market of Ontario, they might not want to see the hydro company come in because it would be more competitive, offering cheaper electricity and taking market share.”

While Ontario is perhaps the most open Canadian market, it is fairly young and has its own issues at the moment, says Carl Tremblay, power trader at Citigroup. “It’s not a very efficient market, because there is a lot of non-merchant generation that is supplying power to the grid. A lot of the nuclear plants, wind projects, hydro facilities and gas plants have long-term agreements with the province of Ontario,” he says.

“Those plants will run no matter what power prices are. What you’re seeing is maybe 50% of the generation where they have no risk in terms of prices, so basically they’re just offering their generation as a price-taker.”

Exit fees for the interconnection between Ontario and New York also hinder the market, says Tremblay. “You can price it around $6 per megawatt hour right now compared to $1 in ISO New England. Prices in Ontario are $17, so basically if you want to go to New York you have to pay $17 plus $6,” he says. “So if there’s a spread, it’s not really efficient to do it because gas prices are so low and they still cost the same fixed price amount to get out of Ontario. I think IESO [Ontario’s ISO] would be a more efficient market if they would realign their fee structure to the commodity price. It would increase the flows between ISOs.”