By Jan Carr
The following passages are excerpted from a longer paper published in The Journal of Policy Engagement in April 2010.
In moving to an increased reliance on new sources of electricity while having a commercial structure that is stalled partway between central planning and competition, Ontario is attempting a massive change to the power generation system that underpins our economic well-being. Ontarians spend some $15 billion annually on electricity, so avoiding inefficiencies of even a fraction of one per cent would make significant economic room for investment elsewhere in the economy and public services.
The time has come to re-embrace economics as the unifying framework within which the electricity system is developed and operated. As in the past, investment in the power system of tomorrow should be based on minimizing the cost of meeting planned objectives. Each decision should be based on minimizing life-cycle cost, consistent with achieving the required performance and complying with environmental and other regulations.
Whether economic decisions are taken in the context of central planning, the free market or some combination is a secondary consideration. What is important is that the many players in the power supply industry pull toward a common goal and their collective actions fit together into a functional whole.
By reinstating a rational economic approach for power generation decisions, we will ensure alignment between electricity supply and society’s energy needs. While intuition tells us such alignment will be beneficial, electricity is a special case because it is so intricately and completely entwined with our lives and livelihoods. That
ubiquitous relationship makes alignment not merely beneficial but critical. This is no mere desire to tidy things up. Rather, it recognizes that electricity plays such a pervasive and fundamental role in modern society that its future cannot be treated offhandedly.
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Pricing carbon would have the advantage of continuing a century of economically rational development of the electricity system as an essential underpinning of modern society. To do other than proceed on an economic basis is to risk massive economic dislocations. The alternative process of picking winners and losers in renewable electricity technologies, based on perceptions and public opinion polls, puts us all at a considerable risk. Inevitably, it will make electricity more expensive than it need be for any particular target carbon diet.
Increasing the cost of electricity relative to other sources of energy by making arbitrary technology choices will reduce the role that electricity can play in reforming our energy-use patterns. It will also put our entire economy at a disadvantage when compared to others that stick to economically rational approaches.
The pushback on putting a price on carbon is, of course, that it increases the costs for everything. But given that we have the most economical energy supply possible now, any change we make will put the cost up. The case for pricing carbon is that it promises that costs will go up by only the minimum amount possible because investment decisions will be founded on economic rationality.
We should all be wary of the fact that policy-makers are leaning toward tasking electricity with carrying the lion’s share of reducing our carbon diet. This makes sense in that its highly centralized structure simplifies the logistics for making changes. But it doesn’t make sense in that the biggest use of fossil fuels is in the transportation sector and not electricity generation.
At its peak, Ontario’s electricity sector contributed about 20 per cent of the province’s man-made carbon dioxide emissions, and it is on track to producing only five per cent by 2014. Cars and trucks contribute most of the balance, collectively making electricity’s contribution relatively small. It is, therefore, clear that a switch from fossil fuel to electricity will reduce our carbon footprint, and we should be doing all we can to expand its supply and use. That will only happen if we do not put price barriers in the way. And price barriers will be avoided only if we put a price on carbon and refrain from policy initiatives that pick winning and losing technologies—choices that will inevitably cost more than necessary to meet emission targets.
Let me make one final observation on facilitating rational economic development and avoiding subsidies and the taxing of particular technological approaches. The temptation to implement a particular solution by fiat is great because it creates a sense of achievement that is consistent with the sense of crisis driving change. In contrast, relying on economic pressures produces relatively invisible and slow incremental change. But those economically driven changes will be more substantial and sustainable precisely because they have been economically driven. In fact, to rely on anything other than economic forces could easily result in change consisting of a series of isolated anomalies
that create the very disconnects and discrepancies that will lead to retrenchment and a decline in the use of renewable energy sources. And for electricity in particular, its ubiquitous presence will magnify the effect of any such retrenchment on our general well-being.
Jan Carr, PhD, P.Eng., was chief executive officer of the Ontario Power Authority from the time of its establishment in January 2005 until September 2008. Prior to that, he was vice chair of the Ontario Energy Board during its transition from a government department to a self-funding, independently operated tribunal.
The passages above are republished with permission from The Ontario Centre for Engineering and Public Policy (OCEPP). For more information see <www.ocepp.ca>. All rights reserved.