When the voters of Ontario returned the Liberals under Dalton McGuinty to a historic third term in office they also sent some important messages about what they want from their government, and opened up some unusual opportunities for the energy sector.
The power sector finds itself in territory that is both familiar and unfamiliar: While the hybrid market and the general direction of the Long Term Energy Plan appear to be relatively firmly in place, the dynamics of minority government coupled with the desire to “manage down” the electricity file will likely introduce some new uncertainties. The next few months will no doubt be a time in which people throughout the industry will be focused on gaining a better understanding of how the new political reality in Ontario is likely to work.
For the Ontario electricity sector, the actions needed from government are relatively low-profile, back to basics stuff: the procurement system needs some fine-tuning, logjams in regulatory approvals need to be alleviated, operability and SBG issues need to be addressed, for example. These are not the stuff of high profile election promises, but they are consistent with a generally recognized preference for the government keeping its house in order and minimizing risk. An immediate priority for both the government and the industry is getting organized to specifically address the practical challenges facing the system.
The 2011 Ontario election campaign was remarkable for the way electricity policy was treated. No longer a secondary issue to be swept under the carpet and kept out of the debate if at all possible, a relatively high-profile and detailed plan for the power sector was a key plank in the Liberals’ election platform. Although many in the power sector harbour serious concerns about certain aspects of the Long Term Energy Plan, the fact that there was a relatively substantial plan to start with raised the level of the political debate, and opened up the possibility for increasingly adult discussions on long term costs and pricing in the months and years ahead.
Long term thinking
Among the many possible interpretations of the electorate’s thinking is that the public is looking for stability in government. Although much has been said about the significance of the minority position the provincial government has found itself in, the Liberals are likely to remain in charge for at least several years. Addressing Ontario’s fiscal situation in a tough economy will present a major challenge to the government. So a degree of stability and continuity appear to have won the day albeit with the government on a shorter leash – which is a positive for the energy business.
For the electricity sector, which relies on long term investments, long term thinking is critical. Many are the times stakeholders in the power sector have said that they are less concerned about a particular policy direction than about the risk of continual changes in course. The 2011-2015 time-frame may be one of the rare periods in recent history when the general course of provincial electricity policy is clearly set out from the beginning, with many of its precepts already road-tested, and refinements already in the works. While complete social consensus is never realistic to expect, and the policy itself may contain some problematic elements, the electricity industry can be much more productive when definite choices are made, and held to. A path has been chosen and the sector can now focus on how to make the journey as smooth and efficient as possible.
Challenges, both new and ongoing
But the next four years may not be as predictable as all that. The very fact that the general direction is well-known creates opportunities for participants to open up unresolved issues a layer or two beneath the surface. The green energy policy may be here to stay, but there is a FIT review in the offing. Will it result in new principles being applied to the procurement of renewables? The government has its Long Term Energy Plan, but there is also the Integrated Power System Plan 2, expected by the end of the year. Will changes in the physical circumstances necessitate further change in the plans? The government has its transmission development priorities. But the actual progress of grid expansion depends on how a range of independent agencies interact, and outcomes are far from assured.
Another example is the fact that at some point, someone in the government will need to respond to the anti-wind backlash that seems to have cost the government a few rural seats. In a minority situation the incentive if to hammer out a compromise deal with such parties can intensify suddenly. Political compromise may sound sweet in the newspapers, but it creates an element of uncertainty that makes developers less sure of their ground. Yes, the sector may not be facing radical changes of course, but that doesn’t mean it will all be a smooth ride.
Following the election many people are probably asking what can the electricity sector do, to make the best use of this period of relative stability? It’s an area in which you can expect to hear more active discussion across the sector in the coming months.
The challenges facing the sector are considerable. A partial list could include the following:
• The need to proactively address Surplus Baseload Generation (SBG) while dealing with increasingly volatile load patterns and rising levels of variable generation
• Alleviating the approval-related difficulties of siting new infrastructure, both generation and transmission, on a timely and cost-efficient basis
• Arriving at a reasonable approach for making a durable long-term decision on new nuclear capacity
• The challenges of systematically reconciling the multiple objectives that are now expected to be considered when making infrastructure decisions: serving new load, improving environmental performance, and supporting the transition to smart grid technology, while creating economic value in terms of new jobs.
• The ever-present problem of managing consumer impacts and explaining to a skeptical consumer base why prices in the present and future are higher than those of the past
• Forestalling the continual temptation for government to intervene in decisions that are more effectively made by an independent regulator.
The role of government
One of the key changes that a period of general stability can be used to address is the reduction of government’s role in the sector. Reasonable people can differ about the strategic direction a government should take, but there is little doubt that excessive intervention by government in the specifics of the industry dampen both the ardour of private investors and the effectiveness of the regulators and other public agencies. Ideally, political intervention should be a tool reserved for a very limited set of circumstances when the normal systems of planning and regulation fail. The planning process, if it’s properly constructed, should be able to reflect the government’s priorities while addressing long-term needs, nearly eliminating the need for political intervention. The degree to which this occurs will be a key test of the coming years of governance.
The cancellation of a certain gas-fired power plant in Mississauga, announced during the election, made it clear that all three parties are vulnerable to the temptation to intervene. It was painful to watch. It makes little sense to appoint independent agencies to plan and procure generation and then to over-ride them. Although there are signs that the public is ready to embrace some difficult choices to keep the lights on, such consensus seems to break down if the issue affects one’s own back yard. As government develops the courage to stand by the decisions of independent agencies, the agencies themselves may also have to consider what can be done to make such disruptions less likely in the future.
As APPrO has maintained consistently over the years, the government’s priority should be setting long term policy, while allowing sector agencies to implement and oversee the application of the policy objectives. Changes should be considered only if, after rigorous examination in consultation with stakeholders, it is clear that the changes will provide an overall net benefit to Ontario. Impacts on market participants and in particular OPA-contracted generators must be carefully considered.
Bitter medicine and adult conversations
It takes courage to go to the voters with a downbeat message, and skill to manage a campaign when you’re prescribing bitter medicine. The Liberals’ messaging in this area may be just a small taste of more difficult economic conditions to come, but more than likely the key issue is how effectively policy makers can build a social consensus that accepts realistic pricing and puts aside talk that helps to maintain dream-like illusions about electricity costs. This election may be described as historically unique in that both the government and the voters took delicate, almost imperceptible, but nonetheless real steps towards publicly acknowledging that electricity prices in Ontario need to carry a heavier burden than previously thought. Prices will rise, and the debates on that are far from over, but adult conversation on prices is perhaps closer than ever before.
Ontarians may not be like the Danish, who see relatively high electricity rates as part of their national strategy for efficiency, security and independence. However Ontarians appear increasingly ready to look beneath the surface and grapple with difficult choices. The parties and the electricity sector should not miss the opportunity to build on this readiness, and improve public awareness of energy issues.
For green energy at least, the next few years may be a period of consolidation and relative stability, but perhaps less dramatic growth. In this context the broader energy sector will benefit at least from clarity of direction on renewables. Part of that clarity could be to set more specific targets for renewables in the energy plan and how best to integrate them into the system to provide the optimal value for ratepayers and our economy, rather than sticking to the precept of having no “upper limits” – an approach that actually adds to the uncertainty for everyone.
It will be of some comfort, even to those who don’t support the aggressive stance of the current green energy policy, that the complex series of rules and regulations being developed by the OEB, the IESO and Hydro One in support of green energy can now be expected to be refined and worked into more practical forms, rather than being thrown away and starting from scratch with a new system.
Hard work ahead
Voters appear to be telling politicians to get down to the hard work of properly governing the province in difficult times. If this challenge is accepted, then the industry may have a rare opportunity to address some of the items that have been left on the shelf for some time. There is no shortage of issues.
One of the key messages presented by APPrO has been to remind people that policy in the electricity sector must reflect an enduring set of transparent organizing and governing principles. Easy to say, but not always easy to stick to. Economic efficiency is directly related to the accuracy and meaningfulness of price signals. Whether applied to the GA, exports, CDM or other areas, there is work to do in improving price signals.
As many are telling the policy-makers, an immediate challenge for the sector will be to integrate the current renewable fleet into Ontario’s electricity system so that reliability, security and operability are not compromised, while proactively managing SBG.
In terms of procurement, the issues may operate on two levels, refining the current program, and striking a balance between the competitive and standard offer mechanisms. APPrO has said that “Competitive procurement with clearly defined requirements and evaluation criteria yields the best value for Ontario ratepayers.” Squaring that with the review of the FIT program may be a significant challenge.
In Ontario the energy sector may always be a politicized field, but the conditions are in place to make it somewhat less so. Aside from a few judicious political interventions with respect to siting of major projects, voters don’t seem to be asking for a highly politicized sector. There is comfort in knowing that there is a certain receptivity to having an adult conversation on costs, and that sudden changes of course are not the will of the people.
Whatever your views on provincial politics, the die has been cast and the options facing the sector are clearer and better established than they have been in quite a long time. The years ahead represent a great opportunity for productivity, cross-sector co-ordination, and making some long-needed improvements in the system. There is a lot of ground to cover – and this is an excellent time for straight talk to begin!
— Jake Brooks