It is common knowledge in Ontario that the province is preparing for a major round of cost-cutting and potentially painful restructuring of government services to bring costs more in line with revenues. And probably quite wisely, the provincial government plans to host some very public discussions about how the changes should be made. In principle, every aspect of public spending is coming under close scrutiny as the province considers the recommendations from senior economist Don Drummond, and during the debate over priorities that is sure to follow.
Although the operation of the electricity market is not always seen as related to government spending, compelling arguments can be made that in this case, at least certain aspects of the electricity system should be among the areas examined during the overall review. This is not just because the public and the broader public sector spend a lot of money on electricity. It’s because there is much to be gained by reinforcing the operation of market-based processes in the power sector.
History has shown that sound propositions to improve the operation of the electricity sector have often been hindered because of a lack of public understanding. If properly managed, including electricity in a broad public discussion on the province’s economic priorities could have the effect of deepening the public’s appreciation of how the sector operates, and what is necessary to keep investments coming forward in a rational way.
Eight years ago, when the McGuinty government first enunciated its priorities for energy policy, it stressed the belief that the first principle and its over-riding priority would be energy efficiency. It said it would strive to create a “culture of conservation” and use that as the basis upon which other energy policies and plans would be built. Looking back at the results over that time frame, success has been mixed. Certainly one can assess progress by hypothesizing how much more consumption could have grown without the current set of conservation programs. But the reduced growth rate in energy consumption is related to a combination of factors, including a slowing economy, and technical improvements adopted by manufacturers the world over to manage costs, a process in which Ontario is essentially a free-rider. Electricity consumption per capita, as well as population, continues show stubborn upward pressure. Perhaps most troubling, much of the growth in consumption appears related to discretionary consumer choices: larger houses, more appliances, etc. Although society appears to have accepted the importance of conservation as a principle in the public debate, personal convenience seems to outrank efficiency in the priority-setting process that is part of our culture. Nowhere is this more evident than in the fact that the politically sensitive policy makers in the McGuinty government, while recognizing the need for major investment in infrastructure, felt compelled to pair the much-needed investment program with a taxpayer-funded subsidy to prices known as the “Clean Energy Benefit.” Ontario’s culture of conservation has not reached the point the Danes have, where energy prices are understood as a key part of the society-wide strategy for achieving conservation and related public goals.
There is however, a good chance that Ontarians’ electricity consumption habits will come under the microscope as the purse strings are tightened. Arguably, there is enough waste and unnecessary consumption in Ontario that cuts in power usage will be less painful than equivalent cuts in other areas.
There is a more positive way to frame the question of where to reduce costs. Rather than pitting each area of spending against every other, in a zero sum game, government can try to build new frameworks that encourage more efficient behaviour. Few areas are better suited to this kind of re-invention than the electricity sector: There is already a functional market system in place, however impeded and distorted it may be at times. There are areas of waste and inefficiency so large that the IESO produces reports on them, pointing to potential efficiencies in the tens of millions of dollars per year.
And now, an industry association comes along and announces that the efficiency business is burgeoning, largely under everyone’s radar, generating huge value and promising to do much more, if appropriate policies are put into place. As reported in the story “North American energy service industry rebounds,” elsewhere in this issue of IPPSO FACTO, the industry that ensures energy efficiency in buildings alone is expected to top $100 billion per year by 2017.
What’s more, this spunky growth industry made a submission to Don Drummond, calling for precisely the kind of transformative change that the McGuinty government has set its sights on: Major cost reductions across the economy, with little or no public expenditure, available by adopting a different model of doing business. Their model is called Performance Based Solutions or PBS. Although it’s not a new idea, it seems to have found new life. Private energy management companies essentially take over the energy operations of all kinds of other companies, fixing up their hardware and recapitalizing as necessary – without charging the customers a penny. The energy service companies get their revenue by contracting for a share of the energy savings that accrue over time. Everyone wins, including the environment. And although they don’t stress the point, customer based generation is one of the suite of options these bright young efficiency entrepreneurs carry in their tool kits.
But there’s a message attached to this promise. Some rules will have to change, rules that limit the ability of energy service companies to play in certain market sectors, the group says. The OPA and the OEB need to make adjustments to accommodate metering “in series” as well as “in parallel.” And a number of the obstacles impeding connections will have to be sorted out. Fortunately, these are not difficult changes to make, at least not compared to the challenges of restructuring the public service that the provincial government is likely to be considering in the future. For the full set of recommendations, see “ESAC calls for changes to facilitate onsite generation,” elsewhere in this issue of IPPSO FACTO.
And at the same time, the IESO and many others have noticed that money is being left on the table every day because market functions in Ontario are not being allowed to operate as fully as they might. A number of market-driven incentives are now buried in the Global Adjustment and averaged out across all consumers. The IESO’s Electricity Market Forum says, “Improving efficiency in the IESO-administered markets is primarily about having a ‘higher fidelity’ energy price signal. For example, there are components of the hourly market uplift that represent the marginal cost of energy. These costs could be reflected in the HOEP but currently are not. An enhanced price signal is necessary to encourage customer engagement and to prompt action in response to actual system conditions.” A range of inefficient decisions, costing millions of dollars per year, take place because of impediments to exports and imports. There are artificial adjustments to ramp rates and a slew of mechanisms that impede market signals. (For more on this question, see our previous editorial, “The decline of the price signal: Are low prices the problem or the solution?” – You can Google "decline of the price signal" (with the quotes) to get it.)
Electricity generators have always appreciated the “performance based” approach. The basic assumption is generally that, if you don’t make kilowatt-hours, you don’t get paid. Using that principle as the basis for re-thinking reward systems in the public sector – it’s not such a bad way to go. If the government is going to set up new performance-based systems for managing money in the public sector, why not set up performance-based systems for managing energy as well?
A move to performance based solutions, and strengthening the market functions that are available in our power system – these are solutions that could be particularly apt during this time of austerity-focused reform. A return to economic fundamentals, a form of belt-tightening, and likely to reduce environmental emissions, all at the same time. And it’s a great opportunity to reinforce some neglected market mechanisms that could likely save consumers and the government millions and millions of dollars per year.
— Jake Brooks