On May 1, 2012, the Ontario electricity market reached its tenth anniversary. There were no parties, no moments of silence, no fuss at all. For a feature of the economy that has been the focus of massive investments of time and money, and is the subject of so much debate, one might have expected to see a lot more attention, in the energy industry if not amongst the public as a whole.
There are those who say that not much has changed. The net effect of having a market has not produced an easily visible drop in prices or a decisive move away from centralized administration. But there are certainly many who believe that the nature of the modest incremental changes that have taken place since market opening are more profound than they they are generally given credit for.
The most important changes wrought by a market are subtle because they affect people’s outlook and behaviour. For example, is there any significant chance that major investment decisions in new generation will be made in future without careful consideration of the competitive alternatives? The market did not cause that change nor does it directly sustain it. But it made such a fundamental shift possible, and continues to underlie people’s sense of what goes into a sensible assessment of options. In short, the presence of a market has made it possible for people to think and act differently.
There have been studies in other jurisdictions that see billions of dollars in savings going to consumers every year as a result of the transition to competitive markets for electricity. But these studies are always problematic because they rely on assumptions about what would have happened to prices and demand if there had been no move to competition.
At the same time as celebrating its successes, one has to acknowledge that Ontario’s electricity market is suffering from serious difficulties. Many of its functions are badly distorted and some people have even called it useless. It has been particularly unsuccessful at creating the incentives necessary to finance investment in new capacity. The hourly energy price is a long way from representing the true value of the commodity. A number of the market rules seem arcane and slow to change.
However, these are not the only standards by which to judge a market. Ontario’s imperfect system has several factors working in its favour. First of all, the hourly prices, and all the costs of the system, are transparent and plainly available for all to see at any time. This fact alone is probably responsible for a huge amount of well-informed consumer decisions, the backbone of any efficient system. Secondly, the system for dispatch of generation appears to get the most use from the lowest cost units at any given time, within the constraints set by public policy. That’s another crucial feature. And finally, the process of market evolution is reasonably methodical and principled. Which is to say that while rarely pleasing everyone, changes are considered carefully, system efficiency and consistency are high priorities, and there are few surprises.
The IESO has found that over the ten years since market opening, concrete benefits have been produced in several distinct areas. Generator availability has improved. Inter-jurisdictional trading has risen. And dispatch efficiency has improved. For more information on each of these positive omens, see the article on the 10-year anniversary of the market, elsewhere in this issue of IPPSO FACTO.
There is one thing that markets can never do. They can not set objectives. The process of moving towards market functions can be so complicated that the achievement of a market system sometimes comes to be seen as an objective in itself. But that is a serious mistake. Markets are a means, never an end. Only human beings can decide what the ends are. In electricity the ends are usually a delicate combination of reliability, security, cost minimization, and environmental protection. As the frequency and speed of change in the relative value placed on these four objectives increases, the complexity of administering the system multiplies. Energy sage Amory Lovins memorably observed that the market is an excellent servant, a poor master and a lousy religion.
Despite their value as tools, markets are always imperfect. Some of the imperfections can be mitigated, some can not. The inevitable conclusion is that even if markets are properly nurtured, even if they are properly understood as mechanisms, and even if they are flourishing, they are not sufficient to replace all forms of oversight. Other tools, non-market mechanisms like regulation, will always be necessary, and in fact critical to the success of markets. The issue should never be cast in the extremes, whether markets are good or bad, right or wrong. (That would be too much like religion where it doesn’t belong!) As with any set of tools, the crucial questions are always about where the equipment can be best applied, and how to make the existing arrangements more effective. As noted by George Vegh later in this issue, ideology provides little or no guidance when choosing amongst legal and regulatory options for the power sector.
It could be said that the most pervasive benefit of having a market is that the alternatives to a market are so uncertain. If one wants to move away from a market to some kind of administered system, in general or in any specific sub-area of the energy system, one is entering fields of debate where there are very few definite answers. Arguably, administered systems have less requirement for transparency, and are more likely to be perceived as being subject to political influence or playing favourites. More important, the administered systems themselves can be unwound and restructured at any time. In fact it is almost a certainty that they will continue to take over market functions from time to time, only to cede the same functions back to markets at later points. While administered systems come and go, changing shape and function unpredictably, the market obeys a number of immutable laws that are more predictable and more powerful than the most influential regulator or market participant could hope to impose on other players. As one small example, imagine how an administered system would deal with setting the constantly changing levels required for imports and exports of electricity. What combination of factors would it consider in priorizing requests or would it eventually resort to relying on market functions because it’s simply too difficult and risky to optimize and be fair while trying to balance the full range of non-market considerations?
Even if the market has done nothing more in its first ten years than give everyone another yardstick by which to measure the features of the system that concern them, it is a major improvement in the ability of human beings to understand and manage one of their most complex and impactful creations. It could be said that at the same time, the impact of a market is both revolutionary and distinctly ordinary.
The continued operation of a market is nothing remarkable at all. That’s one of its most remarkable qualities.
— Jake Brooks, Editor