A provincial election is expected in a matter of months, and with it quite likely a spirited debate about energy and electricity policy. In principle this should be an excellent opportunity for clarifying the issues facing the electricity system, the options for addressing them, and the various remedies being offered by each of the major parties.
However, if history is any indication, it may also be used as an opportunity for the contenders to fire shots at their opponents, tactics that rely on stirring the emotions of voters, frequently oversimplifying the issues and doing little to aid the cause of reasoned debate. Sometimes the tactics used in an election can even drive misinformation into the minds of voters.
This will not be the first time, nor the last, that practitioners in the power sector find themselves approaching an election with a good deal of trepidation. The overheated atmosphere preceding a provincial election has given rise to some of Ontario’s most dubious policy initiatives: the shutdown of the retail power market by Ernie Eves, and the cancellation of the Mississauga power plant by Dalton McGuinty being two recent examples. Many politicians rely on critiquing the weaknesses of their opponents rather than setting out their own policies and plans. Voters and stakeholders will need more than that to establish a sense of direction and build confidence. Expect people across the industry in the coming months to return to the common question: How best to encourage our political leaders to take the high road, focusing constructively on what they propose to do, in terms that recognize the complexity of the challenges?
In the run-up to the coming election no doubt the top debating points will revolve around how to control rising energy costs. Always sure to spark anger amongst voters, rising electricity costs are much debated and little understood. The party in power is usually on the defensive over the latest round of increases, and thereby prone to questionable actions that might temporarily suppress prices.
It’s fair enough that politicians often choose to highlight rising electricity prices as means of engaging the public in discussion. But if doing so, one has to be prepared to deal with a relatively complex set of issues. Rising electricity price is a problem that has many aspects and no single cure. To suggest that one policy has caused the problem, or that one remedy can fix it, would be grossly misleading the public, and possibly handcuffing the next government.
If broaching the question of electricity prices in a public debate, discussion leaders need to be prepared to deal with three types of complications:
1. Electricity price increases have multiple causes: Today’s electricity prices are like a snapshot of the accumulated effects of years of deliberate policies – and unintended consequences – stretching over decades. They never represent the direct effect of any one policy.
2. The policies that are most effective at controlling rate increases take effect over a long period of time: This means that policy consequences are often separated from political consequences. The measures that suppress prices in the short term tend to push up prices later. Conversely the leaders who are most successful at keeping prices down for the long term will not likely get all the credit they deserve at the time they take the action, if ever.
3. The solutions for controlling price increases are usually multi-faceted: Effective measures in the power sector need to deal simultaneously with technology change, health care impacts, environmental issues, industrial competitiveness, employment, power market and public communication aspects of electricity policy. The tools used will almost certainly require a skillful combination of policy, legislation, market mechanisms and regulatory measures, backed up with an astute awareness of current engineering, legal, and financial options.
Thoughtful, reasoned platforms from our leaders will be those that set out the problems in terms that are easy to understand, without minimizing the challenges. For example, it will be important to distinguish between actual price increases and projected price increases. Actual price increases in Ontario haven’t been much above inflation. APPrO President Dave Butters noted in 2012 that, “The total market cost of electricity has been relatively modest over the past decade – matching the rate of inflation almost exactly. During that time the cost of electricity as a percentage of the overall household basket of goods is virtually unchanged, moving from 1.9% to a still quite low 2.1%. In contrast, the cost of food and gasoline has far outpaced the CPI index.” In contrast, when talking about projected prices increases, the difficulties are significant: the amounts will likely be higher, uncertainty will be involved, and it will always be important to specify time frames.
Debate over prices needs to start with the recognition that there is a big difference between price increases that are avoidable and price increases that are not avoidable. Most cost increases are a consequence of past decisions that cannot now be undone. Although examining those decisions can reveal lessons about how to make choices in the future, a properly organized discussion allocates somewhat less time to critiquing past decisions than it does to developing the options for moving forward.
While examining the components of cost increases, past or future, observers need to separate causes into categories, based on what can be done about them. For example:
1. Cost increases that result from the march of history (for example, population growth, depletion of natural resources, improved safety and emission standards, the need to work in denser urban settings, the inevitability that new capacity will cost more than depreciated plant, etc.)
2. Cost increases that are necessary to maintain established standards of reliability (mostly replacement of aging infrastructure, possibly including recognition of the need to reinforce systems to deal with extreme weather conditions)
3. Cost increases that result from policy decisions to change the supply mix (Green energy being the best known example, but a decision to proceed with any form of power generation could have cost implications)
4. Cost increases that result from other policy decisions (such as location decisions driven by industrial policy, or stakeholder input). In extreme situations this could include moving a power plant after the contract has been signed.
Decision makers can do almost nothing about category 1. Category 2 can be managed in many ways, but the issues are technical and many of the cost increases will be felt in one way or another. Category 3 is manageable over the medium to long term and is fair game for public debate. It gets the most attention from the public and media, although sometimes more than its share of blame for cost increases. In this area public policy can affect long term costs, as well as health care, environmental and other costs. Category 4 is the most manageable of all. It’s an area where something can be done by government, with significant cost reduction benefits. Unfortunately it’s in categories 1 and 2 where the bulk of cost increases lie.
Once the debate has focused on the price increases that can be avoided or managed, the question changes. We need to ask: What are we willing to pay in terms of extra cost for these supply choices, either because they lead to benefits of other kinds such as improved reliability, health or environment, or because they reduce expected long term costs? This is an interesting and useful area for public debate. The government and concerned stakeholders would do well to issue white papers to prompt discussion on the wisdom of investing in reliability and cleaner air during an era of financial challenges.
There are few absolute rules about how to keep electricity prices low, but the one thing that has consistently driven electricity prices up is sudden changes and policy reversals, usually instigated by political forces. Ironically, the very process in which the problems of electricity prices get the most attention – elections – is often the same process that causes unnecessary price increases.
There is no magic formula but there are some dependable principles. Electricity prices will be minimized to the extent that public policies are developed carefully enough to ensure they are sustainable in the long term. In addition, prices will be kept down by the extent to which shorter term decision-making relies on market discipline and steady regulation to deal with the inevitable ebb and flow of market based prices.
No political party should expect to have a ready answer for electricity prices. More like a toolbox and a set of principles. The best cure for high electricity prices is refraining from quick fixes. This does not mean government shouldn’t set long term direction. Government has to steer the ship, and think about the kind of system Ontarians want to pass along to their children. But when taking action, government needs to choose its moves carefully, to make sure today’s decisions aren’t going to lead to counter-actions in the future. To achieve this kind of certainty, proposals need to be carefully vetted by experts throughout the industry, to ensure they aren’t likely to entail technical, economic or public policy problems.
If this sounds like an unusually cautious and risk-averse approach, you’ve got it right. The electricity system being capital intensive and highly politicized needs to be very careful not to make mistakes that will affect millions of people for a generation or more.
The problem of controlling electricity price increases is challenging and complicated but not intractable. Promises can be made but they should not be overly ambitious. Dave Butters concluded with the still-apt observation that, “Obviously, no increase to the rates we pay is ever welcome. But the question is whether rates are fair and reasonable. Are increases justifiable and measured? Are we on a path that is manageable for people and businesses – as we work to better reflect the costs of generating, transmitting and distributing power around the province? On balance, Ontario is more right than wrong when it comes to price.”
Our politicians are wise to focus on electricity policy in proactive terms – however, they must be very careful in proposing changes during the coming election.
— Jake Brooks, Editor