As governments and business leaders fashion plans for post-pandemic economic recovery, attention is turning to how the electricity sector might be able to help achieve broader public goals such as economic recovery. Going well beyond the millions of dollars in donated medical supplies, (see page 6), the power industry is in a good position to help rebuild the economy. As an essential industry with a number of large scale investment opportunities under development, it is reasonable to anticipate that power projects will be examined as potential vehicles for economic stimulus. Seeing the potential, the Ontario government recently initiated a Ministerial Advisory Council to identify ways the electricity sector can play a larger role in contributing to job creation and economic recovery. (See the editorial on page 4 for more information on the Council.)
In fact a wide range of companies in the power sector, both public and private, are already preparing or dusting off proposals for sizable long term investments that could create jobs and stimulate economic growth. These proposals cover the spectrum from reinforcing existing infrastructure to installing new leading edge technology. Considering the current conditions, many governments and public policy experts will consider it their public duty to look for ways to expedite these projects and to maximize their benefits.
However, there can be risks whenever government is poised to move quickly to commit large amounts of money to major investments. In times like these it’s only prudent to ensure there are effective checks and balances in place. As a result the value of prior Cost Benefit Analysis may be approaching a new peak of its own.
In the process of developing design options for a provincial incremental capacity auction during 2019 a number of energy experts conducted a brief but highly relevant study on how to apply Cost Benefit Analysis appropriately to the Ontario electricity sector. They identified principles for Cost Benefit Analysis (CBA) that would help to ensure stakeholders had objective information on the consequences of alternative market designs and policy options. Ultimately it was expected that by establishing a robust system ensuring transparency of this information, decision makers would be helping to minimize and stabilize electricity prices. Certainly it would make wasteful and ineffective spending much less likely.
“Having trustworthy objective data like Cost Benefit Analysis can be a big help wherever there’s a risk that preconceived notions could crowd out rational comparison of alternatives,” notes Colin Anderson, President of the Association of Major Power Consumers in Ontario (AMPCO).
The research report prepared by London Economics International LLC (“LEI”) concluded that carrying out Cost Benefit Analysis according to an identified set of principles including independent review “would provide for more informed decision-making, better system planning, and potentially improve stakeholder satisfaction with the Market Renewal process.”
The report, titled “Identifying best practices in cost-benefit analysis in the context of the Ontario Market Renewal Process,” was submitted to the IESO at APPrO’s request in 2019 to help inform discussion related to design questions under consideration at the time, specifically the proposed “Incremental Capacity Auction,” which had been previously subjected to a limited form of Cost Benefit Analysis. The study’s principal author, AJ Goulding, noted that some but not all of the principles were reflected in the IESO’s assessment of the Market Renewal program at that time.
In 2017 the Ontario Electricity Stakeholders Alliance released a statement recommending systematic use of Cost Benefit Analysis in the Ontario electricity sector as a means of ensuring improved objectivity and accountability. It recommended that political parties make “... a commitment to smart electricity decisions informed by rigorous cost-benefit analysis and objective procurement criteria that ensure Ontario ratepayers are getting the best value.” At that time, the Alliance represented 19 associations, consumer groups and boards of trade including APPrO, the Ontario Energy Association, Canadian Federation of Independent Business, Canadian Manufacturers and Exporters, the Ontario Chamber of Commerce and the Ontario Federation of Agriculture.
Although the concept of cost benefit analysis (CBA) has been in use for more than a century, its application to major electricity decisions has varied widely. In principle, cost benefit analysis can be applied to any decision, public or private, to determine whether its overall benefits exceed its costs.
In November 1999, the Government of Canada instituted a policy requiring cost-benefit analysis to be carried out for all significant regulatory proposals, defined as those having an impact over $100 million (see guide here). The analysis is intended to assess potential impacts on the environment, workers, businesses, consumers, and other sectors of society. In the United States, similar rules have been in place since the 1980s. A range of US government policies are routinely assessed by economic professionals appointed by Congress for costs and benefits.
The LEI report noted that “Best practices for CBA require at the onset a clear delineation of alternatives with respect to the status quo, the selection of all relevant benefits and cost metrics quantified using transparent and replicable analysis using current Ontario-specific data. This should be further supported by sensitivities that go beyond load growth and fuel prices to consider variables such as DER penetration. Qualitative factors to be examined include the potential for government intervention.”
It also recommended that independent review, similar to Ontario’s Fairness Commissioner, be made a permanent feature of CBA in Ontario. “The independent reviewer would assess whether the CBA provided met best practices, was performed in a holistic and unbiased way, provided for transparency into assumptions and modeling, and addressed appropriate sensitivities and scenarios. If deficiencies were found, the independent reviewer would make recommendations about how to address them in the analysis.”
From the perspective of the energy sector this is an attractive time to consider options for improving the system. Demand for energy is running below normal levels, and the processes for market evolution have to a large extent slowed their pace or are being reconsidered in a longer term context. There could hardly be a better time to examine options for improving the methods used for assessing new investment opportunities and ensuring they produce maximum economic benefit.
APPrO has made the 2019 report available on its website at this location.
Many experts believe that the consistent use of Cost Benefit Analysis could ensure that decision makers and affected stakeholders have accurate and meaningful information on the impacts of proposed actions before committing to major investments or regulatory initiatives.
Mr. Goulding observed that, “The pursuit of sound analysis should be viewed as an investment given the consequentiality of the resulting changes on the Ontario power sector and broader economy.”
— Jake Brooks