Each Spring, senior executive from Canadian electricity companies, members of the Canadian Electricity Association (CEA), travel to Washington to meet with US officials to discuss areas of common concern. This has becomes an annual opportunity for CEA to reflect on the North American electricity market, consider the strengths and weaknesses of our shared infrastructure, and make recommendations on how the market can be improved.
The North American electricity system, which interconnects Canadian and U.S. electricity markets, is among the most integrated and reliable in the world. It combines a diversity of fuel sources, extensive transmission interconnects and two-way trading that benefits both countries.
The diversity of the Canadian and U.S.
electricity systems, the different balances of conventional and emerging technologies in our various regional generation mixes, and the differing market demands region by region over days, weeks, and seasons, have prompted a level of trade that benefits electricity consumers in every region across the continent. When linked across the international border, our diverse systems have created opportunities for efficiencies in regional systems management, reduced environmental impact, and improved reliability; these are vital achievements for all concerned.
Cross-border trade enables market
participants to take advantage of diversity between the Canadian and U.S. electricity
systems. The diversity and complementarity of our systems are first demonstrated by the
different balances of various conventional and emerging technologies in our generation mixes. These differences primarily reflect availability of resources, as different geographic regions have access to different input resources.
Electricity is now established as a key and growing part of the larger energy trade between the two countries, and it is increasingly two-way. Electricity trade between Canada and the U.S. stems primarily from two sources. First, generators in Canada are key suppliers to particular U.S. markets. In addition, generators in both countries take advantage of the trading relationship to optimize the performance of their respective asset portfolios, which contributes to lower electricity costs and higher overall system efficiency and reliability.
The quantity of electricity exported from Canada has typically been 6 to 10 percent of production. At the same time, electricity imports to Canada have increased significantly. The fundamental point is that the market is a borderless one, and supply meets demand north to south or south to north as that market requires, to the advantage of consumers across the continent. Robust competitive wholesale markets in both the U.S. and Canada rely on integrated U.S./Canadian markets. As the markets continue to open, the importance of cross-border trade will only increase.
Until recently, restructuring of the electricity industry followed a similar pace in both Canada and the U.S. The drive to open markets in both countries, however, appears to have stopped, at least for the present. Currently, approximately 50 percent of Canadian retail customers are in open markets (although regulated rates remain available to retail customers in both Ontario and Alberta).
The Economic and Environmental Benefits of an Integrated Market
Cross-border electricity trade provides the opportunity to optimize the use of generating resources to the benefit of U.S. and Canadian market participants. When linked across borders, the diversity of our systems, our climates, and our demand profiles allow for efficient power flows north or south at various times depending on market circumstances. The resulting regional market efficiency gain reduces the overall need for generating facilities and results in lower generation costs to consumers. Such opportunities exist to a greater or lesser extent in each of the regional markets across the continent.
Efficiencies in regional systems management can also be achieved through participation in or coordination with regional transmission organizations ("RTOs"). In many cases, RTOs present an opportunity for the effective utilization of existing transmission infrastructure. In fact, some Canadian utilities are actively exploring participation in bi-national RTOs as an approach for optimizing the management of their respective transmission systems, all with an eye to the longer term objective of enhanced cross-border integration.
The objectives of reliable, affordable, environmentally preferable power require that all technologies be available. Increased integration enables the larger, combined U.S. and Canadian regional electricity markets to take full advantage of various emerging technologies like wind power, whose intermittent nature requires backup capacity, to meet our future energy needs on a larger scale. In fact, wind power technologies offer greater reliability where there are increased cross-border system interactions, through diversity of supply over larger geographic areas.
Setting the Stage: Factors Affecting Investment in the North American Electricity Market
The bi-national electricity trading system that has evolved between Canada and the United States over more than a half century is, like the trading relationship in general, without compare. What began with small tie-lines and the development of boundary waters for hydroelectricity has evolved into extensive cooperative arrangements for managing transmission system reliability, major inter-ties across the Canada-U.S. border coast-to-coast, and significant trade volume, in both imports and exports. And since the 1980s, the combination of international agreements and regulatory actions has allowed for the creation of integrated North American electricity markets.
Looking to the future, investment in this integrated market will be affected by a number of factors, including legislative and regulatory measures, as well as policy directives. These factors set the stage for investment opportunities in our integrated North American markets.
The U.S. Congress passed the Energy Policy Act of 2005, in part, to encourage investment in all sectors of the energy industry, including electricity. The Act promotes both conventional technologies and emerging technologies, recognizing the need for promoting all energy sources to assure the sustainability of electricity supply. And while the Energy Policy Act is U.S.-focused, the Act will necessarily affect the North American electricity market as a result of the interconnected nature of our respective transmission systems and the interrelationship of electricity supply.
A number of provisions in the Energy Policy Act could encourage investment in this integrated North American electricity market. Of far-reaching impact, in terms of investment in both generation and transmission facilities, is the repeal of the Public Utility Holding Company Act (“PUHCA”). PUHCA had contained provisions restricting investment in U.S. utilities by foreign companies. With the repeal of PUHCA, these restrictions on foreign investment are eliminated.
In terms of transmission facilities, several provisions will help to ensure a truly integrated North American grid and encourage investment in cross-border transmission facilities. First, the reliability standards language in the Energy Policy Act will allow for the establishment of an international Electric Reliability Organization to develop mandatory reliability standards in both the U.S. and Canada. Moreover, the Energy Policy Act encourages transmission investment by providing backstop siting authority, requiring FERC to establish incentive-based rate treatments for transmission facilities, and providing two new tax provisions. Such provisions could allow for increased transmission investment across our respective borders.
The Energy Policy Act should also serve to encourage investment in generation facilities in the North American market, thereby increasing electricity supply. The Energy Policy Act encourages the development of clean coal facilities, encourages the construction of new nuclear facilities, and provides support for renewable technologies in the United States.
While the U.S. Energy Policy Act will play an important role in encouraging infrastructure and supply investment in North American markets, other factors will also have an impact on investment decisions. Energy policies promoted by other respective governments will certainly affect investment decisions. For example, a number of Canadian provincial governments are requiring minimum levels of renewable energy purchases. The government of Ontario has committed to adding 2,700 megawatts of new renewable energy to Ontario’s electricity system by 2010. And the British Columbia Energy Plan has a 50 percent clean energy goal for new electricity demand over the next 10 years. While the U.S. Congress did not include a renewable portfolio standard in the Energy Policy Act, a number of states have adopted renewable mandates in their respective states.
Policy actions taken with respect to climate change will also have a significant impact on generation investment decisions in the U.S. and Canada in the future. Canada, a signatory to the Kyoto Protocol, must have in place the mechanisms to achieve a reduction in greenhouse gas emissions of 6 percent below 1990 levels for the 2008-2012 period. Looking ahead, Canada agreed to the Montreal Action Plan of December 2005, a commitment for further international action on climate change and greenhouse gas reductions by industrialized countries beyond 2012. While the U.S. is no longer committed to the Kyoto Protocol reductions, any actions taken by the U.S. in the coming years will impact investment in the fossil-fuel generation technologies.
Regulatory actions will also influence investment decisions. Since the passage of the Energy Policy Act, FERC has issued several rulemakings to implement certain provisions in the Act and is in the process of completing other major rulemakings. Relevant to cross-border investment decisions, FERC has issued rules implementing the provisions of the reliability standards language, the repeal of PUHCA, and the changes to Section 203 (the merger provision). Other rulemakings will follow, including rules to establish incentive-based rate treatments and rules to implement the native load language. The U.S. Department of Energy is also conducting workshops and studies to implement provisions in the Act relating to the transmission grid. The results of such actions could help to identify necessary grid investments along the Canada/U.S. border, as well as identify the necessary incentives to make such investments. Finally, the Department of Energy and other U.S. agencies are implementing a number of provisions in the Energy Policy Act to promote enhanced electricity supply.
Growth in electricity demand in Canada and the U.S., as well as the retirement of aging or environmentally-challenged facilities, will require increases in generation capacity in our respective countries. Both the U.S. and Canada project the need to increase generation capacity by approximately 25 percent by 2025 to satisfy increases in demand. Increases in generation capacity will require increases in transmission infrastructure to ensure that such supply reaches all end-use customers.
Electricity supply and infrastructure solutions for the U.S. and Canada will necessarily reflect the availability of our respective fuel supply, taking advantage of the diversity of fuel sources. Whether conventional or emerging generation technologies, investment should focus on assuring sustainable generation sources for our respective countries. Investment in transmission infrastructure must also help to address constraints along the border, which will allow for enhanced cross-border trade.
The United States and Canada share the challenges of ensuring the future adequacy of electricity infrastructure and supply, and we need to address these challenges cooperatively. CEA proposes the following areas of bi-national cooperation to promote effective investment in electricity infrastructure and supply in the North American market:
• Cooperation in Enhancing Electricity Supply
• Cooperation in Enhancing Transmission Infrastructure
• Cooperation in Addressing Air Quality Issues and Climate Change
The integration between Canada and the United States will only increase as energy demand and trade continue to grow. This makes close cooperation between our countries a necessity. The benefits of cross-border cooperation are clear; the challenge is to identify the approaches that will take advantage of our diversity of supply and help to ensure a reliable North American electricity market in the future. Resolving our electricity infrastructure and supply needs must be an international concern, requiring the full engagement and cooperation of both countries. Anything less could impede future cross-border trade and, more significantly, undermine the very sustainability of supply we all seek to see
guaranteed.
The North American electricity system, which interconnects Canadian and U.S. electricity markets, is among the most integrated and reliable in the world. It combines a diversity of fuel sources, extensive transmission interconnects and two-way trading that benefits both countries.
The diversity of the Canadian and U.S.
electricity systems, the different balances of conventional and emerging technologies in our various regional generation mixes, and the differing market demands region by region over days, weeks, and seasons, have prompted a level of trade that benefits electricity consumers in every region across the continent. When linked across the international border, our diverse systems have created opportunities for efficiencies in regional systems management, reduced environmental impact, and improved reliability; these are vital achievements for all concerned.
Cross-border trade enables market
participants to take advantage of diversity between the Canadian and U.S. electricity
systems. The diversity and complementarity of our systems are first demonstrated by the
different balances of various conventional and emerging technologies in our generation mixes. These differences primarily reflect availability of resources, as different geographic regions have access to different input resources.
Electricity is now established as a key and growing part of the larger energy trade between the two countries, and it is increasingly two-way. Electricity trade between Canada and the U.S. stems primarily from two sources. First, generators in Canada are key suppliers to particular U.S. markets. In addition, generators in both countries take advantage of the trading relationship to optimize the performance of their respective asset portfolios, which contributes to lower electricity costs and higher overall system efficiency and reliability.
The quantity of electricity exported from Canada has typically been 6 to 10 percent of production. At the same time, electricity imports to Canada have increased significantly. The fundamental point is that the market is a borderless one, and supply meets demand north to south or south to north as that market requires, to the advantage of consumers across the continent. Robust competitive wholesale markets in both the U.S. and Canada rely on integrated U.S./Canadian markets. As the markets continue to open, the importance of cross-border trade will only increase.
Until recently, restructuring of the electricity industry followed a similar pace in both Canada and the U.S. The drive to open markets in both countries, however, appears to have stopped, at least for the present. Currently, approximately 50 percent of Canadian retail customers are in open markets (although regulated rates remain available to retail customers in both Ontario and Alberta).
The Economic and Environmental Benefits of an Integrated Market
Cross-border electricity trade provides the opportunity to optimize the use of generating resources to the benefit of U.S. and Canadian market participants. When linked across borders, the diversity of our systems, our climates, and our demand profiles allow for efficient power flows north or south at various times depending on market circumstances. The resulting regional market efficiency gain reduces the overall need for generating facilities and results in lower generation costs to consumers. Such opportunities exist to a greater or lesser extent in each of the regional markets across the continent.
Efficiencies in regional systems management can also be achieved through participation in or coordination with regional transmission organizations ("RTOs"). In many cases, RTOs present an opportunity for the effective utilization of existing transmission infrastructure. In fact, some Canadian utilities are actively exploring participation in bi-national RTOs as an approach for optimizing the management of their respective transmission systems, all with an eye to the longer term objective of enhanced cross-border integration.
The objectives of reliable, affordable, environmentally preferable power require that all technologies be available. Increased integration enables the larger, combined U.S. and Canadian regional electricity markets to take full advantage of various emerging technologies like wind power, whose intermittent nature requires backup capacity, to meet our future energy needs on a larger scale. In fact, wind power technologies offer greater reliability where there are increased cross-border system interactions, through diversity of supply over larger geographic areas.
Setting the Stage: Factors Affecting Investment in the North American Electricity Market
The bi-national electricity trading system that has evolved between Canada and the United States over more than a half century is, like the trading relationship in general, without compare. What began with small tie-lines and the development of boundary waters for hydroelectricity has evolved into extensive cooperative arrangements for managing transmission system reliability, major inter-ties across the Canada-U.S. border coast-to-coast, and significant trade volume, in both imports and exports. And since the 1980s, the combination of international agreements and regulatory actions has allowed for the creation of integrated North American electricity markets.
Looking to the future, investment in this integrated market will be affected by a number of factors, including legislative and regulatory measures, as well as policy directives. These factors set the stage for investment opportunities in our integrated North American markets.
The U.S. Congress passed the Energy Policy Act of 2005, in part, to encourage investment in all sectors of the energy industry, including electricity. The Act promotes both conventional technologies and emerging technologies, recognizing the need for promoting all energy sources to assure the sustainability of electricity supply. And while the Energy Policy Act is U.S.-focused, the Act will necessarily affect the North American electricity market as a result of the interconnected nature of our respective transmission systems and the interrelationship of electricity supply.
A number of provisions in the Energy Policy Act could encourage investment in this integrated North American electricity market. Of far-reaching impact, in terms of investment in both generation and transmission facilities, is the repeal of the Public Utility Holding Company Act (“PUHCA”). PUHCA had contained provisions restricting investment in U.S. utilities by foreign companies. With the repeal of PUHCA, these restrictions on foreign investment are eliminated.
In terms of transmission facilities, several provisions will help to ensure a truly integrated North American grid and encourage investment in cross-border transmission facilities. First, the reliability standards language in the Energy Policy Act will allow for the establishment of an international Electric Reliability Organization to develop mandatory reliability standards in both the U.S. and Canada. Moreover, the Energy Policy Act encourages transmission investment by providing backstop siting authority, requiring FERC to establish incentive-based rate treatments for transmission facilities, and providing two new tax provisions. Such provisions could allow for increased transmission investment across our respective borders.
The Energy Policy Act should also serve to encourage investment in generation facilities in the North American market, thereby increasing electricity supply. The Energy Policy Act encourages the development of clean coal facilities, encourages the construction of new nuclear facilities, and provides support for renewable technologies in the United States.
While the U.S. Energy Policy Act will play an important role in encouraging infrastructure and supply investment in North American markets, other factors will also have an impact on investment decisions. Energy policies promoted by other respective governments will certainly affect investment decisions. For example, a number of Canadian provincial governments are requiring minimum levels of renewable energy purchases. The government of Ontario has committed to adding 2,700 megawatts of new renewable energy to Ontario’s electricity system by 2010. And the British Columbia Energy Plan has a 50 percent clean energy goal for new electricity demand over the next 10 years. While the U.S. Congress did not include a renewable portfolio standard in the Energy Policy Act, a number of states have adopted renewable mandates in their respective states.
Policy actions taken with respect to climate change will also have a significant impact on generation investment decisions in the U.S. and Canada in the future. Canada, a signatory to the Kyoto Protocol, must have in place the mechanisms to achieve a reduction in greenhouse gas emissions of 6 percent below 1990 levels for the 2008-2012 period. Looking ahead, Canada agreed to the Montreal Action Plan of December 2005, a commitment for further international action on climate change and greenhouse gas reductions by industrialized countries beyond 2012. While the U.S. is no longer committed to the Kyoto Protocol reductions, any actions taken by the U.S. in the coming years will impact investment in the fossil-fuel generation technologies.
Regulatory actions will also influence investment decisions. Since the passage of the Energy Policy Act, FERC has issued several rulemakings to implement certain provisions in the Act and is in the process of completing other major rulemakings. Relevant to cross-border investment decisions, FERC has issued rules implementing the provisions of the reliability standards language, the repeal of PUHCA, and the changes to Section 203 (the merger provision). Other rulemakings will follow, including rules to establish incentive-based rate treatments and rules to implement the native load language. The U.S. Department of Energy is also conducting workshops and studies to implement provisions in the Act relating to the transmission grid. The results of such actions could help to identify necessary grid investments along the Canada/U.S. border, as well as identify the necessary incentives to make such investments. Finally, the Department of Energy and other U.S. agencies are implementing a number of provisions in the Energy Policy Act to promote enhanced electricity supply.
Growth in electricity demand in Canada and the U.S., as well as the retirement of aging or environmentally-challenged facilities, will require increases in generation capacity in our respective countries. Both the U.S. and Canada project the need to increase generation capacity by approximately 25 percent by 2025 to satisfy increases in demand. Increases in generation capacity will require increases in transmission infrastructure to ensure that such supply reaches all end-use customers.
Electricity supply and infrastructure solutions for the U.S. and Canada will necessarily reflect the availability of our respective fuel supply, taking advantage of the diversity of fuel sources. Whether conventional or emerging generation technologies, investment should focus on assuring sustainable generation sources for our respective countries. Investment in transmission infrastructure must also help to address constraints along the border, which will allow for enhanced cross-border trade.
The United States and Canada share the challenges of ensuring the future adequacy of electricity infrastructure and supply, and we need to address these challenges cooperatively. CEA proposes the following areas of bi-national cooperation to promote effective investment in electricity infrastructure and supply in the North American market:
• Cooperation in Enhancing Electricity Supply
• Cooperation in Enhancing Transmission Infrastructure
• Cooperation in Addressing Air Quality Issues and Climate Change
The integration between Canada and the United States will only increase as energy demand and trade continue to grow. This makes close cooperation between our countries a necessity. The benefits of cross-border cooperation are clear; the challenge is to identify the approaches that will take advantage of our diversity of supply and help to ensure a reliable North American electricity market in the future. Resolving our electricity infrastructure and supply needs must be an international concern, requiring the full engagement and cooperation of both countries. Anything less could impede future cross-border trade and, more significantly, undermine the very sustainability of supply we all seek to see
guaranteed.
