Commentary by Michelle Robichaud, President, Atlantica Centre for Energy
Atlantic Canada has an enormous task ahead to reduce emissions to net zero by 2050. One of the ways the federal government has identified for provinces to reach this goal is to clean the electricity grid. The Atlantic electricity grid must phase-out coal by 2030 and reach net-zero emissions by 2035. And, the only way to accomplish the task is with the support of provincial utilities.
Atlantic provincial utilities operate in highly regulated environments and they are generally monopolies; they are virtually the only option to make sure the light turns on with the flick of a switch.
To regulate the rates and services of electricity utilities, utility boards have been established by provincial governments. These utility boards operate independently from government with the mandate to balance ratepayers’ needs for fair rates with a utility’s opportunity to earn a fair return on their investment, especially where the utilities are private sector organizations like in Nova Scotia. The utility boards’ members have the technical job of reviewing evidence and arriving at a decision in order to achieve their mandate.
The key feature of this regulatory process is for utility boards and their decisions to remain independent from government, and politics. This independence helps ensure ratepayers receive a fair return for their costs, while utilities have confidence to invest multiple billions of dollars in local projects, as is required for our transition to a net-zero electricity grid.
The utilities that operate in a regulated environment have a more predictable and clear understanding of how their businesses are monitored through this legislation and what they must do to justify any financial investments that may affect the people who pay utility bills.
Here’s the problem; the Government of Nova Scotia just changed these important rules. Near the end of the regulator’s process of evaluating evidence put forward by Nova Scotia Power and customer representatives, the government introduced Bill 212, which sets the amount of the rate increase and will further limit the utility’s ability to get a return on their investments.
Now the regulator’s mandate has been compromised, now they can’t do the job they were asked to do, or at least they are impeded in being able to fairly evaluate whether a utility can earn a reasonable return on its investment to clean the grid.
While the provincial government’s action will likely help provide some temporary cost relief for ratepayers, it may have done irreparable damage to help Nova Scotia take big steps towards reducing emissions and meeting the government’s own emissions reduction targets.
Afterall, why would a utility invest multiple billions of dollars in Nova Scotia electricity infrastructure if it can’t hope to earn a reasonable return, let alone have confidence that the government will maintain its current rules?
Remember, the federal government is imposing rules on the provinces and the utilities to make the electricity grid “clean” by 2035, with coal being eliminated by 2030. In order to do that, utilities need to invest significant capital to change the way they generate power to make sure the flick of the switch actually works. The Government of Nova Scotia has additional requirements for the percentage of renewable electricity on the grid as well, furthering the investments required.
Beyond the clean electricity grid though, there are massive investments needed to transition to net zero by 2050. RBC recently issued a series of reports on climate change, the first report estimates the transition to net-zero emissions will cost Canada two trillion dollars. Not all this investment will come from utilities, in fact, most of it will come from the private sector. The decision by the Nova Scotia government to change the rules contradicts the fair and predictable investment climate for those in a regulated environment, so what does this mean for private companies?
RBC’s Proof Point update from September further outlined how Canada is not spending enough on the green economy, and how options like the United States’ new Inflation Reduction Act create more attractive investment areas for private utilities. As RBC concluded: “policy has a role to play in accelerating investment.”
Companies looking to make investments in new technologies like batteries, offshore wind, tidal power and hydrogen will be carefully weighing whether they put their money in a safer, more predictable province, or state.
There are incentives to bringing in new money to a region, but those are weighed by risk. To successfully address the challenges and urgency associated with the objective of net zero, energy systems must quickly evolve. Practices must be in place to attract, support and benefit from research, development, and technology commercialization efforts to take full advantage of the opportunity.
Governments need to ensure these practices are predictable to help lower investment risk.
Utilities and developers are prepared to invest in these emerging technologies but they require greater regulatory clarity and a fair and balanced path to cost recovery that reflects the interests of both investors and ratepayers.
The Atlantica Centre for Energy is Atlantic Canada’s proactive voice for energy. The Centre provides a unique meeting ground for industry, government, the education and research sectors, and the community at large to foster partnerships and proactively engage in energy related issues. The Centre is dedicated to increasing energy literacy for Atlantic Canadians, and helping the region realize opportunities associated with the energy sector.