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STATE OFTHE CANADIAN

ELECTRICITY INDUSTRY

2020

STATE OF THE canadian ELECTRICITY INDUSTRY 2020 • Canadian Electricity association | 32 | STATE OF THE canadian ELECTRICITY INDUSTRY 2020 • Canadian Electricity association

trans·for·ma·tiona thorough or dramatic change

in form or appearance

contents04 Introduction

31 Federal Regulations and Cumulative Burden

07 Innovating for a Secure Future

37 Provincial Electricity Markets & Economic Regulation

15 Decarbonization, Electrification and Climate Resiliency

43 Looking Ahead: 2020 and Beyond

25 Meeting the Needs of Customers and Communities

4 | STATE OF THE canadian ELECTRICITY INDUSTRY 2020 • Canadian Electricity association

State of the Canadian Electricity IndustryTransforming to meet climate, customer and competitive needs Turbines. Simple yet highly complex assets emblematic of the Canadian electricity system. Used to convert energy into the power that turns the lights on, they go largely unnoticed. And while the system may be invisible to the average consumer, it is in the midst of a transformation as technological, societal and environmental changes compel our electricity companies to create new ways to serve customers, communities and policymakers.

Members of the Canadian Electricity Association (CEA) have built upon a strong foundation, as one of the world’s lowest-carbon electricity systems by significantly improving environmental performance over the past two decades. At the same time, they have continued to modernize electricity infrastructure, ensure the security of the power system and enable customers to interact with it in novel ways. They continue to do all of this within a tightly regulated environment.

The current federal government, re-elected in October 2019 with a minority mandate by Canadians, has staked out ambitious policy goals.

This includes exceeding current 2030 carbon-reduction targets and laying the groundwork for net-zero emissions by 2050, as well as advancing electrification of the economy.

Additional industry-relevant policy imperatives include reducing diesel reliance in northern Indigenous communities, accelerating home retrofits and electrifying government buildings. Internationally, the continued lack of consensus on a global carbon market system has a further significant bearing on the industry outlook.

This is the backdrop against which CEA presents State of the Canadian Electricity Industry 2020. Identified are themes that encompass the most significant drivers of change and the most critical focal points for our members. An overview of the current status, necessary industry actions and specific recommendations to help Canada’s electricity industry continue to provide safe, secure and sustainable electricity for all Canadians in the face of a rapid evolution is outlined.

2020 will be a transformative year for the electricity industry. It will continue to face both challenges and opportunities.

The carbon reduction imperative is only becoming more urgent and is a key driver—one among many—of a pressing need for accelerating innovation. Meanwhile, customer expectations around service and costs are rising.

Highlighted within are CEA’s key public policy-related issues and objectives through 2020 as our industry works to manage multi-faceted transformational change. We welcome stakeholders to engage with us in this dialogue to ensure our electricity system remains equal to the needs of our communities and to the challenges of our future.

Founded in 1891, CEA is the national forum and voice of the evolving electricity business in Canada. The Association contributes to the regional, national, and international success of its members. CEA members generate, transmit and distribute electrical energy to industrial, commercial, residential and institutional customers in all Canadian provinces and territories.

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89,000canadians

greenhouse gas free

employs approximately

$34 billioncontributes over

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The electricitygeneration mix in Canada is


Innovating for a Secure Future

Current Status Innovation is key to the current transformation in the electricity industry. Perhaps the most fundamental of many current shifts relates to the emergence of an ever-more diverse, distributed and technology-enabled electricity system. Operations are evolving in order to produce cleaner and more reliable electricity, delivering and using it more efficiently, and enabling customers to engage with the system in ways they never have before.While CEA members work to modernize the electricity system and enable integration of technologies that deliver customer benefits, governments and their regulatory agencies have a major role in fostering industry innovation and risk-taking through better processes. The electricity industry is working with federal and provincial policy makers and regulators to encourage greater receptivity to innovation-enabling investments and to ameliorate dated regulatory frameworks.

Based on current trends worldwide, the electricity industry expects significant growth of electric vehicles, battery storage and distributed generation in the next decade. New investments in emerging technologies such as small modular reactors will also make a significant difference in the delivery of energy services.

Potential Participants in Interconnected Electricity Systems by 2040: “Digital technologies are set

to transform the global energy system in coming decades, making it more connected, reliable and sustainable.”

Source: International Energy Agency

01


1 billion+11 billion+

households

smart appliances

http://www.iea.org/news/digitalization-set-to-transform-global-energy-system-with-profound-implications-for-all-energy-actors

http://www.iea.org/news/digitalization-set-to-transform-global-energy-system-with-profound-implications-for-all-energy-actors


For more examples of how CEA members are innovating for tomorrow, visit the online home of the Association’s Centre of Excellence at electricity.ca/lead/centre-of-excellence/

Industry Actions Within the construct of the existing provincial regulatory systems and other non-regulatory business models, CEA members are introducing innovative technologies to provide safe, reliable and sustainable power to Canadians. These range from greater integration of renewable distribution technologies to advanced smart grid automation to behind-the-meter end-use technologies. Investments in innovation require an assessment of many variables, including risk exposure. In many cases, these decisions are also based on what is allowed under the existing regulatory frameworks. The following initiatives highlight a few innovative projects by CEA members:

Key Facets of Industry Evolution & Innovation Representative Industry Actions

Energy Storage, including Pumped Storage: Progress towards commercially viable utility-scale energy storage continues. An essential complement to intermittent generation—such as wind and solar—storage will also improve reliability, management of new demand patterns and utilization of existing generation assets.

TransAlta’s proposed Brazeau Hydro Pumped Storage project will store water for renewable generation when demand is low. Water will be pumped up from the lower reservoir and stored in the upper reservoir for generation use when demand is high. It would more than double the generating capacity of the existing facility at Brazeau and significantly increase total hydro generation in Alberta.

Grid Modernization: Grid digitization and automation, coupled with the use of big data, shows great promise. Benefits include:

• improved grid resiliency and restoration capabilities

• optimization of the increasingly complex ecosystem of grid-connected generation, storage and load-management resources

• enablement of the sophisticated exchanges of energy and data that will characterize customer interactions in a highly electrified future

Distributed grid intelligence is an Oakville Hydro solution involving advanced sensors and automatic network responses to changing grid conditions, allowing for restoration after outages within seconds. Building this network allowed for replacement of near end-of-life equipment with automated switching devices, and for deployment of smart grid intelligence locally for maximum customer impact.

End-Use: Utilities are laying the groundwork for a future in which relationships with at least some customers will become more interactive. Anticipated wide-scale adoption of personal-use EVs—one example of the broader trend towards electrification—will require smart management of charging timing, ideally coupled with opportunities for grid managers to tap into the storage capacities within expanding EV fleets. (See also section 3, “Customers”)

In a unique partnership, Nova Scotia Power and NB Power will test numerous solar, battery, EV smart-charging and smart thermostat technologies to optimize customer and grid benefits. The Collaborative Smart Grid Innovation Project will encompass all customer segments, with each utility focusing on different aspects of technology testing.

http://www.electricity.ca/lead/centre-of-excellence/


As the industry invests in new digital technologies, it must remain vigilant against evolving and more frequent cyber security threats. Trends such as decentralization, digitization and automation will create new vulnerabilities. This underscores the importance of long-standing multi-agency and cross-border collaboration between CEA, its members and the agencies listed below, to ensure that strong detection and prevention measures are in place.

• Communications Security Establishment• Canadian Security Intelligence Service• Royal Canadian Mounted Police• Electricity Information Sharing & Analysis Centre (Canada-US)• Canadian Centre of Cyber Security• Electricity Subsector Coordinating Council (Canada-US)• Independent Electricity System Operator (Ontario)

Small and modular

The premiers of New Brunswick, Ontario and Saskatchewan signed an MOU in late 2019 and committed to collaborate on the development and deployment of innovative, versatile and scalable small modular nuclear reactors (SMR). They did so in recognition of the potential value of SMRs in on-and-off grid uses, in meeting the needs of energy-intensive sectors such as mining and manufacturing, and in creating Canadian export opportunities.


Outlook and Asks Innovation is a must as the world fully transitions to a digital, low-carbon future. At a macro-level, continued innovation in the electricity industry requires a regulatory system that is conducive to investments in moderate to high-risk innovative technologies by companies. The framework needs to better enable appropriate levels and types of research and development, and of investments extending beyond traditional poles-and-wires and bricks-and-mortar. As the industry continues to work with regulators on that framework, there are specific measures that the government should undertake to further support industry innovation for the benefit of all electricity consumers and stakeholders:

• Prioritize public-private partnerships for innovative electricity-specific technologies that would enable Canada’s transition to net-zero emissions by 2050 Public-private partnerships would accelerate research, development and deployment of new innovative technologies to reduce emissions across sectors and enhance customer experience through behind-the-meter energy use and management technologies.

• Modernize outdated regulations Outdated rules, such as the federal Electricity and Gas Inspection Act and the Weights and Measures Act, are stifling innovation. Among other deficiencies, current regulations contemplate neither the availability of micro-processing and other improved metering options, nor the range of emerging energy transactions, such as bi-directional electricity flows that allow consumers to become “prosumers”. These outdated regulations pose obstacles in the adoption of clean energy technologies such as electric vehicles.

• Expand “Project Lighthouse” to other jurisdictions This collaborative initiative, led by Ontario’s Independent Electricity System Operator (IESO), is designed to raise awareness of cyber threats to electricity companies and to enable quicker response times. It is creating improved capabilities to analyze internet-based data from generation, transmission and distribution companies—to both predict and identify cyber security attacks—which could be replicated across the country.

• Adopt new regulations to accelerate innovation The creation of a Private Mobile Virtual Network Operation (PVNO) will support innovation, competition, incorporate new technology and ensure markets provide economically efficient solutions to current and emerging wireless communications needs. This designation would: ‒ optimize electrification of the transportation

sector with electric vehicles (EVs) ‒ further enable the deployment of virtual

power plant technology to improve grid resiliency and reduce the ecological footprint of power generation

‒ improve the integration of Distributed Energy Resources (DER) such as wind and solar

‒ increase grid automation to improve safety for line workers, first responders and the public

‒ significantly improve the reliability and quality of power delivered, an essential requirement of emerging high-tech industries



Decarbonization, Electrification and Climate Resiliency

Current Status Canada has the advantage of a remarkably low-carbon electricity grid. From 2000-2017 there has been a reduction in sectoral carbon dioxide-equivalent emissions of 42.5 per cent. More than 80 per cent of electricity now comes from non-emitting sources. Yet, with an aspirational federal government goal of 90 percent non emitting electricity sources by 2030—and recent direction to the federal Environment Minister by the Prime Minister to exceed the current 2030 carbon-reduction target and move to a net-zero economy by 2050—the journey is far from complete.

02

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

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120

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80

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40

20

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aton

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Eq.

Electricity Sector Greenhouse Gas Emissions in Canada (1990 - 2017)coal natural gas other

Source : Energy and Greenhouse Gas Emissions (GHGs)


https://www.nrcan.gc.ca/science-data/data-analysis/energy-data-analysis/energy-facts/energy-and-greenhouse-gas-emissions-ghgs/20063


Achieving 90 per cent or greater net-zero emissions in Canada will require an appreciation of regional constraints, technology limitations and systems-level planning to ensure safe, reliable and affordable electricity to Canadians. While Canada should continue to enable investments in clean energy sources and associated systems, the federal government should make a concerted effort to leverage the already clean energy portfolio of the sector to decarbonize other sectors of the economy, particularly transportation.

Transportation is a large emissions source and is well-suited for electrification. Annual EV sales in Canada increased almost 14-fold from 2013 to 2018, reflecting ongoing improvement in cost competitiveness and vehicle range.

Early indications of future public investments in mass transit skew heavily towards electrified systems, while progress continues towards adoption of EVs for use in truck fleets and other commercial contexts, as well as other forms of transportation such as shipping. There is significant longer-term potential for electrification of building-related energy needs and of industrial and commercial processes.

2010 2011 2012 2013 2014 2015 2016 2017 2018

50

45

40

35

30

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Electric Vehicle Market Shares and Sales Growth (2010-2018)market shares total sales (ev and phev)

Sources: Bloomberg New Energy Finance, IEA

Projected Global Passenger Vehicles Sales that will be Electric by 2050

57%Projected Global Passenger Vehicle Fleet that will be Electric by 2050

30%+Canada’s Target for ZEV Light-Duty Vehicles by 2040

100%

Source : World EV Outlook 2019, IEA, Data Retrieved: June 2019; Visual Created by the Canadian Electricity Association


Industry Actions The electricity sector is preparing for significant growth in electrification, especially light passenger vehicles over the next 10 years. Companies have set up specific initiatives to promote electrification, including the establishment of local charging network infrastructure, topping-up of provincial rebate programs for installation of residential EV stations and direct investments in their own electric vehicle fleets.

Electrification also provides an opportunity to better utilize existing assets. Off-peak baseline generation can be directed towards EV charging and to other needs formerly met by fossil fuels, assuming the right rate design, data access and technologies are in place. “Smart charging” of EVs has the potential to reduce the increased capacity requirements by more than a third.

While these initiatives are important first steps in the transition to a decarbonized economy, federal and provincial/territorial governments must collaborate to develop a policy framework that will enable the transformation to an electrified future. Such plans should be ambitious, while at the same time recognize the reality that different Canadian jurisdictions are at various stages in their energy transformations and electrification potential. Regional specific approaches and inter-regional collaboration will be important to ensure electrification proceeds efficiently and with due regard to price implications for customers.

https://iea.blob.core.windows.net/assets/e5ffa993-ef78-49f7-8cfa-5375a41d074e/ieadigitalizationandenergywebinar-180220161419.pdf


EV Charging Funds Further Network Build-Out

Hydro-Québec is authorized by legislation to use revenue from increased electricity sales resulting from EV charging to fund installation of fast-charge stations—1,600 more of which are expected to be deployed across the province over a one-decade period. Some 2,000 stations already make up the “Electric Circuit” in Quebec and Eastern Ontario, which is Canada’s first public charging network for EVs.

Catastrophic Insurance Losses in Canada

1999-2008 2009-2018

Average # of catastrophic events annually

56 104

Average loss + loss adjustment expenses (2018 dollars) annually

$4.4 billion $19.1 billion

Global Extreme Weather Events: Trends Since 1980

Floods and other hydrological events Quadrupled

Climatological events (extreme temperatures, droughts, forest fires)

More than Doubled

Storms and other meteorological events

Doubled

Source: Insurance Bureau of Canada, 2019 Fact Book. An insured loss is catastrophic if it totals $25 million or more.

Source: European Academies’ Science Advisory Council, 2018

As electricity assumes a bigger role in energy consumption through electrification, it is imperative that energy infrastructure can withstand increasing stresses, such as extreme weather events, and the incorporation of new loads. Creating climate resiliency strategies is now more vital than ever. Through an improved CEA climate adaptation guide and training, members are working to developed company-specific plans to address both these impacts and opportunities.

http://www.sciencedaily.com/releases/2018/03/180321130859.htm

http://www.sciencedaily.com/releases/2018/03/180321130859.htm


Outlook and Asks Creation of a national strategy to guide electrification remains a key CEA policy objective. We need to quantify the scope and timing of new generation requirements, determine the most efficient electrification opportunities by region and identify the required policy and investment tools.

More specifically, policies should acknowledge the centrality of CEA member contributions to electrification. Utilities will have to make transformative investments in Canada’s distribution-grid and should be eligible recipients of the monetary credits generated through the application of the federal Clean Fuel Standard.

In addition, CEA makes the following recommendations to government that would further its goals on decarbonization, electrification and climate resiliency:


• Support energy storage projects Introduce an incentive program for the commercial development of energy storage, emulating previous programs-such as the Wind Power Production Incentive-that were instrumental in fostering the development of renewable generation.

• Accelerate the implementation of the SMR roadmap Support the implementation of a roadmap for small modular nuclear reactors, which have great potential as sources of reliable and non-emitting baseload generation.

• Enhance programs on climate adaptation Continue to co-fund industry climate adaptation and resiliency initiatives through the NRCan Climate Change Adaptation Platform.

STATE OF THE canadian ELECTRICITY INDUSTRY 2020 • Canadian Electricity association | 23


Meeting the Needs of Customers and Communities

Current Status CEA members ensure that Canada’s electricity system continues to be affordable, reliable and clean. Member experience and expertise, along with a continual focus on building upon well-established relationships with customers, positions members to harness the many opportunities of this transforming industry. Companies, however, will be challenged to meet increasing consumer expectations and maintain relationships through new touchpoints such as electric vehicle charging, smart homes and consumption dashboards.Customers are becoming more active and differentiated participants in energy systems. Ten years ago, a customer had a simple one-way relationship with the utility. In the future, a smart-home ecosystem—in which various forms of generation, storage and smart appliances are all digitally integrated—will be much more common. A home may consume less electricity, potentially even producing more than it requires at times, resulting in a lower carbon footprint and cost-of-ownership.

While much of the momentum towards this future state comes from the pull of customer desires, there’s also a strong push arising from the trend towards electrification and emerging technologies. Meeting the demands of large-scale electrification will require better energy management, along with better customer communication and provision of the right tools to become partners in this effort. Electricity suppliers will need sightlines on individual energy use patterns, customer connectivity to help with proactive management and pricing structures that create appropriate incentives.

03



Industry Actions CEA member companies are responding to customer needs, evolving into energy management companies and working with communities to leverage existing infrastructure and maximize benefits. Some of the initiatives include:

Saint John Energy’s Smart Energy Project involves localized deployment of artificial intelligence, and the testing of a range of smart consumer products and energy resources. These include controllable residential water heaters, dispatchable heat pumps with thermal storage and residential battery storage devices.

Alectra Utilities’ PowerHouse hybrid project is a collaborative trial of a home-specific “virtual power plant” model, involving integrated control of solar, storage, EV charging and a hybrid heating system, with the goal of minimizing GHGs while still reliably and affordably meeting all household energy needs.

The electricity industry also remains keenly aware of the importance of relationships not only with individual customers, but with Canadian communities broadly. Expectations around the level of community engagement and consultation that major projects require have been steadily rising. On a smaller scale, there are heightened expectations for engagement and communication even for routine grid maintenance work.

CEA and its members consider the following to be the core foundations of community acceptance or “social license” for electricity companies, and are committed to consistently delivering on them:

• quality and reliability of service provided to customers• readiness to operate and provide resilience in a changing climate• business practices that incorporate sustainability into day-to-day operations• meaningful engagement and consultation with respect to major projects• a demonstrated ability to innovate to meet changing needs and expectations

While these criteria are relevant to all Canadian communities, CEA members also recognize the unique imperative of consultation and engagement with Indigenous communities. Meaningful involvement of Indigenous groups is already crucial for gaining project acceptance, but the federal government must clearly define expectations around Free, Prior, Informed Consent (FPIC) to avoid ambiguity for both industry and Indigenous communities.

Residential Customer Satisfaction Continues to Improve Year-Over-Year

CEA conducts an annual national survey to take the pulse of key views on the part of electricity consumers. In the 2019 survey, two-thirds expressed general satisfaction with their electricity company, an 11-point increase over the past five years. Customers were three times more likely to say their experience with their electricity utility—in comparison to their experience with other service providers—was better than they were to say it was worse. And while innovation was important to customers, the outcome they most wanted to see is financial savings.Source: CEA 2019 National Electricity Customer Satisfaction Report (Innovative Research Group).

Hydro Ottawa’s MiGen Transactive Grid Project encompasses a complete micro-grid and gives participants the ability to send electricity back to the grid. MiGen facilitates customer generation and storage of electricity, provides signals that support sound energy-management decisions within households, and is open-source to encourage collaboration among innovators.


Outlook and Asks The Canadian electricity industry is customer-focused. The scope of its current success and future opportunities is a function of the degree to which it is meeting and anticipating customer needs. To further transform energy services to consumers, CEA makes the following recommendations:

• Update regulatory models Provide regulatory frameworks—economic and otherwise—that will enable deployment of various technologies, offering services and development of new market structures that will directly benefit customers in terms of cost, convenience, reliability and environmental attributes.

• Implement mechanisms to support customer-focused innovation Support consumer-focused investments in new innovative technologies through mechanisms such as the Regulatory Innovation Fund.

• Support initiatives to protect networks from cyberthreats A safeguarding of the customer interest in grids and other electricity infrastructure that is secure from cybersecurity threats, and the reliability and privacy implications of such threats.

• Support adoption of passenger electric vehicles and residential charging infrastructure Proactively develop strategies needed to advance electric vehicles, including residential charging infrastructure.


Future State

One of the tools CEA members use to stress-test their corporate strategies is a set of scenarios. The Future of Electricity: 2040 was developed in collaboration with members of the Association. They are projections of different possible futures—each assuming a different interplay of policy, technology and risk factors—that lay out distinct future outcomes in terms of the nature of the electricity system and of customer interactions with it.

Will the large utilities of today come to orchestrate a range of distributed energy resources and collaborate effectively with new market entrants? Or might those utilities be sidelined as new entrants capture emerging market opportunities or as large users take electricity supply into their own hands? While all the scenarios are plausible, CEA is working to create the conditions for a future that optimizes responses to customer needs, leveraging existing industry infrastructure and expertise.


Federal Regulations and Cumulative Burden

Current Status CEA members are navigating a rapidly shifting regulatory landscape in Canada, both at the federal and provincial/territorial levels. Key policy drivers include a suite of carbon-reduction initiatives, an overhaul of project impact assessment processes, legislative changes relating to fish habitat protection, and ongoing electricity market renewal and associated regulatory constraints. These changes impact the entire value chain of electricity from generation, to transmission to delivery.As corporate citizens, CEA members support the stated broad intent behind these various measures: ensuring negative impacts are minimized and benefits are maximized. But the procedural costs must be justified by the benefits of the outcomes. In an already highly complex regulatory environment, simply adding a myriad of rules means costs compound while outcomes become ever more uncertain. The federal government has acknowledged that there are some negative impacts arising from the cumulative regulatory burden and promised countermeasures such as the proposed Centre for Regulatory Innovation.

Recent experience, however, suggests that new regulation continues to be rolled out without regard to impacts on Canada’s competitiveness, compatibility with existing regulations and the ability to achieve the desired outcome.

The incremental costs associated with new layers of regulation appear to have had a chilling effect on the willingness of investors to support innovation needed to solve some of Canada’s most pressing problems. The multiplicity of regulatory tools either in place or proposed can also mean that regulations may impede each other, or force regulated entities into less beneficial actions.

04



Hurdles and complexities are also acute during regulatory impact assessment processes. Project proponents in these procedures have often been required to:

• respond to multiple supplemental information requests, each which may require re-work of materials already submitted

• deal with a lack of certainty and predictability around early consultation and informed consent by affected communities

• spend unnecessary resources on reporting due to duplication at other levels of government, adding to cost and risk

Getting Regulations Under Control

Germany and Denmark provide compelling examples of how oversight agencies can help foster regulatory efficiency. Germany’s Regulatory Control Council (Normenkontrollrat, or NKR) is an autonomous advisory body set up in 2006. Before any new federal legislation is adopted, the NKR reviews ministry estimates of compliance costs for citizens, businesses and public authorities and reports to Parliament and the public. The NKR also reviews existing administrative procedures with a view to making them simpler and faster. Denmark’s Business Forum for Better Regulation has a similar mandate.Source: Business Council of Canada, “A Better Future for Canadians”, October 2019


Outlook and Asks CEA will provide input on implementation guidance and enabling regulations that remain under development within the federal government, relating to both the new impact assessment process and to recent changes to the Fisheries Act. It will remain engaged regarding the final shape of the federal Clean Fuel Standard (CFS) and supports additional federal-provincial equivalency agreements, which avoid the overlay of two separate sets of climate change regulation.

CEA will continue to advocate for solutions aimed at addressing the existing cumulative regulatory burden more broadly. Recommendations to government include:

• Continue efforts to review duplicative regulations Support the Treasury Board Secretariat, in collaboration with NRCan and Environment and Climate Change Canada (ECCC), to review all redundant, overlapping and/or outdated regulations that hinder progress towards Canada’s clean energy future.

• Enhance inter-governmental collaboration Pursue greater inter-governmental regulatory alignment through the work of the Regulatory Cooperation Table and consistent with the Canada Free Trade Agreement.


Industry Actions CEA continues to work closely with federal agencies and decision makers on regulatory efficiency. In 2019, with support from Natural Resources Canada (NRCan), the sector commissioned a major study of specific regulations and processes that impede electricity sector investment and innovation. The study, led by Navigant Consulting, identified several regulatory “pain points” related to generation, transmission and distribution operations. CEA plans to work with the federal government departments in 2020 to alleviate these regulatory issues to ensure companies can successfully deliver the desired outcomes of the regulations without being unnecessarily burdened by duplicative policies.


Provincial Electricity Markets & Economic Regulation

Current Status Utility investment and associated returns on electricity infrastructure are tightly regulated by utility tribunals in most provinces and territories. Striking the right balance between prudence and cost control, and innovation and forward-looking investments is a difficult challenge for regulators. The economic regulatory framework needs transformative modernization to ensure it supports the levels of research and development and non-traditional investments that will generate the best long-term outcomes.While the concern with affordability is laudable, it can result in the rejection of applications involving innovative technologies. New innovations carry inherent risks and often have relatively short lifespans to recover costs. Current regulatory frameworks are challenged in adequately weighing these considerations against long-term cost reductions and other customer benefits. Early-adopter utilities face difficulty in terms of earning a return on innovative investments. All utilities face the plight of frequently onerous, expensive and slow-moving review processes.

Capital expenditures approved by regulatory tribunals generally become part of a utility’s suite of tangible assets, or “rate base”, on which it earns a specified rate of return. These investments are generally confined to “bricks and mortar” assets such as electrical transformers. However, this model will need to be modernized as intangible investment—such as cloud-based IT services—can also offer more functionality at the lowest cost to customers. Moreover, these technologies will increasingly become necessary elements as utilities seek to modernize both the grid and their interactions with customers.

As “behind the meter” activity also continues to grow—for example customer adoption of technologies such as batteries to store self-generated and/or off-peak energy—investments in transmission and distribution will have to keep pace. This will prove essential as most behind-the-meter technologies will be unable to fully or economically serve customer needs for the foreseeable future without a grid connection. The business case underlying many behind-the-meter technologies in fact depends on the ability to transact energy via the grid.

05



Industry Actions Notwithstanding these challenges, CEA members know that innovation is essential to keeping pace with environmental imperatives and customer expectations, and routinely invest in promising pilot projects. They can take advantage of mechanisms such as “innovation sandboxes”, allowing for customized guidance from regulators and potential temporary relief from specific regulatory requirements when innovative technologies are being considered. Many CEA members are also developing innovation-based capacities and business offerings through non-regulated subsidiaries.

CEA members are pursuing such investment with rigour due to their understanding of sustained importance not only of innovation but of the infrastructure that enables its deployment. The experience of early-adopting jurisdictions such as California is that a robust grid, in fact, becomes more important as technological innovation proceeds, and as the penetration of such things as distributed energy resources increases.


Outlook and Asks The economic regulatory framework needs to advance innovation and optimize the right investments, whether tangible or intangible, all while retaining regard for affordability for customers. CEA asks for government engagement in, and support for, the two-track approach that it wants to see pursued:

• Maximize potential flexibility within the current economic regulatory framework CEA-commissioned research has identified levers already available to regulators to better facilitate industry innovation. Most promising are process-related levers, such as optimized compliance and reporting requirements and streamlined regulatory proceedings.

• Re-design the “regulatory compact” Further entrenchment of incentive-driven and performance-based rate setting is one promising guiding principle. Other specific issues for determination include how to:

‒ holistically value distributed energy resources such as storage

‒ allocate roles and foster investment in infrastructure such as EV charging networks

‒ design rates to account for increased self-generation


An Emerging Regulatory Embrace of Innovation

Included within Hydro One’s most recent rate application was a proposal to use battery storage to improve poor reliability at the remote Aroland First Nation in northern Ontario. A more than 60 per cent reliability improvement is targeted through this pilot project, and at a much lower cost than a traditional poles and wires solution would have involved. The value proposition was so compelling that the Ontario Energy Board-in what has been termed a groundbreaking decision-both allowed the assets to be rate-based and directed Hydro One to consider other economically justified distributed energy solutions for northern communities in its next application.


looking ahead: 2020 and Beyond

Current Status While Canadians will have broader and more sophisticated interactions with their electricity providers in the future, the electricity industry is likely to retain a low profile in the minds of most. The thermostat will adjust when they get home, low-emissions electricity will cook dinner and power devices and cars will be reliably charged by morning. But the vast complexity of the system making all that possible is likely to remain as little noticed as the unobtrusive turbine converting energy powering our everyday lives.Yet the Canadian electricity industry is unquestionably being impacted by dramatic regulatory, environmental, economic, technological and customer-driven change. CEA members are not merely responding to these transformational forces, but actively influencing the direction of change and shaping the outcomes.

What follows captures the past-present state of each of the themes addressed above, and the future state CEA and its members are committed to move towards–with the interests of the climate, customers and competitiveness firmly in mind.

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Innovating for a Secure FuturePast-Present State: The long-standing model of a small number of large generating facilities, who initiate a one-way flow of electricity for passive customer consumption is becoming an increasingly poor representation of how electricity grids actually work.

Decarbonization, Electrification and Climate ResiliencyPast-Present State: Canada is promisingly positioned but remains at a relatively early stage in forging a concrete and comprehensive plan for de-carbonization on a scale consistent with our international commitments.

Possible Future Scenario Electricity companies significantly evolve their operations, lever new technologies and energy-management opportunities, and foster the emergence of a cleaner and more flexible grid where diverse, distributed and conventional clean energy resources are carefully orchestrated.

Summary of CEA Recommendations

• Prioritize public-private partnerships for innovative electricity-specific technologies

• Modernize outdated regulations such as the federal Electricity and Gas Inspection Act and the Weights and Measures Act

• Adopt new regulations to accelerate innovation

• Expand “Project Lighthouse” to other jurisdictions to address cyber security threats

Possible Future Scenario The electricity industry builds on its de-carbonization track record, including storage and more non-emitting generation, while bolstering the climate resiliency of essential infrastructure. A National Electrification Strategy further lightens the carbon footprint.


• Introduce an incentive program for the commercial development of energy storage projects

• Accelerate the implementation of the Small Modular Reactor (SMR) Roadmap

• Continue to co-fund climate adaptation and resiliency initiatives through the NRCan Climate Change Adaptation Platform


Meeting the Needs of Customers and CommunitiesPast-Present State: The once limited-in-scope expectations customers had of their electricity providers is expanding, driven in part by the digitally enabled transparency and service improvement they experience with other industries.

Possible Future Scenario The electricity industry rises not only to increased expectations regarding basic interactions but facilitates and benefits from a more fundamental change in the nature of the role of electricity customers, and successfully delivers a wider and more tailored range of products and services.


• Update regulatory models that will enable deployment of various technologies and offering of various service

• Implement mechanisms to support customer-focused innovation

• Support initiatives to protect networks from cyberthreats

• Support adoption of passenger electric vehicles and residential charging infrastructure

Federal Regulations and Cumulative Burden Past-Present State: Extensive new regulatory requirements and procedures continue to be overlaid on the large volume the industry is already subject to, leading to added costs and uncertainties, and impairing investments needed to meet vital underlying objectives.

Possible Future Scenario Regulation becomes more predictable, non-duplicative to the greatest extent possible, and procedurally efficient; while a primary and unwavering focus on outcomes helps to ensure public and stakeholder confidence. Close coordination characterizes shared federal-provincial regulatory responsibilities.


• Continue efforts to review duplicative regulations

• Enhance inter-governmental collaboration


Provincial Electricity Markets & Economic Regulation Past-Present State: Economic regulation of utilities is misaligned with current investment needs, and a barrier to the pace and scope of technological adaptation that key imperatives call for.

Possible Future Scenario Policy makers provide clear direction for a re-design of the current “regulatory compact”, to strike a better balance between cost prudence and carefully considered and timely investments in innovative technologies.


• Maximize potential flexibility within the current economic regulatory framework

• Re-design the regulatory compact


Acknowledgements:CEA would like to acknowledge the contributions of CEA staff, particularly Francis Bradley, Justin Crewson, Diana Dominique, Patrick Farley, Dan Gent, Stephen Koch, Channa Perera, Michael Powell, Sarah Robinson and Jay Wilson in producing this report.

Editorial development of this report was by Kevin Hanson.

For more information:Please visit electricity.ca or contact Channa Perera at [email protected]


http://www.electricity.ca

mailto:perera%40electricity.ca?subject=


electricity.ca • [email protected]

STATE OFTHE CANADIAN

ELECTRICITY INDUSTRY

2020

state of the canadian electricity …...the electricity industry is working with federal and...

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