Earlier this month, Newfoundland and Labrador (NL) experienced what many called an “energy crisis,” when issues in a switchyard, combined with rising demand for power with to the onset of winter weather, led to a shortage of electricity. NL Hydro, the provincial crown corporation responsible for generating and supplying electricity throughout the province, staged rolling blackouts across NL to address the shortage.
Nevertheless, the province’s recent energy shortage raises two questions: first, how should government address short-term shortages? Second, how can it prevent shortages in the future?
When demand for power exceeds supply at full capacity, a number of outcomes are possible. First, rates could rise to a level at which individuals consume less energy, mitigating the shortage. However, the government, or an agency established by the government, typically sets rates to prevent monopolistic behaviour, ensure affordable power, and allow families to budget their energy usage without worrying about fluctuating supply and demand. Additionally, electricity tends to have inelastic demand, meaning that consumers do not reduce their usage significantly when rates rise (nor do they increase their usage when rates decrease). This is especially true when these consumers know that the rate increases are temporary. Indiscriminate rate hikes, therefore, would have to be particularly severe in order to adequately reduce consumption in a crisis.
The alternative–rolling blackouts–has its own flaws. When the market rate for electricity rises above the fixed rate during a crisis, shortages develop because of the lack of incentives for consumers to reduce their consumption. Power providers often use periodic blackouts in certain areas to deal with this shortage. Under such a response, those who value electricity dearly have no way to buy it from those who do not care about it all, since it is distributed by chance and not need. Someone who wants to watch a movie, for instance, might receive power while someone writing an important paper might not, despite the fact that the former might value the electricity he uses much less than the latter.
Thus, there is little that NL could do about the disaster earlier this month. The real problem lies in the fact that such an incident is possible in the first place.
NL’s provincial government could address this possibility in a number of ways. First, it could open its grid to private generators. These businesses would see an opportunity to profit from the vulnerability of NL Hydro’s generating stations by offering their own power.
Alternatively, the provincial government could privatize Nalcor, NL Hydro’s parent company. Premier Clyde Wells first proposed privatizing the province’s energy utility over twenty years ago, which would have allowed it to operate more efficiently and respond to NL’s energy needs by freeing it from the political vices that pull it away from meeting its mandate. The Public Utilities Board (PUB) could continue to regulate the newly privatized Nalcor, though, ensuring that it does not use its monopoly status to boost rates. And as the recent Muskrat Falls debate revealed political discussions about energy policy tend to distract from the economic rationale for the Crown Corporation’s development decisions.
There are few reasons for not pursuing both reforms. In fact, they would decrease the likelihood of mishaps similar to this past month’s from recurring. They would also open up NL’s electricity market to new suppliers, thus, preventing the risk of shortage and allowing NL Hydro to make decisions based on the needs of the province’s residents, rather than the whims of St. John’s politicians.
Michael Sullivan is a 2013-2014 Atlantic Institute for Market Studies’ Student Fellow. The views expressed are the opinion of the author and not necessarily the Institute