Preventing Crisis: Newfoundland and Labrador’s Electricity Shortage Examined

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

Nova Scotia’s Energy Future

Nova Scotia’s (NS) Utility and Review Board (URB), in addition to the newly elected Liberal Party, is changing the province’s energy future.

On 29 November 2013, for instance, the URB approved the Maritime Link Project and the Liberal government introduced the Electricity Reform Act. Although the two developments are separate, both intend on creating a more cost-efficient energy market for consumers.

At a projected cost of $1.5 billion, the Maritime Link will transport energy from Newfoundland and Labrador’s (NL) Muskrat Falls region via subsea cable to Cape Breton, NS. The URB is convinced, however, that the project’s long-term benefits outweigh its short-term costs. Although it will take years before electricity begins flowing into NS, the project’s long-term benefit to the province is unmistakable: the newly amended agreement, indeed, provides a secure, renewable, and cost-competitive source of energy to Nova Scotians.

In addition, NS’s Liberal government introduced the Electricity Reform Act, which aims to increase efficiency in the province’s energy sector and reduce prices in the consumer market.

The cost of electricity in NS, for instance, has increased over this past year and NS Power, the province’s utility, continues to rely on nonrenewable energy resources, such as coal, which is likely to further increase prices. This new legislation, however, will create an open market for renewable energy manufacturers to sell their electricity directly to consumers, not only encouraging efficiency, but also affording the public a choice to consume sustainable and environmentally friendly energy. If passed, the legislation dictates that the URB will control licensing and NS Power will continue to provide energy to the public without refusing services.

Similar to the Maritime Link Project, however, it will take a considerable amount of time to realize the benefits of creating an open market for renewable energy.

There are, of course, no guarantees regarding the financial benefits to consumers. The uncertainty is due largely to the unknown administration and operating costs of such a system. With the right measures in place, though, the government is confident that the change will prove harmless to everybody involved.

Together, the Maritime Link project and the Electricity Reform Act have the potential to transform the province’s energy market for the good of both consumers and the environment. Moving toward a more competitive electricity market, for instance, will benefit Nova Scotians by ensuring that they are not paying above fair market value for electricity. Furthermore, the Maritime Link and the Act reinforce one another by securing a long-term source of renewable energy for the province, while also creating equitable means of distributing it to the public.

Either way, these developments demonstrate a need for improving the province’s electricity market, which the government is taking seriously by embracing environmentally friendly competition.

Rachel Lowe 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