March 29, 2024

North American Electricity:
Enhancing Opportunities

by Francis Bradley, Vice-President, Canadian Electricity Association, bradley@canelect.ca
Each year, the Canadian Electricity Association brings together industry executives and policy specialists to review the state of the North American Electricity market and develop policy proposals aimed at improving market functioning, reliability and security. While this year's forum has been delayed due to international events, CEA nonetheless released the policy paper it prepared for the annual Washington Forum.

The North American electricity industry – traditionally perceived as a model of stability in both Canada and the United States - is in a state of significant uncertainty. There are three fundamental causes for the current situation: lack of clarity around market rules, environmental challenges, and the very poor investment climate.

The CEA North American electricity policy paper takes these three causes for uncertainty as context and justification for its principle thesis. That thesis, stated simply, is that the evolving North American market is increasingly a regionallyintegrated one, and that continued and growing regional integration will reduce uncertainty. While increased regional integration alone cannot solve all the problems that currently plague the industry, it can contribute to greater efficiency, increased reliability, more predictable regulation and policy, lower costs and greater environmental benefits overall, thereby increasing investor confidence and reducing uncertainty in the marketplace.

Uncertainty in the Marketplace
The North American electricity industry is in a state of uncertainty unlike anything it has experienced in its over 100 years of existence.
With respect to lack of clarity around market rules, the model of state-owned or sanctioned integrated monopolies, while still the standard in a number of jurisdictions, is undergoing a change at the hands of state/provincial and federal governments and regulators. New sub-sectors – independent generation, merchant transmission, and power marketing entities – are emerging at a growing rate. This change in the make-up of the industry has required changes in the manner in which regulators treat the industry. In fact, at times, regulators have helped to facilitate the evolution of the marketplace through various measures.

Recent regulatory activity, however, has contributed to uncertainty for the industry. The U.S. Federal Energy Regulatory Commission ("FERC") issued a notice of proposed rulemaking last year to establish standard market design rules; at present, it is unclear when the final rules will be issued. FERC is also taking steps to encourage regional transmission organization (“RTO”) development and participation, but the scale and scope of such RTOs remains undetermined. The transition to competitive markets has been uneven with higher cost jurisdictions moving earlier and further. And while competition at the wholesale level has been most widely embraced, several provincial and state decision-makers have expressed concern regarding the implementation of competition in retail electricity markets. In fact, a few have taken steps to either slow or stop the movement to competitive markets in their respective jurisdictions.

At the same time, electric utilities are feeling the pressure of environmental challenges unlike anything to date. In Canada, this is especially the case as a result of the Government of Canada’s ratification of the Kyoto Protocol. That decision leaves Canada obliged to reduce greenhouse gas (“GHG”) emissions by six percent from 1990 levels for the period 2008-2012; the Canadian electricity industry will face an onerous task to help meet that goal. In the United States, while the Bush Administration has chosen to pursue a voluntary approach that focuses on improving the carbon intensity of industrial processes, rather than Kyoto, several U.S. States have enacted legislation to control GHG emissions. Above and beyond GHG emissions, companies on both sides of the border anticipate increased reduction requirements for other air emissions, including nitrous oxides (NOx), sulphur oxides (SOx), mercury, and particulate matter.

Apart from air emissions, pressures to “green” generation portfolios are increasingly evident through proposals for renewable portfolio standards and restrictions on the building of new conventional generation projects. Moreover, and not to be underestimated, obligations with respect to the protection of species and habitat – fish, birds, and other wildlife – are more and more onerous.

Lack of clarity around market rules and environmental concerns are compounding the third cause for market uncertainty: a very poor investment climate. Investors have been wary of investing in an industry affected by the Enron debacle, the Telecom market deflation, and the continued fallout from September 11th. This lack of investor confidence is a serious challenge to the construction of needed generation and transmission projects and could affect meeting the future needs of customers.

These regulatory, environmental and investment issues are all cause for concern. They are also evident across the North American marketplace. Equally evident across the market is an emerging opportunity that, CEA is convinced, can make a material contribution to moving past such environmental and investment concerns: the potential for efficiency gains from well functioning regional markets. The North American electricity market is increasingly characterized by regionally integrated sub-markets, and continued growth in scale and scope of regional integration is part and parcel of a strategy to move towards greater efficiency. Enhancing existing cross-border cooperation will help deliver continued economic and environmental benefits to the various regional electricity markets in place today, benefiting investors in the industry, the environment, and ultimately consumers across the continent.

The Integrated U.S./Canadian Electricity Market
A remarkable bi-lateral trading system has evolved between Canada and the United States over the last half century. 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 growing exports and imports.

The diversity of our systems -- the different balances of the various conventional and emerging technologies in our regional generation mixes and the differing market demands region by region over days, weeks, and seasons -- has prompted a level of trade that benefits electricity consumers across the continent. When linked across the national 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 involved.

Details of the Integrated Market
Cross-border trade enables market participants to take advantage of diversity between the Canadian and U.S. electricity systems. The diversity and complementary nature of our systems is first demonstrated by the different balances of the various conventional and emerging technologies in our generation mixes. These differences primarily reflect availability of resources, as different geographic regions have access to different fuels.

Electricity is now a key and growing part of the larger energy trade picture between the two countries, and it is increasingly two-way. Electricity trade between Canada and the United States 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 7-9 percent of production. Electricity export shares have varied substantially by province, from as low as 1-2 percent to as high as 30 percent. Overall, Canadian exports have remained relatively stable over the past four to five years. However, electricity imports to Canada have increased significantly over the last several years. The result has been a continuously growing trade and investment relationship in power coast to coast, 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 markets continue to open, the importance of cross-border trade will only increase. Restructuring of the electricity industry remains an ongoing process in both Canada and the U.S. As with states in the U.S., some provinces in Canada are pursuing a restructuring agenda at a different pace compared to others. At present, approximately 50 percent of Canadian retail customers are in completely open markets (although the Ontario government has capped retail electricity prices to low volume customers until 2006).

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. For example, 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 need for generating facilities and results in lower overall generation costs to consumers. Moreover, electricity companies can derive environmental benefits through such efficiencies -- for instance, coordinating on exchanges between “must-run” fossilfuel fired generation facilities and hydroelectric facilities. This involves a generator selling offpeak power to a hydro generator, allowing the latter to “bank” energy (in the form of stored water) in its reservoirs. During periods of high demand, the hydro generator releases enough water to meet its own needs and to assist in meeting the peak demand of its partner in this diversity change, thereby avoiding both emissions and higher costs from fossil peaking units. Such opportunities exist in each of the regional markets across the continent — western, central, and eastern.

Efficiencies in regional systems management can also be achieved through participation in or coordination with regional transmission organizations (RTOs). RTOs present an opportunity for the effective utilization of existing transmission infrastructure. Canadian utilities are actively exploring participation in RTOs as an approach for optimizing the management of their respective transmission systems.

Imports and exports balance system usage and provide reliability at the various transfer points along the U.S./Canada border. Canadian electricity plays an important role in serving peak demand in a number of U.S. regional markets along the border, and even helps to secure reliable service as far south as southern California. In addition to this short-term reliability assistance, two-way trade can help to secure adequate electricity supply in the United States in the future. Increases in transmission capacity across the border are essential for an increase in electricity flow between markets in the United States and Canada. Provided that the barriers and disincentives to transmission investment are removed, and the transmission grid is operated in a manner that accommodates international exchanges, reliability in electricity supply will increase as a result of this integration of markets.

Moreover, the integration of U.S./Canadian electricity markets will allow for the coordination of approaches to more effectively achieve reductions in the environmental impact of electricity facilities. No one technology is universally applicable across a national marketplace -- fuel availability, geography, and a host of other factors help determine the generation mix. The objectives of reliable, affordable, environmentally preferable power require that all technologies be available. In fact, 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.

Finally, the integrated market enables Canadian and U.S. participants to effectively work together to safeguard the North American electric grid against physical and cyber threats. By working through the North American Electric Reliability Council, Canadian and U.S. utilities and other market participants are able to coordinate responsibilities to ensure effective critical infrastructure protection of the electric power sector.


CEA believes that enhancing existing cross-border cooperation in the above areas will help deliver continued economic and environmental benefits to the various regional electricity markets in place today, benefiting investors in the industry, the environment, and ultimately consumers across the continent. Maximizing the opportunities offered by our integrated markets must be part of the strategy to help secure a healthy electricity industry for the future.

The North American electricity industry, faced with a changing industry and evolving market rules, important environmental challenges, and a distressed investment climate, is experiencing a crisis of confidence. Nevertheless, the North American electricity system is among the most reliable in the world and electricity consumers generally have access to energy at reasonable prices. The integration of the North American electricity market offers both U.S. and Canadian market participants opportunities to enhance cross-border trade, increase system and market efficiencies, and improve environmental performance. By enhancing this integrated market, participants will help to lessen the uncertainty in the present market and secure a healthy future for the North American electricity industry.

If success is to be realized and the electricity industry is to play its full and vital role in powering the North American economy in the 21st century, the following must occur:

  • Policy makers must embrace the vision of large, non-discriminatory, bi-national regional markets;

  • Regulators must coordinate and collaborate in setting clear and certain rules respectful of and accommodating jurisdictional realities;

  • Investors must see reasonable rates of return.

Regionally integrated markets are a reality in the Canada-US electricity relationship. Recognizing these natural markets, and identifying opportunities to build on them, offers significant promise for future growth, for improved environmental performance, and for the continuing reliable supply of electricity to consumers across North America.