July 16, 2003
A Manitoba Electricity Conservation Bonanza
Manitobans are energy hogs. A new analysis by Tom Adams, executive director of Energy Probe, a Toronto-based think tank, shows that each of us uses two and a half times more electricity than the average person in other developed countries. Adams is also proposing a unique method of solving the problem, a distribution model called Tradable Electricity Permits.
Our high consumption rates are no accident. Highly politicized and dominated by a Crown monopoly, energy policy in Manitoba operates within narrow boundaries. Consumption is artificially high because prices are kept artificially low. As its owner, the Province takes little in dividends from Manitoba Hydro, exempts the utility from income taxes and guarantees low rates for its debt. The low prices indicate no Fabian miracle of public ownership. Any business which failed to recognize its cost of capital, paid no taxes and had a government-subsidized mortgage would have the lowest prices in town.
Manitoba’s high tax rates and heavy dependence on federal transfers – policy levers that give us slow economic growth –also affect this dynamic. They invite a somewhat desperate political bias towards mega-projects like large dams subsidized by low government guaranteed interest rates. We end up with policies that encourage excess generation of electricity, surplus supply, low prices and the highest consumption in the world.
To look “green,” the government makes symbolic, if ineffectual “PR” efforts to reduce consumption like the Power Smart program, with its token subsidies for upgrading windows and insulation. This recalls the perverse incentives provided by ridiculously cheap power prices in the old Soviet Union. People in public housing would simply throw open their windows in the middle of winter if things got too warm. Why bother with mundane items like thermostats or insulation when energy was essentially free?
Nominally an energy economist, at heart Tom Adams is a sophisticated environmentalist who understands the power of incentives. He is proposing a new model to reward consumers for conserving electricity. His concept is especially attractive because there is no change in status for Manitoba Hydro, which remains a crown corporation.
His model adopts a concept that has proven successful in achieving low-cost reductions in sulphur dioxide emissions in the U.S. and other pollutants elsewhere, permits with market value. Tradable Electricity Permits (TEP) would grant individual Manitobans rights to a predetermined quantity of power, with the cost of a permit determined by existing rate structures. With the size of the permit dependent on historical usage, consumers using their usual amounts of power would see no change in costs or service levels. Consumers using less than their permitted amount, however, would have the opportunity to sell their surpluses in the market. If prices rose in neighbouring markets due to supply constraints, rising fossil fuel prices, or stricter environmental rules, the economic incentives for consumers to find ways to save power would increase. In turn, this would free up more electricity for export.
Adams maintains that the potential for conservation in the Manitoba economy is so large that a large market in cross-border sales would result and bring significant dollar flows to individual consumers across the province. A reduction in power consumption down to the OECD average would give Manitoba room to increase power exports by over 184% without adding new dams. Put another way, the conservation gains from lowering energy use to the OECD norm are the same as building about 2.3 Conawapa dams, minus the inevitable time delays, environmental destruction, complicated politics and large subsidies.
TEPs would pay consumers to conserve. A large portion of residential power demand is based on electric resistance heating. With TEPs, Adams anticipates considerable switching to alternative fuels like ground source heat pumps and pelletized biofuels, as well as major moves to improve home insulation and winterize buildings.
Tradable permits would also provide a more reliable, market-based method of testing the economic value of new investments in generation. Consumers would have an interest in ensuring that their portfolio of permits is only increased if the cost of the new supply exceeds the expected value of that supply, either directly to the consumer or indirectly through the market. An expensive new dam would therefore receive community support only if the cost of power added to the system was truly below existing levels.
Manitoba Hydro’s role remains the same under a TEP regime. The utility would generate the same power from the same facilities and it would receive the same revenue as it does now. Ideally, the Province would remove hidden subsidies by consistently deducting dividends to recognize capital costs and charging a special tax levy equivalent to private rates. The only change in Hydro’s role would happen on the accounting side. The utility would track usage relative to consumer entitlements in the same way that a bank tracks credits and debts. TEPs would transfer the benefits of creating more efficient outputs in the power system to individual consumers while leaving the means of production in public hands.
Smarter and greener, with Manitoba as a world pioneer in innovative energy policy. Adams’ idea is a winner.
The Frontier Centre for Public Policy
is an independent public policy think tank whose mission is "to broaden the debate on our future through public policy research and education and to explore positive changes within our public institutions that support economic growth and opportunity."