Failed Electricity Policies Could Impact Prices

High-profile failures, such as in Ontario and California, have added to an uncertain electricity market investment climate, scaring off a generation of investors, and have curbed the enthusiasm for needed market restructuring in North America, the board says in a recent report. "Policy uncertainties surrounding the future of restructuring, climate change and air quality have increased the risks for investment in the electricity sector," said board economist Gilles Rheaume.

"The unprecedented uncertainty in the electricity sector could lead to supply shortages, causing higher prices and rolling blackouts in some jurisdictions."

However, the report argues that some jurisdictions have successfully, if painfully at first, restructured their electricity markets, attracting new investors and saving consumers money.

"The policy uncertainties in the California and Ontario markets are well-publicized, but jurisdictions that successfully restructured their markets include the United Kingdom, Texas and the Pennsylvania/New Jersey/Maryland region.

"In Canada, Alberta has experienced a long and painful transition to competitive markets, but reforms have attracted new market entrants, convinced private investors to purchase publicly controlled assets, and produced lower wholesale prices for electricity."

The available evidence shows that reforms have been challenging but, on balance beneficial, leading to increased efficiency, the report states.

"Efficiency gains have generally been passed on to shareholders, employees, and consumers," it adds.

It concedes that some groups of consumers who had been subsidized under regulated monopolies ended up paying higher prices, and jobs were lost as former monopolies faced competition.

However, consumers on average have benefited from lower prices and more choice of suppliers and service, it says, and jobs have been created by the entry into the market of new competitors.

While there is no single right way to deregulate the electricity market, the goal should be to align the price of electricity with its true value to achieve the lowest sustainable price, it says.

"When restructuring is introduced, the price of electricity can become volatile in the short term," the report cautions. "Policy makers and regulators should recognize the importance of educating consumers about the market and of appropriately managing expectations about electricity prices."

The Ontario government, for example, scared off investment by changing its plans radically.