North American power utilities are grappling with a growing crisis and dramatic changes are needed.
Nearly all the utilities on the continent (privately held or Crown corporations), and even some Brazilian hydroelectric companies that trade on the New York Stock Exchange, have negligible or outright negative free cash flow.
The reasons should concern Canadian taxpayers and ratepayers.
Power utilities across the world face new challenges, nearly all of which have to be met with larger amounts of capital, including: the push towards natural gas or renewables fuels (or face penalties such as carbon taxes); adding new capacity and flexibility to handle more unplanned intermittent solar, wind and other renewable capacity from other producers and former consumers; losing customers to their own generating capacity (solar or gas, usually); ‘smart grid’ and other interconnection and expensive new long-distance transmission requirements (such as high voltage direct current, or HVDC); independent merchant power competition; energy conservation requirements to reduce demand; slow growth in commercial and household demand with increased demands for reliability; improving security (from cyber attacks).
All of these demands entail substantial increases in capital expenditure, over and above what’s required to maintain normal legacy service.
And additional self-inflicted concerns are unique to Canada: the expansion of vast, ill-considered hydro projects by three Crown-owned power companies.
The demand for capital can be met in four fundamental ways: increasing fees to consumers, businesses and institutional customers; borrowing money; lowering dividends paid to shareholders; issuing more shares.
The last two are generally not available to Crown corporations. However, in the past many such entities have cut or eliminated payments to provincial governments, and received injections of capital from their government masters (paid for by taxpayers).
All of these threats will be met by private-sector utilities in a variety of ways: rate increases (approved by government boards), juggling of peak-demand, bulk or conservation pricing, some borrowing, the occasional share issue, more careful prioritizing in capital budgeting, restraining dividend growth, and mergers to reduce overhead costs and increase scale.
Private investors, then, will take their own risks and sometimes face losses.
Eventually, though, change is needed to the entire rate-regulation architecture and established interconnection arrangements. The system needs to be entirely reformed.
It’s becoming clear that the existing system can’t deal with changes to the energy industry, new technology, and new sources of supply and demand.
But it’s not obvious what will replace it.
A place will have to be found for all the independent merchant producers and customers making their own arrangements, and to make intermittent suppliers pay for their lack of dependability.
The risk to taxpayers in this climate is growing. Crown firms are slow to adapt to new realities such as abundant, cheap shale gas. And the number of customers opting out of the grid is growing. So Crown operations face growing debt.
The capital demands for the Crown utilities alone are expected to be in the tens of billions of dollars over the next decade, and consumption rates are set to rise, even though natural gas, uranium and coal prices likely won’t.
Hard thinking is needed, particularly when it comes to Crown corporations. Provincial governments should seriously consider selling their power generators to remove the risk to taxpayers, or breaking them up to foster more flexibility, original strategy and speed of adaptability.
The power crisis will only evolve and worsen if tough choices aren’t made soon.
Troy Media columnist Ian Madsen is a senior policy analyst with the Frontier Centre for Public Policy.