IEA Commends Canada’s Competitive Energy Markets and Calls on the Federal Government to Strengthen its Efforts in Shaping Consensus on Important Energy Policy Issues

(Paris) — 31 January 2005

“Competition in the Canadian energy markets is well advanced benefiting the consumers of Canadian oil, gas and electricity in Canada, the US and outside North America” said Claude Mandil, Executive Director of the International Energy Agency (IEA), today at the launch in Ottawa of "Energy Policies of IEA Countries – Canada 2004 Review."

Mr. Mandil said further that “The IEA recommends the federal government to strengthen its efforts in building consensus on important energy policy issues. Climate change mitigation remains a big challenge for Canadian energy policy in the coming years”.

“Energy is the conerstone of the Canadian economy, and developing our energy resources in a sustainable way is paramount to ensuring security and prosperity,” said the Honourable R. John Efford, Minister of Natural Resources Canada. “I want to thank the IEA for the considerable effort it has put into reviewing Canada’s energy policies. Its recommendations will help us as we address the many opportunities and challenges ahead through cooperation with the provinces, territories and our stakeholders.”

Energy Policy
Canadian energy policy has significantly contributed to the development of the energy sector, which is a major driver of Canada’s economic growth and well-being. As a large exporter of energy, Canada is an important contributor to North American and global energy security. Canada has demonstrated a strong determination in implementing reforms to improve the performance of its energy sectorand it is a leader in several fields of energy technology.

Canada’s constitution provides for provincial jurisdiction over energy matters within their borders, while the federal government is responsible for international and inter-provincial issues and the broader national interest. Hence, it is a challenge to reach the delicate compromises which satisfy all interests on such specific topics as climate change mitigation towards which Canada is internationally committed. Recognising the extensive efforts by the federal government to achieve consensus on the goals and means of energy policies, the process of intensive dialogue and consultation between the federal government and the provinces should be strengthened further. The issues to be covered by such a process might include: climate change mitigation, streamlining regulatory regimes for new investment in energy infrastructure, expansion of inter-provincial electricity interconnections, electricity market reforms and R&D.

Climate Change Mitigation
The IEA commends the federal government for its efforts and achievements in formulating the Climate Change Plan for Canada in November 2002. Although Canada still displays a high level of energy consumption per unit of GDP produced, Canada has to be commended for its efficiency improvement over the past few years. CO2 emissions projections and analyses of impacts of mitigation measures are essential. Canada’s excellent measuring and monitoring of energy efficiency should now lead to more ambitious sectoral efficiency goals for transport and other sectors, as a solution to reducing emissions. However, living up to Canada’s commitment to Kyoto and at the same time ensuring continued growth together with transition to a less emission-intensive economy is the biggest single economic and political challenge for Canadian energy policy in the coming years. Curbing GHG emissions is all the more challenging as Canada’s emissions are growing along with its production and exports of energy which consume large quantities of fossil fuels. Stronger cooperation between the federal and provincial stakeholders is essential to an effective climate change policy.

The emission trading system envisaged to help large emitters reduce their emissions is a move in the right direction. However, the trading system is yet to be implemented and it remains to be seen whether industry can achieve its emissions reduction target. Reflecting the relative concern of the industrial sector competing with US industry not bound by Kyoto Protocol, the carbon price to Large Final Emitters under the covenant and trading scheme is capped. The federal government will need to make sure that the level of this cap does not weaken the incentives for companies to invest in GHG emissions mitigation measures. Linking the planned emissions trading system with that of another region (e.g.: European Union) is one way to reduce the carbon cost. Investigating further the potential of low emissions technology, and in particular CO2 capture and storage, is also essential.

Electricity Market Development and Security of Supply
Electricity in Canada is under provincial and territorial jurisdiction except inter-provincial trade and international trade with the US. Nevertheless, with a view to improving the overall competitiveness of Canadian electricity industry and hence the Canadian economy, the federal government has an important role to play in several key policy issues.

With growing interconnection between Canada and the US, more co-ordination and joint actions between the federal governments, provinces and their counterparts in the US is imperative with a view to ensuring reliability of electricity supply. The grid failure of August 2003 demonstrates such need, irrespective of the origins of the failure.

As security of electricity supply in certain provinces is better ensured through cooperation with neighboring provinces, more investments in interprovincial transmission network would facilitate the development of reliable domestic electricity markets. When limited to provinces’ boundaries, the supply-demand balance assessment cannot lead to cost-effective investment decisions. Whilst a coast-to-coast high voltage link does not seem to be economically viable, a larger integration of regional power systems is worth investigating. Further development of inter-provincial and international electricity trade could ensure effective competition. Close co-operation between the federal and provincial governments is a prerequisite, and the IEA welcomes the Canadian government’s ambition to increase this.

While the provinces have been leading in the formulation and implementation of electricity market reforms, progress differs among provinces according to their specific circumstances, such as the potential for competition, potential stranded assets and interconnections with other jurisdictions. Reforms attempts have coincided with periods of high prices, increasing volatility and generating consumer dissatisfaction in some provinces, as well as negative incentives to investments. Canadian governments should share such experiences in the federal and provincial co-operation process and a consensus on effective mechanisms to mitigate the price volatility could be explored.

Nuclear
Canada’s nuclear power program is at a critical point in its history. Whilst newer plants are performing well, some of the older plants are experiencing significant problems in refurbishment. For example, the refurbishment of Pickering A Unit 4 resulted in significant costs and schedule overruns. A Canadian review has identified many problems related to project management, and a number of follow-up actions are underway.

Canada should not forego potentially attractive nuclear generation. The federal government should explore barriers to the attainment of maximum economic generation from existing nuclear plants, consistent with safety considerations. It would be appropriate to consider promoting more competition in CANDU plant operation and refurbishment. Noting Canada’s wide range of energy sources for the generation of electricity, the federal government should evaluate the costs and benefits of deploying new nuclear plants in the future, in particular with regard to the environment and the benefit of further diversification of power generation in Canada. Business studies and assessment of the relative merits of different technologies available in the world are important in assisting the decision-making of Canadian utilities.

Oil and Gas
To further tap the potential of domestic oil and gas resources, exploration of areas under moratorium should be examined, taking the relevant measures to protect the environment. The production of unconventional oil from oil sands offers significant potential whilst its environmental impacts need to be minimised through technology developments. Although the regulatory environment in Canadian gas sector has been stable, streamlining of the pipeline approval process should be explored.

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