Canada: US Electricity Trade: Challenges And Opportunities

Canada is the largest foreign supplier to the US of all forms of power generation – oil and gas, uranium and, of course, electricity. (More than $125B in exports annually.) There is a high degree of mutual economic dependence at stake reflecting the extent to which our two economies are closely integrated, more so in fact than any other two markets in the world.

Electricity trade, primarily hydropower from Canada to the US, is a key element of this unique market. It is cheap, abundant and clean. With the right policy and regulatory framework, we can ensure that electricity, particularly from hydro, will be an indispensable part of energy security for both Canada and the US. Most of this trade is the export of hydro electricity from Quebec into the Northeast and from Manitoba into the mid-west. The other part is the outcome of efficient load management through the North American grid.

Statistics understate the high degree of mutual economic dependence at stake in hydropower trade. The Canada-US border runs mostly east-west but the power grids are constructed north-south. In fact, the Canada-US bulk power system is perhaps the greatest example of cross border collaboration. Power generators and transmitters are uniquely dependent upon one another. But they are only as strong as the weakest link.

The electricity blackout that hit central Canada and much of the US mid-west corridor in the summer of 2003 proved dramatically – and to the surprise of many – just how integrated we are. It also pointed dramatically to the need to upgrade that grid – a challenge both governments are addressing, to some extent, with stimulus spending.

But if we hope to exploit the potential of clean power, there are a number of challenges to overcome. The 2008 Long-Term Reliability Assessment of the North American Electric Reliability Corporation (NERC) projected that over 260,000 Megawatts of new variable power would be needed for the North American bulk power system in the next decade. Even if only ½ of this capacity comes into service, it would represent a 450% increase in variable resources compared to last year. That is a staggering undertaking.

If we are going to accomplish major expansion, we will need:

  • to deploy different types of variable power resources to take advantage of complementary patterns of production; and minimize the unreliability of wind and solar power.
  • we will need to reach early agreement on common, open standards to channel research and development efforts. Currently definitions vary widely among states and provinces complicating the regulation of renewable power across the border.
  • we will also need a massive investment in new transmission lines, in advanced control technologies and in new materials to limit power loss during transmission over long distances.

These are some of the financial and technical requirements. But there are political challenges as well, including proposals in the US Congress that would exclude large-scale hydro projects from its unique definition of "qualified" sources for the national renewable electricity standard. Part of a package of legislation incidentally which offers huge, free credits to coal-fired electricity producers, the most carbon intensive by far. Absurd as this may seem, denying that hydropower is renewable explains the power of lobbyists in Washington. The reasoning is simple enough. As the American Wind Power Association stated "output from the large base of Canadian hydro projects could potentially be rerouted and flood the US market, depressing electricity prices to levels too low to support non-hydro renewables"! So hydro electricity from Canada is a "threat" to the US because it is clean, low cost and reliable.

It reminds me of the famous complaint from candle makers centuries ago claiming unfair competition from the sun. That was satire highlighting the dangers of protectionism. Those opposed to Canadian hydro imports are serious, hiding under the umbrella of "green protectionism", transparent, blatant but potentially harmful to economic reality.

Denying that Canadian hydropower is renewable power should be a serious matter, both for the US and Canada. It is serious for Americans because they will be consciously making their value-added industries less competitive by adding needless cost. It is also serious for the US because it constrains their ability to displace coal-fired power. It is serious for Canada because it would distort trade in a manner that is contrary to America's WTO and NAFTA obligations.

Ontario's "FIT" programme – essentially a "supply management system" for electricity – is, in my view, similarly flawed. Trade negotiators, I confess, abhor "supply management" systems of any kind because they are, by their nature, trade distorting. What it means, however, is that Ontario consumers will pay about 7 times more for boutique wind or small hydro power than for big hydro or nuclear, including hydro Ontario might more easily get from Quebec in a "fit" of nation-building. The Buy Ontario features of this programme are simply perverse.

The proposed merger of Hydro Quebec and New Brunswick Power is a compelling example that should bring new light to the definitions emerging in Washington and should inspire broader thinking in Canada as well. The enormous hydro capacity in Canada –and not just Quebec – offers opportunities for consumers on both sides of the border provided major future projects are not strangled at birth by advocacy groups with dogmatic views. The debate about the potential of hydro for both countries would benefit from some adult supervision!

What is also missing from the debate in both countries is the dramatic potential for natural gas – the cleanest of the fossil fuels – in meeting energy security objectives. Technology breakthroughs have made shale gas a real game-changer for the industry and should transform the debate over generating electricity. (States such as Pennsylvania and New York, traditionally importers of the bulk of their energy, could instead become energy producers.) Keep in mind, too, that gas-fired electricity, like hydro power, can pick up the slack for intermittent wind and solar sources when the wind does not blow or the sun does not shine.

The threat from cyber space against computer controls generally and electricity grids in particular is also a very serious challenge, calling for heightened vigilance from governments and industry on both sides of the border. We should not wait for an attack or a major breakdown to stimulate tighter surveillance and protection of computer systems that control critical infrastructure.

The complexity of the Climate Change debate in both Canada and the US poses a major challenge and makes our ten year hassle over acid rain look like child's play. There are acute provincial, state and regional sensitivities involved, making the prospect of a national consensus in either country extremely difficult. There are competitiveness issues – bilateral and global - that cannot be ignored. There are trends or fads of the moment that have seemingly more political appeal than tangible effect but which, nonetheless, tend to distort public opinion.

Given the complexities and the regional, national and multinational sensitivities at play, it is not surprising that finding the right solution is proving elusive. The most difficult aspect in my view is, as Jack Mintz has observed recently, that policies being proposed on climate change will affect the economy now whereas the hoped for benefits will not be evident for years to come.

Everyone involved in the Climate Change debate knows that, ultimately, industry and consumers will be obliged to pay the real environmental cost of energy, whatever the source, through Cap and Trade or a carbon tax. Newer, more fashionable forms of energy may help ultimately but they are also more costly. This, too, we all know.

Given that China, the US, Russia, India and Japan generate 55% of total Greenhouse Gas emissions, we also know that, without a consensus among these major emitters, action by others will be inconsequential. Similarly, we should know that it would be irresponsible for Canada to act unilaterally or at variance with the US on this issue. A coordinated, effective approach by Canada, acting in concert with the US, is the most sensible course. We have to get this one right.

The Clean Energy dialogue launched during President Obama's visit to Ottawa in February was a useful first step. One priority identified was the need to advance smart grid and clean power technologies and help develop government and industry-sponsored reliability standards, along with better cyber security and interoperability guidelines. Ambitious and yet limited. Vigorous support from the power industry on both sides of the border is needed to make this dialogue produce results.

In addition to closer collaboration on "smart grids", we need a high level commitment to develop smart policies, standards and regulations that will harmonize our approach to climate change in a way that delivers tangible results for our shared environment and is consistent with our mutual need for sustained economic growth.

We seem committed in principle to a collaborative approach on Cap and Trade and on the need for comprehensive and effective international agreement but there is a lot of unfinished detail, let alone commitment, outstanding.

For Canada, there is a need for greater sensitivity to the acute provincial and regional factors at play – an aspect that, in my view, the recent study sponsored by the TD Bank seemed to ignore. Without an unprecedented level of federal/provincial collaboration, we will wind up with an imbalance – a hodge-podge of laws, definitions and regulations. As every Canadian in this room knows, it is never certain whether overlapping federal/provincial interests and jurisdictions on any subject will yieldcoherence, procrastination or confusion. (Think vaccinations!)

In the U.S., the regional and federal/state factors are similarly complex and challenging. Never underestimate the political power of coal in America – the source of 50% of US electricity today.

For today's discussion, my simple objective is to try to give the electricity component in this critical debate a fair hearing and to underscore the reasons why a rational, binational approach to future needs and future supply be adopted. We should strengthen, not handicap, what are in fact natural assets. To be more credible in Copenhagen, I believe that we should add more substance to our dialogue and establish clear momentum towards a precise bilateral agreement.

Canada and the US have to get the balance right between measures that will be effective in reducing emissions while avoiding actions that would have prejudicial or discriminatory impacts on our need to sustain growth in our integrated economies.

At a minimum, we should agree to avoid border measures that would distort energy trade between us. "National treatment" is the principle that should prevail. We should 'make a virtue of necessity' and agree on how imported electricity can be credited and certified under a sensible, renewable portfolio standard. We also need to address the importance of competitiveness - nationally, bilaterally and internationally - as we press for a coordinated and effective global agreement.

Above all, we need a firm leadership commitment from governments at all levels in both countries and a serious negotiation leading to common definitions, shared targets, timetables and objectives with standards and mandates that are credible and achievable, based on science, not myths. Our mutual need for a healthy expansion of electricity trade, and energy trade more generally, should be a basic rudder in this debate.

About Ogilvy Renault

Ogilvy Renault LLP is a full-service law firm with close to 450 lawyers and patent and trade-mark agents practicing in the areas of business, litigation, intellectual property, and employment and labour. Ogilvy Renault has offices in Montréal, Ottawa, Québec, Toronto, and London (England), and serves some of the largest and most successful corporations in Canada and in more than 120 countries worldwide. Find out more at

Voted best law firm in Canada two years in a row.
2008 and 2009 International Legal Alliance Summit & Awards.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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