Markets, Electricity Prices and a Culture of Energy Efficiency

1
Markets, Electricity Prices and a Culture of
Energy Efficiency

• Bryne Purchase
• School of Policy Studies
• Queens University

2
Presentation Outline

• The role of energy and energy prices in our
  culture
• Why markets and prices are the preferred policy
  tool to change our culture
• Why the current Ontario electricity pricing
  policy is still perverse
• Outline a pragmatic alternative program to use
  prices and incentives to drive change.

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Culture Habit, the Capital Stock and Industrial
Mix

• Bryne Purchase definition of culture
• a system of ingrained beliefs and values that
  support habitual behaviors and,
• also reflected in the machines and buildings a
  society makes (its capital stock) and in the work
  it does (its industrial mix).
• Behavior, the existing capital stock and
  industrial mix reinforce one another through time
  permeating all social, economic and political
  relationships ie they become a way of life, a
  culture!
• Canadas culture, as Harold Innes understood, is
  profoundly dictated by the production
  technologies of our resource industries, our
  geography and our climate.
• But what lies behind even that?

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Markets, Prices and Culture

• What do markets do?
• establish prices which are a true indication of
  the relative scarcity (ie.value) of a resource in
  society.
• What do prices do?
• motivate behavior determine the nature of the
  capital stock (machines, buildings) and the
  industrial mix (ie. our work)
• In short, markets and prices dictate culture and
  can drive cultural change - modest in the short
  run, but in the long run very pronounced
  (approaching or exceeding unit elasticity).

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Energy and North American Culture

• To quote Marshall McLuhan, The medium is the
  message. And the medium - the currency of our
  modern culture - is energy!
• What characterizes North American culture?
• High energy consumption 6.9 of worlds
  population using 30 of the worlds energy
  supply.
• What is Ontarios culture, especially in
  respect of electricity use? The next chart
  illustrates.

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Ontarios Culture Electricity Consumption Per
Capita
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Energy Intensity versus Energy Efficiency

• Our electricity intensive culture reflects a long
  history extraordinarily low prices! Prices are
  still only a fraction of those in Western Europe
  or Japan.
• But high energy intensity does not necessarily
  indicate social waste or profligacy.
• Social waste should be our target, not simply an
  ideology of conservation for its own sake - as
  long as electricity prices reflect true social
  value!!!
• But herein lies the rub!!!

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Efficacy of Market Prices in Changing Culture

• Moral suasion, education, indoctrination is
  inefficient because it is too ineffective.
• Legislation command and control regulation is
  more effective, but still inefficient because it
  reflects
• Centralized choice and political control
• Inflexible and bureaucratic and
• Potentially costly to monitor and enforce.
• Price mechanisms should be the preferred policy
  tool because
• Administratively simple and require no extra
  bureaucracy
• Universal coverage and decentralized, individual
  choice and,
• Economically efficient when prices reflect true
  social values, including all costs of production.
• But.

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Political Limits on Ontario Electricity Prices

• Evidence is that politicians do not like using
  price as a policy tool, except to freeze them or
  reduce them
• Through most of the 1990s the price of
  electricity in Ontario was frozen.
• The market opened in 2002, prices rose and the
  market closed shortly thereafter, with prices
  rolled back to 2001 levels.
• There are still a plethora of political
  constraints on the price of electricity in
  Ontario
• Maximum market clearing price
• Imports do not set the Ontario price
• OPGs baseload nuclear and hydraulic assets are
  regulated using unrealistically low rates of
  return on equity
• 85 of OPGs unregulated production is subject
  to a further 3 year revenue cap of successively
  4.6, 4.7 and 4.8 cents/kwh and,
• Environmental impacts of S02, NOX and C02 are not
  fully priced into the cost of electricity
  produced from fossil fuels.

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Political Limits on Electricity Prices

• These pricing limits represent billions of
  dollars of subsidy annually to Ontario consumers
  of electricity
• This subsidy encourages the consumption and waste
  of electricity, even as
• Ontario is facing a potential supply crunch and,
• Government touts conservation as a primary goal
  and,
• Government stresses the importance of consumers
  paying the true price of electricity!
• Why?

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Political Limits on Electricity Prices

• Two major arguments against using prices to drive
  a culture of energy efficiency
• impact on big industrial users and,
• Impact on low income people.
• Strange bedfellows but joined under the
  political banners of job protection and equity.
• Irony is that subsidizing electricity users is
• highly inequitable and,
• bad industrial policy for maintaining
  competitiveness and jobs corporate welfare can
  become a culture of dependency every bit as much
  as social welfare.
• Can policy be different? Yes it can!

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Conclusions Using Price to Promote a Culture of
Energy Efficiency

• I recommend the following program
• Allow imports to set market prices
• Raise the regulated rate of return to OPG nuclear
  assets to reflect the true social costs/risks of
  its operations
• Allow OPGs baseload hydraulic assets to earn
  market prices
• Remove the revenue cap from OPGs non-regulated
  assets
• Impose appropriate fees for emissions (including
  carbon emissions) from fossil fired generating
  stations and,

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Conclusions Prices to Promote a Culture of
Energy Efficiency

• I recommend the following program
• Use the additional OPG and tax revenues
  (billions) to
• Reduce taxes and enhance transfers to low income
  Ontarians
• Increase targeted job training and relocation
  assistance in affected industries and
• Fund large tax benefits to corporations who can
  demonstrate that they lead their industry
  globally in energy efficiency.

14
Conclusions Prices to Promote a Culture of
Energy Efficiency

• Not a novel idea to raise energy prices and
  recycle the revenues. But never, in my
  experience, rigorously tried!
• What it lacks is an implementation program
  designed to reduce political risk. Recommend
• Gradualism raise price automatically every
  quarter over a specified period to the target
  level (true market price).
• Transparency keep the additional revenues in a
  dedicated fund out of the hands of OPG or the
  Ministry of Finance.
• Clear winners and commitment - promise, in
  advance, how the estimated additional revenue
  will be used.
• Awaits a political entrepreneur who wants to
  lead, and not merely appear to lead, the parade!