The Green Energy Act: Green Energy Unbounded

On February 23, 2009, the Minister of Energy and Infrastructure introduced the Green Energy and Green Economy Act, 2009 for first reading in the Ontario Legislature.  The Green Energy Act has broad policy implications for energy and environmental policy.  The attached commentary addresses the impact of the Act on public utility regulation in Ontario.  The author looks forward to feedback on this commentary and also encourages comments on other impacts of the Green Energy Act.

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Comments

[David Poch]

A thoughtful commentary largely on the mark, but I must differ somewhat with your observation: "where the OEB could once entertain the difficult, but constrained debates of environmental and resource economics – measuring externalities, etc. – it now must consider cultural, social and ethical influences on the production and consumption of electricity." I would argue that the OEB could but didn’t entertain those difficult environmental and resource economics debates such as externality measurement. Indeed, the OEB has been less than expansive in its consideration of even the financial costs and benefits borne by ratepayers as a group. I would submit that the GEA is in part a response to this narrow application of economics which has been prevalent at both the OEB and the OPA. As such, depending upon the regulations still to be published, the GEA may have the effect of removing some, though not all, of the more difficult debates from the OEB.

The case of conservation spending you cite is illustrative of the OEB’s timidity and the gap that the GEA addresses. Arguing for low conservation spending, Board Staff took a narrow view of economics that looked only at utility costs and benefits. The Board’s rejection of that as ‘too narrow’ was not an acceptance that environmental externalities must be counted. Rather, it was an acceptance that to some extent the ratepayers’ financial costs and benefits (not captured on the utility balance sheet) must be considered. In the case of conservation the Board adopted an approach that gives some limited consideration to the financial costs and benefits borne by the utilities’ customers – i.e. the ratepayers that the OEB is charged with protecting. But even within the relatively narrow calculus of ratepayer funded financial costs and benefits the Board would not (or felt it could not) require the utilities to pursue all ratepayer cost-effective conservation – i.e. to pursue the least cost solution. The Board was likely dissuaded from that path by the traditional regulatory distaste for the cross-subsidy that it would entail and due to a reluctance to see electricity rates rise even when energy service bills would fall due to reduced use. Hence there was a need for the government to step in and do the math just to more fully recognize those broader economic (i.e. financial) costs and benefits. Having said that, the GEA hopefully will go farther than merely a broader financial accounting approach and will be driven by the deeper ecological imperatives that we might all agree are properly within the role of government to consider.

Under the GEA the government takes up that role via regulations and directives that will set tariffs and economic connection tests reflecting government’s view of the financial costs and benefits and the value of externalities, both environmental and social, including the difficult to monetize value of doing our share to avoid climate change and health risks. This was already happening in the context of the IPSP and the coal phase out regulations where government dictated many of the resource choices rather than leaving it up to the OEB to regulate within the confines of its traditional, narrowly defined, economic efficiency approach. The OEB’s task will be to ensure adherence to the new rules of the game and encourage efficiency in exercising the choices left open (few though they may be). Of course, in some cases those new rules do dramatically change the OEB’s role from limiter to catalyst, as you suggest. Part of that role will be to prod reluctant players into the new paradigm. This will indeed be a challenging shift of gears.

David Poch

[Ben Greenhouse]

I have to say I disagree with the dichotomy suggested between "economic efficiency" and "green economics" (the key point that seems to have been picked up by the National Post). My feeling is that an scenario that might be true on a small scale is being incorrectly assumed to be equally true on a much larger scale. The definition drawn from the encyclopaedia talks about the theory of economic efficiency where

"it is sometimes rational to deplete a resource fully; the attainment of economic efficiency through the internalization of externalities does not imply the achievement of environmental sustainability - i.e., the ability of the natural environment to continue to support the human activities that impact on it"

So sure, pulling all the iron out of a mountain (as an example) may, while damaging to the mountain and its nearby inhabitants, be economically efficient even with externalities internalized (of course, it's a question of whose economy you're talking about - people who don't see any benefit from the ore extracted, but suffer costs from the externalities, may not think it's efficient). The impact on the larger natural environment and its processes (broadly speaking) are pretty slim, so it is conceivable that the value of that iron to life as we know it might outweigh the local issues created by its extraction.

However, with renewable energy and global warming we're talking about externalities impacting large areas: cities (smog), countries (health care costs), the entire biosphere (climate change), so it's a bit harder to theorize that there's an economically efficient rationale to keep "paying the cost" of those externalities.

While the whole notion of internalizing externalities is fraught with problems because of the difficulty in valuing those externalities, in the case of large externalities (like climate change) the conceptual value of those externalities (by definition) has to equal the cost of the concomitant reduction in the ability of the natural environment to continue to support life as we know it. Isn't the entire point of valuing and internalizing externalities to capture the value of the harm being done to the natural environment? And what is that value except the ability to continue to support us? Putting it into dollars is almost impossible, but conceptually I think that any idea of economic efficiency that honestly attempts to put a value on global environmental processes is going to find that it's not economically efficient to destroy those processes.

I'd challenge someone to make a rational argument that it IS economically efficient to NOT deal with climate change. Unless the person making the argument only takes a short term view and refuses to take a longer term view, I don't think this argument can be made.

The question at the root of this whole thing is this: are we overpaying for the external costs avoided through all these benefits granted to renewable energy?

That's a tough question to answer because of the difficulty in valuing those externalities. A very radical argument could be that since the services provided by the biosphere aren't at all fungible, that the cost of destroying them is almost immeasurable. Extend that logic to its extreme, and whatever you have to pay to get you to a GHG neutral economy is an efficient cost.

Of course, I suppose the whole notion of climate change and the impact of renewable energy on that issue could all be challenged, but I had to start with some base assumptions.

[John Green]

Your articles is sublim. I like reading you. Keep on! Thanks to go green energy: http://www.windpowercost.org