A net zero economy^[1] by 2050 would require Canada’s electricity demand to grow by more than double. For rapid grid expansion to meet our energy goals, we face a trilemma in managing key priorities within a finite resource base. Ensuring reliability, affordability, and sustainability is a balancing act as policy perspectives, market trends, and consumer preferences stress these factors in different ways.

The energy transition is in large part policy-driven; thus, current policy preferences are uniquely impactful on the way utilities can manage the energy trilemma. Current governments have focused substantially on sustainability as the core tenet for their funding and regulatory pressure on the electricity sector, in the process subordinating what should be considered the fundamental consideration for future energy planning — reliability. Electricity Canada’s 2024 regulatory report Always On^[2] outlines this challenge, taking a critical look at investment barriers for reliability assets and the essential role reliability plays in grid modernization and expansion.

Electricity providers have not forgotten the importance of reliability. It is an ever-pressing issue that is consistently integrated into modelling and investment planning, but diverging priorities between utilities and policymakers, as well as a rapidly shifting energy landscape, have led to suboptimal and stagnated relationships between those utilities and their economic regulators.

To facilitate the energy transition, provincial energy regulators and federal policymakers must establish greater coordination between themselves and utilities, as early industry engagement is essential for investment at the required rate. While the electricity sector is under provincial jurisdiction, federal net zero policy has looked to shape the sector, creating conflicting priorities. Early and good-faith engagement in the design of these federal climate policies can reduce some of the inadvertent effects and prepare the sector to coordinate between provincial energy regulators and utilities for necessary investment strategies to maintain system reliability.

The Canada Electricity Advisory Council’s recent report^[3] also outlines the need for cross jurisdictional coordination. It states that provinces and territories should “include a carbon-neutrality or net-zero objective in the mandates and priorities of their…relevant agencies”^[4] to align with policy at the “federal level [and] to coordinate efforts toward a common goal.”^[5] But, as a lot of top-down policy drives this transition, there must also be sufficient positive federal incentives. Some of these incentives have taken the form of investment tax credits (ITCs), but at this point, there remains a great degree of misalignment between federal mandates, provincial regulatory priorities, and the utilities capacity to manage a changing electricity landscape. These organizations must be coordinated at all levels to support the effective implementation of net zero goals, which will require substantial reliability investments to support associated demand growth.

An Electricity Canada report in 2023, Back to Bonbright,^[6] assessed the fundamental principles behind rate designs for a changing and ever-electrified economy. Economic regulation principles in Canada are based on the work of Dr. James C. Bonbright, who outlined the importance of establishing a revenue requirement, fair apportionment of costs among customers, and optimal efficiency through rate design. The findings of this report not only demonstrate the relevance of these principles today but also the need for regulators to interpret the concept of “used and useful” in a broader way that best interacts with current policy pressures. For the cost of an investment to be integrated into the rate base, the investment must prove to be actively used and useful to the ratepayer, which in some cases undermines necessary reliability investments for future grid hardening. However, this framework can be adapted and consistently applied to include relevant reliability investments for forecasted load burdens. Without this support for investment, current standards of reliability cannot keep up with grid expansion.

Prudently incurred net zero investments require alternative Benefit-Cost Assessments (BCAs). Non-traditional utility investments can be supported through the establishment of a framework that allows varied BCAs to be used across different project circumstances. Though some regulators are exploring alternative forms of BCAs, there is not yet a consensus regarding their application. Utilities face severe capital constraints when it comes to reliability investments, as rigid interpretations of the “used and useful” principle undermine holistic investment for grid expansion. These tailored assessment approaches can reduce the capital burden utilities are facing in trying to maintain system reliability.

The energy transition requires a significant amount of investment, part of this can be achieved by modifying rate design to better allocate investments in decarbonization, reliability, and grid expansion among the customer base, but further public and private capital is also needed. Public support can come in the form of targeted subsidies, but also as a broader shift in the regulatory framework to incentivize net zero investment. Utilities are generally risk-averse in investment, due to the nature of their business model, so regulatory clarity is essential for keeping the cost of capital as low as possible. A policy structure that ensures returns, through contracts for difference or targeted earning opportunities for critical initiatives, increases return certainty and creates a preferred investment environment. Ensuring consistent returns on investment is essential for attracting public capital as well as bridging traditional equity gaps through policies like the Indigenous Loan Guarantee Program.^[7]

To facilitate greater flexibility and clarity, regulators need to be empowered through broader mandates that align with decarbonization and electrification policy objectives. Prioritizing electrification as a policy goal is absent from the mandates of many regulators, creating misalignments between the objectives which feed into the utility business model. This has been targeted by policy makers^[8] as a key step in enabling better coordination in achieving net zero targets. To ensure reliability is maintained through an expanding grid, regulators must be flexible when engaging with a changing energy system. Establishing regulatory frameworks that allow for the proactive submission of utility investment or service proposals, not bound by prescriptive timing requirements, would make for a more adaptive system. Allowing for multi-year investment plans or mid-rate-term requests is more responsive and embraces the momentum created through policy windows.

Utilities are facing policy pressure to enable rapid grid expansion and decarbonization to achieve net zero objectives, but reliability investments, while necessary for supporting these objectives, are not being enabled effectively. Ultimately, utilities require a regulatory environment that facilitates a progressive understanding of rate-setting principles and value assessments for necessary reliability investments. Greater coordination between policymakers, regulators, and utilities can promote regulatory frameworks that better address the rapidly evolving energy landscape that utilities are dealing with.

* Joe McKinnon is Manager of Economic Regulations and Standards at Electricity Canada.

Channa S. Perera is Vice President of Regulatory and Indigenous Affairs at Electricity Canada. Channa is responsible for providing strategic oversight on Regulatory policy issues.

1. Canada Energy Regulator, “Executive Summary: In our net-zero scenarios, the types of energy Canadians use changes dramatically, including using a lot more electricity” (last modified 22 March 2019), online: <www.cer-rec.gc.ca/en/data-analysis/canada-energy-future/2023/executive-summary>.
2. Brattle, Electricity in Canada: Always On, (Issuu: Electricity Canada, 2024), online: <issuu.com/canadianelectricityassociation/docs/electricity_in_canada_alwayson_4-24-2024_2_1_>.
3. Canada Electricity Advisory Council: Final Report, Powering Canada: A blueprint for success, (Natural Resources Canada, 2024), online: <natural-resources.canada.ca/our-natural-resources/energy-sources-distribution/electricity-infrastructure/the-canada-electricity-advisory-council/powering-canada-blueprint-for-success/25863>.
4. Ibid.
5. Ibid.
6. Electricity Canada, Back to Bonbright: Economic regulation fundamentals can enable net zero, (Issuu: Electricity Canada, 2023), online: <issuu.com/canadianelectricityassociation/docs/ec_sel_frame_-_2023_21_> [Back to Bonbright].
7. Department of Finance Canada, News Release, “A Fair Future for Indigenous Peoples: Indigenous Loan Guarantee Program” (last modified 16 April 2024), online: <www.canada.ca/en/department-finance/news/2024/04/a-fair-future-for-indigenous-peoples.html>.
8. Electrification and Energy Transition Panel (EETP), Ontario’s Clean Energy Opportunity: Report of the Electrification and Energy Transition Panel, (Electrification and Energy Transition Panel, 2023), online (pdf): <www.ontario.ca/files/2024-02/energy-eetp-ontarios-clean-energy-opportunity-en-2024-02-02.pdf>.