Electricity sector participants have found it increasingly difficult to source key equipment, impacting supply chain security and the ability of utilities to invest to meet load growth. This is due to increased international competition, scarcity, and longer procurement lead times. Across-the-board tariffs imposed by the U.S. and Canadian counter-measures will significantly exacerbate existing issues, impacting the electricity industry’s ability to source critical equipment necessary for operation and long-term build-out. Disruptions to supply chains in the short term will impact long-term investment decisions and project timelines, harming the sector’s ability to meet the demand growth for electricity over the coming decades.

CHALLENGE: FEDERAL REGULATION

Policy at the federal level is also a challenge for the sector. While provincial regulators are limited in terms of their scope and mandate, they should understand these policy pressures and introduce risk reduction measures to mitigate the challenges that federal policy pose.

The Clean Electricity Regulations (“CERs”) will also create reliability and affordability challenges across Canada, particularly in provinces such as Alberta, Saskatchewan, Nova Scotia and New Brunswick. CERs will drive up system costs as existing infrastructure may need to be retired early, leading to sub-optimal economic pathways for the sector. These added costs will ultimately be paid for by Canadian families and businesses. While future federal policy may impact the longevity of these specific regulations, they still set a precedent for sector restrictions that challenge adequate investment. The sector needs a regulatory environment that promotes investment and building projects faster.

CERs create even greater regulatory misalignment with the U.S. undermining our competitiveness and ability to attract global capital. The CERs are an unnecessary regulatory burden, driving up system costs and undermining this competitive advantage.

CHALLENGE: AFFORDABILITY

Utilities are facing immense policy pressure regarding affordability concerns yet simultaneously are encouraged to make major investments in the grid. This balancing of investment and affordability is a serious concern for utilities, as they are faced with a changing energy landscape. Regulators must support long-term utility investments in areas such as capacity additions, grid modernization and hardening against severe weather much more rapidly to reduce the cost of inaction and delay. While the urgent need to invest in a modern expanded grid will inevitably cost customers more, this can be mitigated through targeted programs, measures and incentives for low-income Canadians at or below the poverty line who cannot pay more for energy. A more balanced approach with tailored support for consumers must be prioritized in the ratemaking process.

ECONOMIC REGULATION AS A SOLUTION

When regulators do not sufficiently account for the impacts that government policy, broader industry trends, and key issues like energy security have on utility investment requirements, the utility cannot effectively manage costs and risks. Regulatory reforms that help reduce investment uncertainty and align priorities between utilities, customers, and regulators can have a positive effect on promoting investment and reducing a utility’s exposure to commercial risk resulting from challenges at the international, federal, and provincial levels. By considering the broader policy landscape in rate-setting, regulators can provide utilities with clearer guidelines on expected returns for investments that align with the totality of investment pressures. This reduces risk by ensuring utilities are adequately compensated for the cost of meeting evolving policy demands and are less likely to have proposed investments rejected.

There are practical and technical reforms that can be made at the regulatory level without major policy direction, which can mitigate the impact of these overarching policy issues and help reduce investment risk:

• Allowing for the increased use of mid-project cost recovery mechanisms helps manage investment pressures by allowing partial returns before project completion, improving cash flow and attracting private investors. These recovery mechanisms can also help utilities improve credit metrics, which benefit ratepayers through reduced utility borrowing costs. Mid-project recovery has a natural smoothing effect, further reducing financing costs otherwise paid by ratepayers over time.
• Encouraging a stable economically regulated environment through an increased return on equity reduces financial risk, lowering borrowing costs and improving credit ratings. Equity Risk Premium (“ERP”) incentivizes long-term investment, making utility stocks more attractive. A higher approved CoC is essential for financing to meet load growth. Without competitive returns, utilities may struggle to attract investment, delaying critical infrastructure upgrades.
• Using tailored accounts to reduce financial uncertainty can reduce short-term financial strain, as new projects to manage load growth can be lengthy. Having access to accounts, like innovation and variance accounts, reduces the impact of uncertainty and unplanned costs.
• Increasing assessment thresholds for cost recovery supports regulatory efficiency. Accounting for inflation and changing investment requirements supports regulatory efficiency and creates greater certainty for moderate capital allocation.
• Using more non-adjudicative tools can provide greater certainty to utilities, allowing service providers to direct internal efforts towards projects that they believe have a high likelihood of being included in the rate base, promoting regulatory efficiency. By adopting more non-adjudicative frameworks, regulators can provide utilities with greater flexibility to implement innovative solutions and reduce investment risk.

Regulatory changes that are broadly applicable across Canada provide opportunities for the sector to reduce investment risk and continue to orient investment towards customer value, despite overarching market and policy uncertainties. Regulation can serve as a risk reduction tool at a granular level, allowing the sector to manage its own needs and challenges despite exogenous factors. Overall, these regulatory innovations can create a more adaptable and financially sustainable system for utilities navigating Canada’s evolving energy landscape.