INTRODUCTION

Throughout over thirty years of climate policy a great deal of thinking — and considerable action — has been devoted to upstream energy systems. And there has been some success, especially decarbonizing power production and reducing upstream oil and gas emissions intensity. But as we bear down on the challenge of net zero by 2050 and the potential electrification of much of the energy system, policymakers will increasingly need to confront the forgotten factor of energy delivery.

In our view, this is where the rubber will most visibly meet the road on climate policy. If emissions reductions efforts don’t sustain energy fundamentals — the safety, security, reliability, resilience and, crucially, affordability, of energy — they will fail. The political, social and economic consequences of a world without energy fundamentals will stand in the way of climate progress. Simply put, durable emissions reductions hinge on maintaining public support and that requires maintaining energy fundamentals.

So how to secure both emissions reductions and energy fundamentals in energy delivery systems?

In recent research, we looked at the political, regulatory, economic, social and technical challenges facing energy delivery systems in Canada and internationally on the road to net zero. We examined New York State, Western Australia and Great Britain.^[1] We reviewed what delivery system emissions reductions might involve in terms of capital investment, operational issues for power and gas distribution, the implications for piped energy systems, reliability and affordability, the responses of energy consumers, and the successes and failures of various policy and regulatory approaches being tried.

The answer? No one knows much with certainty. There is lots of work on technological solutions and lots of modeling and analysis, but there remain yawning gaps between the assumptions baked into models and the ‘real worlds’ of energy delivery and energy fundamentals. Similarly, there are lots of climate policy and regulatory approaches being implemented, but for the most part it is too early to assess their ultimate outcomes and success in reducing emissions — although our research points to the risk of ambitious climate policies running off the rails on cost, affordability, supply or reliability of end use power and natural gas.

All told, we have very little to go on respecting the most constructive path forward on emissions reductions in energy delivery.

So what should be done? Our research underscores that the time is now for Canadian jurisdictions to move with alacrity to better understand how the forgotten factor of energy delivery can be better understood and acted upon in ways that are consistent with both climate aspirations and how the system actually works. With that in mind we have proposed a Canada-wide effort to fill this gap.

Before sketching that out, below we dive deeper into the challenges, contexts, tensions and attention to costs that our research reveals will need to inform current and future policies for energy delivery systems.

CITIZENS, CUSTOMERS, COMMUNITIES AND COMPANIES: CHALLENGES, CONTEXTS, TENSIONS AND COSTS

In the course of decades of climate policy we have encountered a few “oops” moments. We have seen consumer anger over escalating power prices in Ontario driven at least in part by climate policy decisions. Most notorious of course is consumer reaction to skyrocketing energy prices and inflation as countries lift COVID-19 restrictions and as the war in Ukraine carries on. What these experiences show is that when put to it, energy fundamentals like security of supply, affordability and reliability, tend to trump all other considerations for citizens — and by extension policymakers.

But what may turn out to be the biggest oops concerns what happens when the aspirations for energy delivery system transformation meet the real worlds of consumers, citizens and communities in their day to day lives, the real worlds of investors and companies who need sufficient incentives to bring capital and new business models to bear on emissions reductions, and the real world of cost, where decisions about who pays what, when and how for emissions reductions will need to be decided upon in a transparent and thoughtful manner.

The challenge of net zero is unprecedented — in scale, in complexity, in speed. Unlike previous energy transformations, it must be brought about primarily by public policy makers.

Individual economic actors such as investors, utilities or technology developers — and in some cases consumers — have become active participants in responding to the challenge. But companies’ ability to act and their confidence to invest depends in large measure on policy and regulation. Decisions to invest in innovation and in large long-lived energy projects hinge on policy and regulatory clarity, certainty and predictability. Policy reversals, politicized decision-making and unclear rules and regulations can all be barriers to unlocking the large-scale investment needed to transform energy delivery systems.

Citizens have expressed support in principle for the goal of net zero but they have little understanding of what that means for them personally in practice. Experience to date suggests that when push comes to shove, in their personas as customers they will give priority to energy fundamentals (security of supply, affordability, reliability, safety, resilience). At the same time, citizens and customers generally live in long established communities. Communities can be facilitators of change or impediments depending on how they are engaged and brought along, and the sorts of leadership roles they aspire to take on.

If policy and regulation fail to recognize the realities of citizens, customers, communities, companies and costs, no emission reduction plan can survive nor, in all likelihood, will the democratic government that tries to implement it.

Therefore, the central question for this article and the research behind it concerns the delivery of energy in end use markets in a way that responds to climate goals (net zero) while adhering to all of the energy fundamentals and — ultimately — political sustainability of emissions reductions policies.

Every jurisdiction has its unique characteristics as does every community, but comparisons can be useful. Roughly speaking, we might describe the challenges in terms of the physical and organizational changes that need to be made to energy systems, often referred to as “pathways”. Jurisdictions in Canada and in our case studies of Western Australia, New York State and Great Britain are confronting some mix of the following challenges:

• How to accommodate massive growth in electric system load and changes in load profiles entailed by electrification. Flowing from that, how to manage all the issues surrounding new infrastructure and system management.
• How to integrate new local sources into power systems including renewables, storage, distributed energy and demand side response in ways that sustain the integrity of the systems.
• How to support emissions reductions in natural gas systems, including the ongoing greening of gas delivery through energy efficiency and demand side management and the introduction of low GHG alternatives from RNG to hydrogen.
• How to address natural gas systems potentially becoming obsolete if they are replaced by an all-electric system — and all that implies for system integrity, stranded assets, stranded customers and cost allocation.
• How to integrate power, fuel and heat systems (combining gas, hydrogen, electricity, heat and local renewables in integrated systems).
• How to transform the respective roles and business models for utilities, energy service providers and technology providers and create investment conditions that make the new systems work.
• How to account for inevitable supply constraints respecting critical materials, skills and workers in the economy writ large and within public agencies.
• How to reconcile the local character of the challenge with the realities of distant energy sources and interconnected systems at a regional scale.
• And, crucially, how to do all of the above in a way that sustains energy fundamentals.

Different contexts can aggravate the challenges or facilitate solutions:

• The most obvious is physical. Decision-makers have to ask: What energy sources are available? Do they come from within the jurisdiction, and if not, what implications does that raise for cross jurisdiction cooperation or conflict? What are the available delivery routes?
• What are the drivers of load on the system (e.g., space heat or cooling, seasonal variability, industrial, resource sector or commercial demand)?
• Constitutional and legal factors can facilitate or constrain — most notably for Canada the realities of federalism and the imperative of accounting for the rights and roles of Indigenous peoples.
• Political cultures differ, among them the extent to which jurisdictions might be amenable to central economic direction, along with expectations of the populace to directly shape policy and for policy and regulatory processes to be open and inclusive.
• Governmental machinery and associated practices can vary regarding the respective roles of legislative bodies and the political executive and the degree to which authority is devolved to independent bodies, from planning commissions to regulators.
• Public ownership in the energy delivery space and the influence of Crown corporations on policy development is also a crucial element of context.

Regardless of context, for any jurisdiction, responding to the various challenges will inevitably generate tensions that have ongoing political ramifications. Ignoring any of these fast endangers climate policy success:

• The drive to net zero delivers very little direct or immediate energy benefit to citizens but must be undertaken in a way that sustains citizen support for climate action.
• As outlined earlier, the most critical threat to citizen support is common across all jurisdictions: how to reduce emissions while sustaining the energy fundamentals of security, reliability, affordability, safety and resilience.
• Clarifying the respective roles of policymakers and regulators, and identifying how governments can best pursue environmental objectives alongside economic regulation.
• How to secure community and investor support for new energy infrastructure. As discussed above, local acceptability and the investment environment are intertwined unavoidable factors that govern whether new facilities can be financed, approved and built and that shape the speed and costs of doing so.
• Net zero requires speed, predictability for investors and supportable costs. Citizen support requires openness, engagement and due process, all of which add time, reduce predictability and almost always add cost. How can governments best navigate these tensions?
• Finally, and crucially, is cost. Who will pay what, when and how for emissions reductions? Transforming energy delivery systems requires clear, thoughtful and informed approaches to the costs to be borne by governments (taxpayers), by industry and by consumers.

WHAT HAS BEEN LEARNED TO DATE?

As noted earlier we draw here on experience in Canada and other jurisdictions — notably three case studies in the US, Great Britain and Australia, along with a broader literature review covering US and European experience. Again, to underscore, the most striking observation is that very little is known at the level of practical application.

Market based systems have become the norm in most jurisdictions over the past 20 to 30 years, starting with natural gas and later encompassing electricity. Although power distribution in most Canadian jurisdictions is largely owned by provincial or municipal governments, commodity prices are generally market generated. The overarching question for our purposes concerns how market participants (suppliers, pipes and wires, users) respond to market or regulatory signals and how that affects emissions strategies and durability of reforms.

Two of the case studies in particular (Great Britain and New York) underscore how unbundling of energy service delivery, privatization of energy delivery and market pricing, may be hard to reconcile with effective and rapid decarbonization. With multiple players in complex systems, behaviour and outcomes are hard to predict, far less control — all the more so in the face of a policy driven transformation of unprecedented scale, nature and speed. What remains far from clear, however, is whether more centralized and dirigiste methods working in a democratic context can possibly cope with the demands of the transformation before us.

One important question concerns whether what was learned from the market transformations of the past several decades has relevance for the net zero transformation. On its face the answer would appear to be very little since policy is now being driven by a new non-economic imperative (climate) that pulls decision-makers in the direction of more government intervention, not less. On the other hand, much has been learned about consumers, including their general preference for being relatively passive players concerned mainly with knowing that their systems work and being intolerant of price shocks.

In this context, achieving the desired net zero outcome depends fundamentally on the system and its participants being creative, innovative, nimble and adaptable. Much of the technology that needs to be deployed is at best untried, at worst, unknown. New market structures, corporate structures and business models, and new approaches to policy and regulation will need to emerge and evolve. It is impossible to know conclusively what factors will bear on all of this and how they will interact.

Several issues illustrate the complexity and the political, economic and social perils. Precipitate action by policymakers applying the technologies and business models we know today (and in the Great Britain case, a highly complex mix of regulations and incentive systems) risks locking in sub-optimal approaches with legacies that could take decades to resolve.

Cost effects will impinge on consumers whose willingness or ability to absorb costs have been consistently demonstrated to be very limited — and when limits are reached the political blowback is almost always impossible for policymakers to escape. The costs of change inevitably bear disproportionately on disadvantaged consumers, a societal outcome widely regarded as unacceptable in twenty-first century democracies.

Effects on energy fundamentals are often unpredictable and subject to both internal and external factors. To date, fundamentals have generally been maintained, in all probability for three reasons: because the systems were designed with energy fundamentals as the first priority (including being built with some head room for change); because the physical systems themselves have long been generally stable and well understood; and because recent changes (electrification, distributed resources, integration of renewables, etc.) have taken place mostly at the margins (and been accommodated by head room). None of those conditions appears to apply as we look to the coming transformation to net zero.

The inherent inertia of large complex systems built on long lived capital, readily available but in some instances carbon intensive resources and long-established human skills and management systems are mismatched with the speed of change envisioned by net zero. Correspondingly, the potential responsiveness at the demand end varies depending on industrial profiles, local climate, the nature and age of energy using assets and the potential for distributed energy to be practically deployed.

The basic physics of energy systems impinge unavoidably on the potential for change. Heat requirements — especially for certain industries — affect what is practical in choice of supply. The requirements for real time load balancing in power systems is a physical fact and as intermittent renewable resources become more dominant the practical consequences for system design and real time management become ever more challenging. The materials and land intensity of renewable systems raise whole new perspectives on security of supply, resilience and social acceptability.

Local renewable sources may in and of themselves be more economic than distant sources due to reduced transmission requirements, but that may be in tension with more cost effective, reliable and resilient large scale renewable sources if looked at from an overall system perspective.

The economics and operational practicality of existing systems are vulnerable to the effects of rapid change. Power systems from upstream to down are called on to accommodate growth of two (or more) times existing capacities, will need to put in place new system management tools and will need to accommodate changing seasonal load profiles. Declining utilization of existing hydrocarbon (natural gas) systems potentially leaves stranded assets whose costs must be accounted for. It also leaves potentially stranded users for whom new systems may be impractical or too costly. And the advent of electric mobility adds load and system management complexities. Even with a whole system perspective on needed energy services — heat, cooling, mobility, drive power, lighting, electronics — there is no way from today’s perspective to know what will actually work. But without aspiring to whole of system thinking we are flying blind in the wind.

Finally, the effects of climate change itself are a physical fact whose consequences are unknown. But such effects are going to grow and will dominate investment choices and thinking about supply, particularly requirements for resilience like the hardening of systems and the development of ever more robust recovery strategies.

All told, energy delivery system reform is an intricate and complex puzzle with multiple pieces forever in motion.

AN OVERARCHING QUESTION: WHO IS IN CHARGE?

As noted earlier, an overriding theme arising notably in Great Britain and New York is the question of whether markets and market actors can be sufficiently responsive to meet the compressed time frame of 2050 and sufficiently predictable to act in ways that make hard legislated mandates achievable. Against that, of course, is the mystery of whether central planning by governments can meet the multiple imperatives of nimbleness, adaptability and openness in the face of social, economic and technological unknowns that greatly outweigh what is known — and the inevitable limitations of modeling and forecasting in the face of so many unknowns.

The traditional machinery governing energy delivery systems — essentially public or private monopoly utilities for wires and pipes overseen by independent expert economic regulators — is slow to move and risk averse. As such, aside from the conundrum around central planning versus markets, the actors who normally operationalize policy direction in the system have deep knowledge of it but are not particularly nimble (at least sometimes that is for good reason given the need to sustain energy fundamentals and ensure fairness and openness to input from multiple sources).

In contrast, policymakers driven by the net zero imperative may be faster to move but often lack sufficient expert capacity to make choices that will sustain energy fundamentals, and, by extension political support for emissions reductions. Policymakers may also be inclined to create new legislation, policies, public entities and programs as new issues and problems arise, leading to an increasingly complex system that defies comprehension and clarity as has been the case in particular in Great Britain.

All of this raises the question of what role regulators should play in an increasingly crowded energy and climate decision-making system. If their energy expertise and capacity to ensure due process remain important, how best can policymakers provide them with the scope and direction to take into account imperatives — notably emissions reductions — beyond the traditional economic imperative of fair and reasonable rates?

Should policymakers assume roles as de facto regulators or can they stand back, provide policy direction and allow regulators to act? If policy makers are unable to provide clarity of direction, to what degree should regulators be creative in interpreting their mandates or explicit in how they will manage trade-offs? And if regulators get creative with their mandates, how are such actions squared with political accountability? In short, it is crucial to carefully think through the transformation of economic regulators into economic/environmental regulators.

Who needs to be in charge or at least influential in policy choices is a question founded mainly on the issue of expertise. One thing that seems clear is the very large need for technical, economic, environmental, financial and legal expertise. Whether there should be a large role for economic ministries and in particular energy and finance rests on this issue. So does the role of provincial Crown corporations that often embody the bulk of available expertise and have the potential to exert an outsized influence on provincial policy choices. But perhaps a bigger question that emerges strongly from our research is the limited energy expertise in policy systems as a whole. Taking it back to the question of central planning, the expertise gap may be one of the most daunting challenges that will need to be overcome.

CONCLUSIONS: WHAT IS TO BE DONE?

It is clear that there is much to be done, the need is urgent and there is little base of experience anywhere from which to draw. What is emerging, on the other hand, is a growing appetite to reform energy delivery systems and a growing body of early experience in Canadian and international jurisdictions, albeit so far only at modest scale.

Several critical policy principles emerge from our research:

Policy should take an integrated approach to energy and climate. While the foundational approach of legislating specific targets has helped to concentrate minds on the problem of achieving net zero, it has fallen well short of reconciling the overriding emissions priority with the energy fundamentals that delivery systems must fulfill. Reducing energy fundamentals to second order considerations will not lead to durable emissions reductions.

Policy should incorporate inclusive, rigorous and adaptable planning that corresponds with market-based systems. There is growing recognition of the vital role of planning but it will be crucial to identify how to ensure it corresponds to market systems where a great number of essential technological solutions remain far from tried and true. Technology neutrality is a good place to start.

Policy should be grounded in whole of system thinking — both in energy system and machinery of government terms. Whole system thinking remains an elusive but crucial goal. While adding more perspectives should bring greater wisdom it also adds complexity and ambiguity and inhibits speed. And, of course, what constitutes the “whole system” varies. For some, the debate centers entirely on the electric power system but the “system” necessarily extends to heat systems and mobility systems and, given the vital role of energy in society, the boundaries get pushed steadily outward to encompass broader economic questions such as competitiveness, social questions such as equity and questions of fiscal management. In the end it comes down to the political judgment of leaders. This is good for democratic accountability but it is filled with the perils of what may well turn out to be bad judgments based on narrow and short-term considerations.

Policy should recognize the strengths and limitations of both incremental and comprehensive processes of reform. The Western Australia case suggests there is merit in incremental approaches, in effect learning by doing. The Great Britain case, on the other hand, shows how incremental approaches can lead to such accretion of measures that the whole approach becomes incomprehensible. None of the experiences we reviewed provides us with a sure model of how best to allocate responsibility and accountability among various actors but in all circumstances there is a need for comprehensive thinking and large scale policy at the system level within which numerous close to the ground actors can undertake incremental approaches in various parts of the system.

Policy approaches should include environmental organizations, communities, citizens and other parts of civil society at the right time and on the right questions. All of the case studies and experience in Canada have varying degrees of citizen engagement — largely through advocacy groups — and varying degrees of success. Where the focus is on relatively simple challenges such as designing small local systems or driving particular technologies, citizens may become engaged and become sufficiently knowledgeable as to be constructive contributors. But at the big system level and for highly technical questions that concern power system physics or complex business or regulatory models, citizens may be little more than bystanders. When they react negatively to price increases or oppose new infrastructure, they may also be inhibitors of change. What is crucial is identifying the appropriate level, nature and timing of public involvement.

Operationalizing these principles is a tall order. Distinctive conditions in individual jurisdictions will inevitably dictate distinctive solutions. Nonetheless, given the shared challenges and tensions, there is ample opportunity for mutual learning across Canadian jurisdictions on an ongoing basis.

With this in mind, we propose the creation of a time-limited task force mandated to develop concrete and actionable recommendations for energy delivery system reform. Such a process would convene federal, provincial and territorial policymakers and regulators alongside Indigenous and municipal governments, industry, civil society and academic leaders to identify needed policy, legislative and regulatory changes. Crucially, this process would not supplant existing efforts towards emissions reductions (including the recently announced regional strategy tables undertaken by the Minister of Natural Resources), but rather, serve to accelerate, inform and better coordinate them.

Key to the approach is respect for constitutional divisions of authority — energy delivery is largely under provincial jurisdiction — and the diversity of energy profiles and market systems across the country, and that it be and be seen to be collaborative, credible, influential and representative of the expertise required to effectively execute its mandate. If done well, such a process would provide policymakers with many of the means by which to make the above noted principles operational.

This will be pivotal as attention turns increasingly from the what to the how of emissions reductions. The idea of net zero emissions by mid-century has, over the few years, become firmly embedded in the public discourse. In many jurisdictions, including Canada, that goal is now expressed in legislation, thereby creating an imperative for action that has been absent from most climate policy worldwide for the past several decades. Legislation can always be changed of course but politically the idea of net zero appears increasingly to be set in stone.

Not surprisingly but strikingly, experience to date reveals the extent to which countervailing realities, even if not set in legislative stone, remain economic and political bedrock that cannot be avoided. The most important of these are energy fundamentals, and the place where their absence will be most visibly felt is in the energy delivery system. As policymakers turn their attention to energy delivery — the forgotten factor of climate policy — it will be crucial to sustain energy fundamentals. Ongoing support for emissions reductions from citizens, communities, customers and companies depends on it.

* Michael Cleland is an executive in residence with the Positive Energy Program at the University of Ottawa and formerly President and CEO of the Canadian Gas Association and Assistant Deputy Minister Energy Sector with the federal Department of Natural Resources.

Dr. Monica Gattinger is Founding Chair of Positive Energy, Director of the Institute for Science, Society and Policy, and Full Professor in the School of Political Studies at the University of Ottawa.

1. Michael Cleland & Monica Gattinger, “Net Zero: an International Review of Energy Delivery System Policy and Regulation for Canadian Energy Decision Makers” (4 April 2022), online (pdf): <www.electricity.ca/files/reports/english/Net-Zero-Intl-Regulation-and-Policymaking-Report_Gattinger-Assoc_April-2022.pdf> (This research study was undertaken for the Canadian Gas Association and Electricity Canada, with support from Natural Resources Canada. In separate work, we reviewed the state of knowledge across North America and Europe respecting the cost and operational implications of rapid large-scale electrification of transport and heat).