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THE ENERGY CRUNCH: Electricity markets are changing radically

To keep pace, public policy makers need to do some innovative thinking, David Parkinson says


Published Feb. 17, 2001


Note to Chicken Little: Maybe the sky isn't falling, but watch your head just the same.

The energy crunch that has hit North America in the past several months can best be viewed as a cautionary tale of the folly of short-sightedness, of bad planning, of the volatility inherent in even the most efficient open markets.

Experts tell us there's no need to panic, that the markets have a way of correcting themselves, of bringing supply and demand back into balance and bringing prices for oil, natural gas and electricity back down to more affordable levels.

However, underneath these assurances lies the inescapable reality that energy markets, not just in Canada and the United States, but throughout the world, are undergoing radical changes that are fundamentally altering the flows and economics of our energy supplies.

Increasing reliance on natural gas to fuel electrical generation. The rapid expansion of the technology-intensive New Economy, with its heavy demand for electrical power. Robust economic growth in the developed and the developing world. Globalization, trade liberalization and the deregulation of energy markets to promote increased competition. Untimely energy policies in North America and abroad that discouraged development of new energy sources. The convergence of these factors contributed to the current crunch, which caused California to be nearly crippled by high electricity prices and dangerously low supplies, consumers to be pummeled by skyrocketing home heating costs, and angry motorists to protest prices.

High energy prices are jamming the brakes on the U.S. economy, threatening to trigger a recession that could spread globally. An economic slowdown should take the pressure off energy demand and ease prices over the next year. Nevertheless, the mess in the energy markets should serve as a distant early-warning to policy makers that energy issues will demand a lot of attention in the first part of the new millennium.

Experts say the next decade will see a showdown between a continued surge in energy demand on the one hand, and financial constraints, infrastructure limitations, domestic politics and environmental pressures on the other.

"The overall picture is that we expect global demand for energy to keep rising substantially," said Robert Priddle, executive director of the International Energy Agency (IEA), an arm of the Organization for Economic Co-operation and Development, in Paris. He said that barring "policy interventions," energy demand will climb roughly 60 per cent from current levels by 2020.

The bulk of that growth will come from developing countries, as they further industrialize and their consumers acquire more energy-intensive luxury goods. The biggest growth area will be in electricity consumption.

"That's going to take an enormous investment in infrastructure," Mr. Priddle said. He estimated it would cost "something like $3-trillion" (U.S.) to meet electricty demand in the developing world by 2020.

"It's beyond the capacity of government investment," he said. "But it's not beyond the capacity of private enterprise."

This anticipated heavy growth in demand has led to a push in many countries to deregulate energy industries. The aim is to provide increased competition and a shift to market pricing, which should encourage private-sector infrastructure investment. But the debacle of deregulation in California's electricity industry has made many policy makers nervous about going ahead with their own changes.

"I think people are quite alarmed," said Marjorie Griffin Cohen, a political science professor at Simon Fraser University in Burnaby, B.C. "They have seen deregulation cause problems. There are big risks involved."

Canada will soon come under increased international pressure, especially from the United States, to accelerate the deregulation of its energy industries. New U.S. President George W. Bush recently met with Prime Minister Jean Chrétien, making it clear that a continent-wide energy policy is a priority in his new administration.

The United States also issued a position paper in December to the World Trade Organization calling for increased competition and market access in the energy sector, as part of its proposals for the recently started negotiations on the General Agreement on Trade in Services (GATS).

"Basically, what they want is access to Canadian energy," Ms. Griffin Cohen said.

André Plourde, energy economist and associate dean of business at the University of Alberta in Edmonton, said Canadian leaders will face resistance from the public to opening up electricity and natural gas utilities to foreign competition, and in fact are beginning to hear calls for reregulation.

"There's going to be some pressure," he said.

But Mr. Priddle of the IEA said reregulation and government-imposed price protection for consumers would do more harm than good.

"There's a risk some people will take the lesson that competition doesn't work. That would be wrong," he said. "It's not in the consumer's best interest to keep prices down in the short term, at the expense of security of supply in the long term."

Indeed, the high prices in recent months have kick-started a raft of projects to bring fresh energy supplies to market, particularly natural gas.

"The structure of the gas market has been fundamentally changed by the switch to gas-fired electric power generation," said Tom Adams, director of Energy Probe, a Toronto-based energy watchdog. "This electricity-driven demand is not going away."

However, the high cost of natural gas is prompting some electricity producers to look at other, less-clean fuels, such as coal, to power their generators and there is also increasing talk of a resurgence of nuclear power overseas.

Gerry Scott, climate-change campaign director for the David Suzuki Foundation, a Vancouver-based environmental group, said governments are losing sight of key environmental goals in the race to secure new energy supplies.

"Where is the Kyoto consciousness?" Mr. Scott said, referring to the Kyoto Protocol of 1997, which calls for a 6-per-cent global reduction in greenhouse gas emissions, from 1990 levels, by 2010.

Mr. Plourde of the University of Alberta said the tug-of-war between affordable energy supplies and environmental concerns will be "the big issue" in the energy sector over the next several years.

"People are going to be talking about how much they're willing to pay to protect the environment."

Analysts said that while high energy prices have sparked renewed interest in developing alternative and renewable energy sources, governments will have to become much more active in promoting these alternatives if they hope to make a dent in the energy market. The IEA predicts renewables will make up just 3 per cent of the global energy supply by 2020, up from 2 per cent now.

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