The Value of Electricity

My travels across the country talking about the Canadian electricity system have provided the opportunity to ponder the price-value issue around electricity. The following is intended to shed some light on the matter.

What’s the true value of electricity to Canada? Is value determined by price alone, or is it more than that?

In our society, the first thing we think of when we discuss value is how much something costs. Did I get good value for what I paid?

But there is also a personal element involved – I might value something that I need or want more than you would, even though the price is the same.

I think people tend to value electricity mostly according to its price, except during those rare times when it is not available (for example, during an outage) – and then my guess is they value it much more, at least for a little while, because they understand how much they need it.

That’s because electricity is pervasive in our lives. Name one other commodity that does so much for us. Very little in our homes would work without electricity. Our office buildings and businesses are almost totally electricity dependent. So are our factories. Some day many of our cars, buses and trains might also run on electrical power.

The absolute necessity of a reliable electricity supply for both our comfort and our prosperity is one reason for valuing electricity more than we tend to.

There are also various economic arguments that one could cite – in 2009 electricity contributed about $25 billion to our economy; capital expenditures were some $16 billion; we exported close to $2 billion to the U.S.; and we directly employed more than 100,000 Canadians, with a large number of others indirectly employed.

But in my mind the economic rationale for valuing electricity becomes even more persuasive when supply is not there. During the 2003 Ontario blackout (triggered by problems in Ohio, which cascaded across northeastern North America) the province lost somewhere between $1 billion and $2 billion in Gross Domestic Product, lowering GDP by 1.4% for the year. That was the effect of a blackout where the power was restored to most customers after about a day.

In addition to economic considerations, there is also an environmental value to electricity – it is about 75 per cent free of any smog or climate change causing emissions. And electricity suppliy will get even cleaner over the next decade.

But as I said earlier, we still mostly talk price when discussing the value of electricity. So let’s look more closely at price.

Here is what Jatin Nathwani (Ontario Research Chair in Public Policy for Sustainable Energy at the University of Waterloo) said recently about the value of electricity in the Globe and Mail (July 9, 2010): “What is the cost, and what is the value of electricity? I recognize value when I see it. My total electricity bill with debt costs included is in the order of $4 a day – this for a five-bedroom house with as many occupants and all the amenities…” Jatin then goes on to note how hard it is to get the “junior” members of his household to conserve – everyone with kids has been there!

Paul Murphy, CEO of Ontario’s Independent Electricity System Operator also had some interesting observations on the price/value question in a recent speech to the Ontario Energy Network (January 11, 2011):

“Those of you that have heard me speak before know that I have trouble throwing out stuff, and my old hydro bills have served me well in some of my previous speeches. Only this time I wanted to not only find out how my electricity rates have changed, but also how my taxes, my water charges, my cable and my telecommunications costs over the past 15 years have changed. The results may surprise you. I know they surprised me.”

“In the past 15 years, my property taxes have gone up by 240 per cent, my costs for cable TV have increased by 200 per cent and my water rate has gone up 90 per cent. While my cost for my landline has decreased over the past 15 years, when I add in my cell phone costs for me and my family, it is a 380 per cent increase.”

“Over the same 15 year period, my hydro rate has gone up by an unremarkable 30 per cent.”

There is no doubt in my mind that electricity delivers exceptional value to Canadians. As you can see from Paul Murphy’s numbers, electricity price increases have been quite modest for several years. In fact, global surveys show we have among the lowest electricity prices compared to most industrialized countries. We also have exceptional reliability, and we deliver a relatively clean product.

But here is a key question – is Canada’s electricity sector in a good position to continue delivering great value?

A very important fact that is not well understood is that, after a large build-out in the 1950-80 period, we have made relatively little investment in our electricity infrastructure over the past 30 years. That’s one of the reasons why electricity prices have increased much less than other household products and services.

We are now reaching that critical time when our supply infrastructure – generating stations and transmission/distribution wires – needs to be renewed. To date, however, there has been little recognition of this, or public and political support for the necessary investment in our 21st century electricity infrastructure.

I think Jatin Nathwani sums it up best, from the Globe article above:

“To acknowledge, however grudgingly, the value of electricity service only when it is not available – on either hot and muggy days or cold and freezing nights – is a poor substitute for rational decisions required for funding future investments in the sector. Cost is, indeed, central and important. But when judged against value delivered, electricity is by far the runaway winner in the race to deliver a good quality of life and economic productivity. Its provision deserves better treatment by our politicians and the public.”

This is an important public policy issue, if Canada is to continue getting great value from its electricity systems.