Privatization of Canada's electrical grid accelerating

Canadians tend to think of power generation as a public utility a crucial piece of infrastructure that governments are duty-bound to provide and oversee. But in Canada, the responsibility of managing the electricity grid is no longer a question of public trust; increasingly, it's a matter of private enterprise.

And with the country facing increasing demand for electricity and a need for massive investments to upgrade anaging power grid, governments eager to avoid tax hikes are helping to accelerate the trend.

"It used to be all large, Crown-owned utilities, but governments are moving towards this [privatized] model in concerted ways," says Kent Brown, whoheads up BluEarth Renewables Inc. The Calgary-based company is just one of many private firms now involved with supplying Canada's growing electricity needs.

'There is a significant increase in private sector involvement, but the big question is on the nuclear side.' Jim Harbell, Strikeman Elliott LLP

ACBC News analysis found that roughly a quarter of Canada's total current generation capacity of 127,024 megawatts is generated by private firms. The rest still comes from more recognizable public utilities such as Ontario Power Generation, Hydro Quebec, BC Hydro and others.

But by 2020, private generation is set to rise to more than a third, or 36 per cent, of Canada's power output and that's just tallying projects that are already officially planned. Many more private plants are in the early stages of design, and are securing the necessary regulatory and environmental approvals.

Where the money's going

Private firms are behind the lion's share of the growth in Canada's electricity output planned for the coming decade. The generating capacity of firms such as TransAlta, Enbridge and Suncor is growing exponentially. Conventional oil companies are moving into the electricity sector, buildingnatural gas,wind and hydroelectricity projects.

Toronto-based law firm Stikeman Elliott has identified the power sector as a strategic one in terms of business opportunities, partner Jim Harbell says. The firm acts for some of the provincial bodies involved in new projects, but Stikeman will also represent developers themselves, or the financiers who lend projects their money.

"There is a significant increase in private sector involvement, but the big question is on the nuclear side," Harbell says.

Even before the reactor disaster at the Fukushima Daiichi plantin Japan raisedpublic unease about atomic energy, the private power industry was gravitating towards smaller-scale, renewable power sources rather than nuclear projects.

That's because a massive, extremely expensive facility isn't neededto make power from natural gas or wind, University of Toronto environment economics professor Paul Dewees says. By and large,nuclear reactors are exponentially more expensive to build and long-term in nature andfew private firmsare ready to spend a decade, plus billions of dollars, tobuild a nuclear reactor without a clear message from government about how much power they'll be expected to produce, and what price they can expect to get for it.

"I doubt very much you'll see a nuclear plant being built anywhere in the world without an iron-clad contract from a government prepared to be a customer for a fixed price for a long time," Greenwich School of Business professor Steve Thomas says.

The plan to build a massive reactor in Olkiluoto, Finland, is a textbook case of why the private sector generally shies away from nukes. Originally proposed in 2000, the plant was supposed to come online in 2009. When that deadline came and went, a government report found the project was at least four years away from being operational and the budget had ballooned by 50 per cent to more than $4 billion US. The plant is barely closer to existence today than it was then.

"We were hoping that project was going to show us how to do nuclear cheaply, quickly and efficiently," Dewees says. "We're still waiting."

In Canada, the Point Lepreau nuclear refurbishment project underlines the costs involved with building and operating reactors. The project is three years behind schedule and an estimated $1 billion over budget.

Privatization pitfalls

The business case is easier to make forsmall-scale plants based on sources of energy such as natural gas and wind, and much of that investment involves domestic companies.

"There's quite a limited field of international companies in power, because very few are looking outside their own national borders," Thomas says.

Power grids varycountry by country, and evenregion by region, based on political whims and the relative abundance of natural resources with the potential to generate power in any given area. This makes it hard for power companies to establish a global presence.

Not that there aren't similarities and lessons private sector companies in different regions can learn from each other. And if privatization isn't handled properly, it can lead to big problems.

For example, after working for decades on the public utility model where a state-owned monopoly was responsible for the electrical system, much of the industrialized world began the deregulation process in the 1990s. Few places had as dramatic a transition as did the U.S. state of California.

After selling off much of the generating capacity to private firms, the state launched its new utility system in 2001. It worked on a spot price model, where the cost of power could vary hour by hour based on supply and demand. It was pitched to taxpayers as being more efficient and theoretically cheaper for energy-conscious consumers. It turned out to be anything but.

"It launched in a perfect storm," Dewees says. "It was a time of drought so [hydroelectric power] supply was low. At the same time, there was a heat wave, so demand was high," he says.

With little hydroelectric power, fossil fuel burning plants had to pick up the slack. But the state's tough emissions standards meant that those plants had to buy carbon offsets. The price of nitrogen permits went through the roof, from $2 to about $200 within weeks. Added costs caused plants to slow output.

"Rolling brownouts with terrifically high prices lead to furious consumers who were told that prices would be more efficient," Dewees says.

The outcry led legislators to set a cap on the retail price, but that just outraged the companies that had invested on the promise of a free market.

"Local distribution utilities were buying power a 20 cents and selling it at 10," Dewees says. "Everything that could go wrong, did go wrong."

Canadians attempts at privatization haven't been quite as dramatic, but they have faced similar pitfalls. Former Ontario Premier Mike Harris opened the province's energy system to a freer market in May 2002. Throughout that hot summer, consumers complained about high prices, so in November of that same year, the provincial Tories set a cap on the retail price that has remained ever since.

Why governments want out

With all the headaches, it's no wonder governments are trying to get out of the power business.

"Electricity networks are really complicated, because you have to generate it at the moment it's being consumed," Dewees says. "You can't really store it."

That's part of the reason why power is "not the business that governments want to be in anymore," BluEarth's Brown says.

Beyond the profit potential for the private sector, the new model can be more efficient for everyone, he adds. Supporters of privatization maintain that companies can do a better job than government of managing supply and demand, and of finding ways to generate electricity economically.

'You can't go back to the old pubicly owned utility model at this point.' Steve Thomas, business professor

"Private industry is better able to manage the risk. They're great at managing their assets and procuring power because we need to come in on time and on budget," Brown says.Despite the high startup costs, the appeal of that the electrical sector holds for private investors is that power plants are generally long-term assets that will spin out cash for decades.

As lawyer Harbell points out, a well-maintained power plant can have a useful life of more than 50 years. "They're not exactly trendy investments, but they pay," he says.

"Pension funds want to have their dollars engaged for the long term, and these assets are fairly safe places for them."

Bottom line

Ultimately,Canada's power system needs upgrading. And with governments tightening their belts for the new age of austerity in the wake of the stimulus money spent to pull the economy out of recession,it's unlikely the country will turn back from privatization, experts say.

"Canada is in a bit of a mess in trying to update its existing grid, which was based on this public utility model," Thomas says.

"You can't go back to the old publicly owned utility model at this point."