The Canadian Electric Energy Industry Report (Assessment)

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Updated: Feb 13th, 2024

Introduction

Canada is one of the richest countries in the world. It has abundant reserves of natural resources and well-developed trade networks. Currently, it is the world’s 11th largest economy. It is also the second-largest country in the world. Together with the U.S, the country has the longest undefended boundary in the world. The country’s electricity sector is seen as one of the greatest contributors to its continued economic growth (Pineau & Froschauer 2004).

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The sector has also contributed significantly to the country’s political growth. Today, Canada is a member of some of the most prestigious organizations in the world. They include the G20 and the Organisation of Economic Cooperation and Development (OECD).

The country’s electricity industry is based on territorial and provincial arrangements. In most regions, the generation, transmission, and distribution of electricity have been taken over by integrated public utilities that are government-owned (Pineau 2008). Some provinces, such as Ontario and Alberta, have resorted to creating electricity markets in the region. Electricity demand has also gone up over the years. Currently, the country has one of the world’s largest per capita electric power consumption. At the present, it is estimated to be at an average of 16,995 kWh annually.

Currently, the country is the second-largest producer of hydroelectricity. Close to 58 percent of its electric power is from hydro stations. The country is home to some of the world’s largest hydroelectricity projects. Some of them include Newfoundland and Labrador, Quebec, Manitoba, and British Columbia (Pineau & Froschauer 2004). Besides hydro, Canada has also heavily invested in nuclear power. Currently, it is the sixth-largest nuclear power producer in the world. The figure stands at approximately 100 billion kilowatts annually. Approximately 50 percent of the power consumed in some provinces is generated from nuclear stations. Such regions include Ontario. Canadian-designed (CANDU) reactors are used to generate this power.

In this paper, the author analyses how Nova Scotia Power Inc. operates in the generation and distribution of electricity in Canada. Various aspects of this company in the energy sector will be discussed.

Structural Analysis of the Canadian Electric Energy Industry

Each Canadian territory and province has jurisdiction over the natural resources at its disposal. Consequently, the electricity sector is organized along with territorial and provincial rights (Espey & Espey 2004). Some of the regions have specialized in the generation of power from hydro stations. They include Québec and Manitoba. Others are Labrador and Newfoundland. Others, such as Alberta and Ontario, have mainly invested in nuclear reactors. The country’s political structure creates a competitive environment. It is considered to be one of the greatest contributors to the country’s economic growth. The provinces have embraced foreign investors to improve their economic bases.

The generation, transmission, and distribution of electric power in Canada are not centralized. Consequently, all provinces and territories have come up with independent utility boards. However, it is important to note that transmission in the entire country is regular. The rates are also homogeneous in the entire nation (Pineau 2008). The unbundling of some of the utilities in the Canadian electricity sector took place in the 1990s. The structure of the sector has fostered healthy competition in the international wholesale market for electric power. Currently, Quebec and British Columbia are the largest exporters of the commodity.

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Most of their power is exported to the USA. The US was previously the largest consumer of electricity in the world before been overtaken by China. Considering that Canada shares one of the longest boundaries with the country, the market for its electric energy continues to be steady. Quebec and British Columbia have to generate, transmit, and distribute electric power in line with the U.S requirements. The provisions are contained in Order 888 of the Federal Energy Regulatory Commission (FERC). The two regions must also comply with other U.S market policies to maintain the market. As a result, the Canadian government keeps these parameters unbundled to enhance flexibility.

In most Canadian provinces and territories, electricity utilities are vertically integrated. Generation, transmission and distribution are run by crown corporations (Espey & Espey 2004). The corporations operate as regulated monopolies. The situation is evident in several jurisdictions, such as Saskatchewan, New Brunswick, Nunavut, Quebec, British Columbia, and Manitoba. In other regions, large crown corporations own the generation and transmission lines.

However, distribution is handled by privately owned entities. Such areas include Labrador, Newfoundland Northwest Territories, and Yukon. The situation is similar in Prince Edward Island, although at lesser proportions. Some companies, such as Nova Scotia, have a virtual monopoly in the distribution of electric power in the province (COMFIT: Nova Scotia Community Feed-In Tariff [COMFIT] 2011). Nova Scotia Power Inc. has been granted the right to purchase power from other entities. The company uses a feed-in tariff system. The aim is to encourage small players to produce electricity. In the recent past, the entity has also engaged in electric power generation. Several small public electricity distribution entities still exist in the country. However, the establishments operate at the local level.

Some governments in the country have significantly reduced their control in the electricity sector. As a result, they have attracted investors from different parts of the world. However, the two governments still maintain control over their electric markets. There are variations in the programs adopted by the two territories. The electricity market for Ontario is hybrid (Mazer 2007). The Ontario Power Authority contracts supply lines. The body also handles system planning. Besides, it regulates the prices of most of the electricity generated within its jurisdiction. On the other hand, the generation in Alberta is done on a competitive basis.

However, transmission and distribution are rate-regulated. Across the country, various municipalities have taken over distribution lines within their jurisdictions. Some of these municipalities have also emerged as key players in power generation within their jurisdiction. They include Edmonton. The entity owns EPCOR, the largest electric energy generator in the region. Other municipalities influence a generation by regulating the publicly traded companies operating within their jurisdiction. They do this by purchasing the majority shares.

Canada is also home to large energy-intensive manufacturing industries. Most of them are involved in the smelting of aluminum (Pineau 2007). Others include paper and pulp factories. Over the years, these companies have made efforts to generate their power. Rio Tinto Alcan is one such firm operating in Canada. The company specializes in the extraction of minerals. It is mainly focused on the smelting of metals, especially aluminum. Its activities are energy-intensive.

To cut down on operation costs, the company has set up seven hydroelectric stations. Its stations are located in the British Columbia territory and Quebec province. Combined, the seven generate close to 3,300MW of hydro. In the process, the company has emerged as one of the most successful and self-sufficient mining entities in the world. As the firm seeks to extend its mining activities in other parts of the country, plans are underway to boost its energy production.

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Canadian provincial administrations largely control the generation, transmission, and distribution of electricity. However, the federal government also plays a major role as the regulator at the national level. It achieves this with the help of the National Energy Board (Mazer 2007). The board authorizes the establishment of international power systems extending beyond territorial boundaries. In doing so, the federal government maintains law and order within the electricity sector. Provinces also share power resources with minimal conflicts.

The highly structured Canadian electricity sector attracts investors from different parts of the world. The Canadian Nuclear Safety Commission ensures that reactors are maintained and operated in a manner that ensures the safety of the population. The federal government shares jurisdiction over environmental issues arising from generation, transmission, and distribution of electric power with the territorial and provincial administrations.

In this case, issues about air pollution and the emission of greenhouse gases are addressed at the national level (Calvert & Cohen 2011). The federal government also initiates environmental assessments for major hydroelectric projects in the country. It is justified to do this since it has jurisdiction over fisheries and waterways in the nation. Consequently, the national government ensures sustainable economic development. The reason is that the electricity sector is structured in a manner that does not negatively affect other sectors of the economy (COMFIT 2011).

Factors Explaining the Structure of the Canadian Electricity Sector

Most of the crown corporations in the electricity sector in Canada are monopolies. They are mandated by the provincial and territorial governments to perform these responsibilities. There are no direct policies by the government of Canada restricting small businesses. However, they are locked out of the sector for various reasons. The reasons include the high capital requirement for parties wishing to invest in the sector (Doern 2005). Utilities involved in service delivery are expensive to establish and maintain. They also take long durations of time to set up. Many of the small players lack the capital required to achieve this. Since the largest share of the market has already been taken up by crown corporations, such as Nova Scotia Power, new businesses find it hard to establish a niche.

Provincial and territorial governments issue permits to companies wishing to generate, transmit, and distribute power within their jurisdictions. Most of these governments, especially in Ontario and Alberta, maintain a deregulated market. However, small players cannot lay out the necessary infrastructure required to operate in the sector (Doern 2005). In areas where the sector is highly regulated, such as Nova Scotia, small businesses experience difficulties entering the market.

Nova Scotia Power Inc. has also been granted a monopoly in the region. As a result, potential competitors are locked out of the market. However, some small generation companies have been allowed to produce and sell to the corporation. The arrangement denies them the chance to sell their power directly to the Canadian market. Such practices encourage the growth of the monopoly by suppressing small companies.

As already indicated, the Canadian electricity sector is highly decentralized. The federal government only plays the role of a regulator in matters about safety and environmental conservation (Calvert & Cohen 2011). The provincial and territorial governments, on the other hand, oversee the generation, transmission, and distribution of electricity. The structure of the country’s electricity sector has is successful compared to other nations where the central government controls all generation and distribution systems. There are a variety of reasons why the Canadian government opted for a decentralized system.

The size of the country is one of the major contributing factors to the structure of its electricity sector. It is important to note that Canada is the second-largest nation in the world in terms of its total area covered after Russia. As a result, it would be close to impossible for the federal government to coordinate all activities about the sector. Without the decentralization of the sector, there are high chances that it would be highly ineffective and inefficient. By delegating these operations to the provincial and territorial governments, the country has been in a position to come up with one of the most effective electricity sectors in the world.

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The decentralization of the sector is also aimed at fostering peace and unity among territories and provinces that make up the nation. The regional governments are allowed the chance to exploit the natural resources at their disposal for the benefit of their citizens. It is important to note that the country is endowed with many natural resources that can be used in the production of energy production. Such resources include coal and fossil fuels.

Some regions, such as Ontario have sufficient uranium deposits. Uranium is the most commonly used reactor fuel in the country’s nuclear power plants. Some of the regions are also geographically advantaged. Areas, such as Manitoba, Quebec, Labrador, Newfoundland, and British Columbia have numerous waterways and rapids which encourage the establishment of hydroelectric power stations (Clark 2007). The independence of the provinces and territories also eases the federal government’s burden in terms of financing development projects since they are in a position to generate their income. Revenue generated by the regional governments from the electricity sector also helps improve service delivery to the Canadian citizens at the grassroots (COMFIT 2011).

As most of the provincial and territorial governments continue to deregulate the sector to encourage the wholesale generation of electric energy, they encourage the entry of new investors. All the provincial and territorial jurisdictions have enough resources at their disposal to produce their electricity (Stern 2007). The country has many water resources which encourage the production of hydroelectric power. The structure of the sector also encourages competition between the various provinces and territories. The governments have over the past decades come up with measures to encourage investors. With deregulation being common in some provinces, such as Alberta and Ontario, many players are encouraged to participate in the generation of power.

Possible Future Structure of the Canadian Energy Industry

Currently, most activities involved in the production of electricity in Canada are entrusted to large crown corporations. The corporations are vertically integrated. They operate as monopolies regulated by the regional governments. Nova Scotia is one such corporation. The structure discourages competition from smaller companies that often lack the resources to generate, transmit, and distribute on a large scale (Sioshansi 2013).

The crown corporations on the other hand have the financial might to put in place the necessary infrastructure needed in the electricity sector. They are also in a position to conduct their activities on a large-scale. As such, they are in a position to enjoy economies of scale. The revenue generated is also reinvested back into the sector by the corporations. As a result, they can edge out competition from other smaller players in the entire sector.

Both the federal and regional governments have not been seen to take any action geared towards empowering the small investors in the sector. As such, it is expected that the entire sector will be dominated by monopolies in the coming decades if nothing is done. The monopolies will be expected to make supernormal profits since they are in control of the entire market.

Although most of the territorial and provincial governments in Canada have empowered crown corporations to run major utilities in the electricity sector, some of these regions have maintained unregulated markets. Such regions include Alberta and Ontario. In Ontario, the Ontario Power Authority just plays an oversight role. The government through the body only seeks to regulate the pricing of power generated by players in the sector. The body also helps in contracting for the supply of power and developing an integrated system that helps the government plan for the sector. The nature of the market encourages the entry of all players (Baumol 2006).

It can be termed as perfect competition. The government is not viewed to be in favor of any particular player in the industry. The structure has empowered small businesses wishing to invest in the electricity sector. As a result, there are numerous small businesses involved in the generation, transmission, and distribution of electric power. If the situation persists, there is the likelihood that the nature of the sector in the province will be a perfect competition (Sioshansi 2013). The players in the sector will be expected to make normal profits. Any investor will be free to enter the market at their will. In the long-run, the market will be flooded with small businesses with very little market share. Profitability will hence go down.

How the Structure Affects Strategy Decisions at Nova Scotia Power Inc.

In this section, the author will use Porter’s Five Forces to analyze how the structure of the Canadian electricity sector has impacted crown corporations operating in the market. The framework has previously been used in the analysis of business strategies in many sectors (Bohm 2009). It draws its arguments upon the economics of industrial organizations (IO) through the analysis of its microenvironment (Henry 2008). The framework seeks to reveal the attractiveness of an industry based on the intensity of completion among players in the sector. It comprises of three forces arising as a result of horizontal competition (Kortmann 2012).

The remaining two are a result of vertical competition. Those arising from the horizontal competition include the threat of substitute services or products, threat of entry of new players, as well as the threat of established competitors. Forces arising from the vertical competition on the other hand include customers’ bargaining power in the sector, as well as that of suppliers. The forces have a major effect on the strategies that are employed by organizations in a particular industry. As such, they have a great bearing on the business plan adopted by a particular organization.

It is important to note that Nova Scotia Power Inc. is considered to be a near-monopoly in the region’s electricity sector. It is a vertically integrated utility that has over the years acquired most of the infrastructure used to generate, transmit, and distributing electric power within the province. It is privately owned by Emera. In the past, the corporation has operated almost as a monopoly. However, a new government policy formulated in the year 2001 saw the establishment of a Community Feed-in Tariff (COMFIT) system.

The move empowered organizations, most of which are community-based to generate renewable energy to be sold to Nova Scotia Power Inc. As a result, the corporation today is faced with the threat of new entrants. (Gillespie 2009) The move has significantly reduced its profits considering that it previously generated nearly 100 percent of the power consumed in the region. The bargaining capabilities of suppliers have also increased.

The community-based generators have higher bargaining today since it is a requirement for the government that the corporation purchases surplus power from these parties (Gillespie 2009). To counter the competition posed by these new companies, the corporation has itself resulted in generating renewable energy to boost its production capacity. Today, the corporation is putting up wind turbines with the hope of eliminating the threat of new entrants.

Nova Scotia Power Inc. is also faced with the threat of substitute products. Traditionally, the corporation depended mainly on pet coke, natural gas, and coal for electricity generation. The COMFIT system introduced by the government of Nova Scotia however encourages the generation of electricity from renewable energy sources, such as solar and wind (Jacobs 2009). The two sources have quickly gained popularity in the sector (Pineau & Lefebvre 2009). As a result, the demand for the power generated by Nova Scotia Power Inc. has gone down. To counter this, the corporation in 2014 struck a deal with Berwick, Mahome Bay, and Antigonish to establish a windmill plant in Hants County. By mid-2012, it was expected that 25 percent of its electricity generation will be from renewable energy.

Contrary to the popular belief that Nova Scotia Power Inc operates as a monopoly in the area, there also exist half a dozen municipal utilities. They all transmit and distribute electrical power in the region using their infrastructure. The municipal utilities are Riverport, Berwick, Lunenburg, Mahone Bay, Antigonish, and Canso. They purchase power from Nova Scotia Power Inc and sell it directly to their customers.

As a result, the market share that the corporation previously owned has been significantly reduced. With the presence of other well-established distributors, the bargaining power of the customers has increased (Feldman 2009). The reason behind this is that they now have a variety to pick from. The development has seen a decrease in profitability of Nova Scotia Power Inc. However, the corporation has been in a position to survive even amidst this heightened rivalry to dominate the market following their superior infrastructure which has made it to offer better services to customers (Peterson & Fabozzi 2012).

For example, it adopted the GIS Schneider Electric technology as a link to its customers. The technology enables the company to get prompt notification of any problems on their system to respond more swiftly to power outages compared to other players in the sector.

Contribution of the Canadian Electricity Sector to the Country’s Economy

The Canadian electricity sector has contributed significantly to the country’s economic prosperity. The federal, territorial, and provincial governments have witnessed rapid growth in their economies thanks to the sector. In this section, we will look at the contribution of the sector to the economy of Canada as a whole. In some instances, references can be made to individual provinces and territories (Feldman 2009). Today, the country is considered to be one with diverse energy resources.

The growth in the electricity sector is also sustainable. Currently, it is ranked second in terms of hydroelectricity production. The country has also seen significant growth as a nuclear power over the years. Currently, the nation is ranked sixth in the generation of nuclear energy in the world. Both electricity sources are considered clean energy sources. They are in line with the internationally set standards that call for the minimization of greenhouse gases (GHG) emission levels. With over 75 percent of the electrical energy produced in the country is from these two sources, the sector can be said to be undergoing sustainable growth (Paganetto 2004).

The power generated in the country has as a result been endorsed by many international bodies, such as the Organisation of Economic Co-operation and Development with America being the largest foreign market for their electricity. The country has in the past decades used electricity to power as a commodity of trade. With an ever-increasing demand for energy security in Northern America, the country has stood to earn billions of dollars in terms of revenue from the electricity sector (Warner 2010).

The table below shows the performance of the Canadian electricity sector concerning other nations around the world:

The performance of the Canadian electricity sector in comparison to other parts of the world.
Figure 1: The performance of the Canadian electricity sector in comparison to other parts of the world.

The Canadian electricity sector has also been a key catalyst for the emergence of the country as a leading global economy. Today, the country is ranked the 11th largest economy in the world. It is important to note that the performance of the entire economy depends on that of individual sectors (Pophal 2014). The electricity sector in the country has over the past experienced rapid growth. It has not only strengthened Canada’s energy security, but also that of the world at large.

It has also promoted urbanization and industrialization in the country. The sector provides the much-required energy to run factories in the country (Schmarzo 2013). It also serves as a source of lighting and heat energy to homes and offices within the country. In the process, it has helped in the development of other sectors in the economy such as paper milling, mining, and the pulp industry.

The figure below illustrates the growing trend of the Canadian energy sector, which is important in the generation of electricity in the country:

Growth in the Canadian energy sector.
Figure 2: Growth in the Canadian energy sector.

The Canadian electricity sector is also a major source of employment. The sector is seen as a source of wealth for the country. In 2009, the sector accounted for 6.8 of the nation’s GDP. It has also created employment for an estimated 260,000 persons. It has also attracted investment from all over the world (Riggs 2008). In 2009, capital expenditure amounting to over 61 Billion U.S. Dollars was recorded. The amount was about 20 percent of the country’s new capital investment.

The industry is the largest private-sector attracting immense foreign direct investment. As a result, it has greatly contributed to the growth of other related sectors in the economy, such as the engineering, construction, financial, as well as equipment manufacturing industry (Wetherly & Otter 2011). In 2008, the federal, territorial, and provincial treasuries generated revenues amounting to over 35 billion U.S dollars in terms of royalties and taxes emanating from the sector.

The figure below shows the contribution of the Canadian electricity sector to the economy:

Contribution of the Canadian electricity sector to the economy.
Figure 3: Contribution of the Canadian electricity sector to the economy.

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