Electricity reform urged by Jaccard

Mar 07, 2002, vol. 23, no. 5
By Marianne Meadahl

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Fall-out from the electricity crisis that hit California in 2000 should not lead Canada to abandon its own reform trend, says SFU energy expert Mark Jaccard.

In a paper for the C.D. Howe Institute titled, California Shorts a Circuit: Should Canadians Trust the Wiring Diagram?, Jaccard says Canadians “should not turn their backs on the benefits of electricity reform.”

He believes competitive electricity markets are achievable. “The potential social benefit is enormous, given the risks facing electricity investments today,” he says. “California's calamity shows, however, the large risks from market design mistakes. Reformers must create incentives to ensure that the market has an adequate capacity reserve, and that some consumers will quickly reduce their demand when markets tighten.”

In a bold move, California opened its reformed electricity market to both big and small consumers in 1998. Two years later, its electricity system short-circuited while prices skyrocketed. The next year saw times when peak demand could not be met, even as the state was paying a premium cost to suppliers.

While wholesale prices ebbed in 2001, the state's electricity system today “remains particularly vulnerable to unforeseen combinations of extreme weather, demand shifts and generator shutdowns,” notes Jaccard, an associate professor in SFU's school of resource and environmental management.

The California crisis stunned the world's electricity reform movement. Experts, politicians and other interest groups continue to investigate the state's reform wiring diagram to determine what caused the short circuit and how similar mishaps can be prevented.

While some point to a design error, Jaccard says the problem, when weighed against reform successes elsewhere, doesn't justify “forgoing the consumer benefits from improving operating efficiency and sharing investment risk with private producers.”

“Smaller, competing electricity suppliers are the future, replacing monopolies that never understood the full risks inherent in megaprojects, such as nuclear plants,” he says.

Jaccard says Canadian reformers should focus on “limiting the potential for extreme price volatility and price manipulation in spot markets, including any associated reduction in system reliability.” They should also work to reduce the influence of short-run market price volatility on average retail rates and ensure price signals are sent to consumers who can respond in ways that improve system efficiency.

As electricity markets continue to be highly uncertain, Jaccard believes the reform movement should continue, but that reforming jurisdictions need to be more “cautious and cognizant of electricity's uniqueness” when designing competitive markets.

“If it is to succeed, such reform should proceed in a cautious manner that recognizes the special characteristics of electricity as a commodity, and preserves some of the financial advantages that Canadian electricity consumers already enjoy from their resource endowment.”

Jaccard is a former chair of the B.C. utilities commission. He has chaired two inquiries into electricity market reform in B.C. and has advised governments around the world on energy issues, including the reduction of greenhouse gas emissions.

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