Submission to the Utility and Review Board Hearing to Approve the Maritime Link Project*

Large scale energy infrastructure investments are complex, requiring multi-disciplinary and multi-stakeholder examination in order to minimise risk and maximise both short term and long term benefits.  They require an effective integration of energy policy with environmental policy, social policy, economic development policy and industrial policy.  Investments on the scale of the Maritime Link do not lend themselves to simplistic short term analysis through one policy lens; rather they require careful consideration through multiple lenses and over a long term horizon in order to make the right decisions.

In this brief paper it will be argued that the Maritime Link investment must be considered against four super-arching tests which may allow its multi-dimensional nature to be properly evaluated.  It is understood that the Utility and Review Board (UARB) may not have a mandate to explore the merits and demerits of the Link from all dimensions.  However, it is respectfully submitted that in fulfilling its mandate from the Province on the Maritime Link investment decision, the UARB will not wish to inadvertently disadvantage future generations of Nova Scotians with respect to energy security or higher energy costs.

The Four High Level Tests which I propose below are designed to avoid policy uncertainty and maximise the chances of an evidence-based decision.  They are:

Test 1: The Economic Rationale Test
Test 2: The Policy Consistency Test
Test 3: The Policy Integration Test
Test 4: The Future Generations Test

Test 1: The Economic Rationale Test

The case for the Maritime Link has been made – and refuted – by economic models operating under different scenarios for future energy pricing and availability under conditions of both economic growth and contraction.   While a complete summary of the large amount of evidence before the Board is not possible, I would like to reprise some of the most relevant arguments made by some of the key actors and their independent consultants.

Nova Scotia Power has presented a detailed application claiming that the Maritime Link Project is the “lowest long-term cost alternative” and that it is consistent with existing environmental regulations.  The application also asserts other strategic opportunities including: greater interconnection to the North American grid; increased capability to develop new variable sources of electricity such as wind and tidal; enhanced reliability; and the ability to prepare for many differing future energy scenarios.

Synapse Energy Economics provided a set of assumptions which note that indigenous wind and potential New Brunswick imports could be lower cost.  They assert that the objective should not be to “oversupply” renewable energy requirements, and that a variety of options exist to help improve system flexibility to integrate variable renewable generation.  They also note the benefits of previous policy decisions in Nova Scotia.  These includes the introduction of the Community Feed-in Tariff, as well as Efficiency Nova Scotia, which has achieved energy savings at a cost of only 3 cents per kilowatt-hour; thus providing a real “least-cost” resource to the system.

Richard Carlson, John Elder, and Richard Levitan on behalf of the Consumer Advocate make similar points with respect to energy efficiency and renewable energy integration.  They are optimistic that gas prices will be lower than some predict, and that Nova Scotia will be able to import renewable energy from the New Brunswick intertie.  Like Synapse, they make a set of assumptions that they believe tip the balance against the Maritime Link investment.  However, like Synapse, they exclude economic impacts after the scenario time-period (the so called “end effects”).

The Canadian Wind Energy Association notes that they were initially enthused by the potential to make provision for further wind generation in Nova Scotia through the enhanced interconnection to a hydro-electricity resource, but are concerned that the flexibility of the resource is not being fully exploited.  The Helios Centre while optimistic for the future of energy efficiency in Nova Scotia, is concerned that load growth and other events in Newfoundland and Labrador could reduce the availability of surplus energy.

Finally, Power Advisory LLC, on behalf of the Department of Energy conducted a separate study arguing that the Maritime Link was the most cost-effective option.  They noted that even in the case where the 40% renewable energy requirement is relaxed, and there is greater use of natural gas the Maritime Link still pays off in the long-run.  Power Advisory describes the “strategic value” of the Maritime Link, including providing an ability to respond to potential future stringent environmental requirements.  They note that the contract terms provide a hedge against price volatility, whereby the fixed price block will protect against high market price scenarios, and the market price block will be attractive if prices remain low.

All of these findings are internally consistent, and are based on how different energy scenarios may change variables such as price, demand, time-periods, and policy assumptions such as the desirability and capability of importing renewable energy from various jurisdictions.

Clearly it is not reasonable to expect the Maritime Link to pass the Economic Rationale Test under every potential scenario.  If applied to any other investment decision with a 20-30 year time frame such a test would result in almost no investments in infrastructure whatsoever.  Rather, I would argue that the ultimate test should be “is the Maritime Link likely to be one of the lowest cost options under most plausible scenarios?”  It is neither sufficient, nor intellectually rigorous to argue for suspension of the investment unless there is a guarantee of lowest cost outcomes under all scenarios.  As noted by Nova Scotia Power in their response to the interveners, the overwhelming majority of the Synapse Energy Economics models showed a positive case for Maritime Link and only two (out of 20) demonstrated possible lower cost alternatives.  This does not mean that either those two scenarios will necessarily prevail.  Under the same logic, the possibility of a much better deal from Hydro Quebec at a later date should not result in the automatic postponement of the investment decision.  We must assess the economic case on the basis of least risk and maximum benefit in the greatest number of plausible futures.

Of course, in critically assessing the plausibility of the various scenarios under consideration, we must also take into account a number of broader factors relevant to the successful implementation of such a decision once it is taken.  We must consider i) the way in which the decision before the UARB also achieves consistency with previous Provincial policies; ii) the extent to which integration with other (non-energy) policies has been achieved; and iii) the responsibility of Provincial decision-making processes not to  burden future generations with extra costs or exposure to lower energy security.  We will turn now to those factors.

Test 2: The Policy Consistency Test

In the period 2007-2010, something of a policy consensus emerged on energy issues in the Province.  Starting with the release of the 2007 Integrated Resource Plan, this consensus was manifested by the cross-party support for Greenhouse Gas reductions and renewable energy regulations first introduced by the MacDonald government and the multi-stakeholder support for the design process which led to the inception of Efficiency Nova Scotia.  These policies were further reinforced by the Dexter government, which built on the legacy of its predecessor government in delivering Efficiency Nova Scotia and firming up a 2015 25% renewable electricity supply target, and confirming the tacit 2020 target of 40% renewable electricity provision.  Some of these processes have been described in the peer reviewed literature (Adams et al, 2012).

It has been well demonstrated that in the absence of policy consistency, energy investments stall.  This is especially so in jurisdictions where some level of marketization of energy production and distribution has been established.  Privatised and deregulated utilities will not invest where there is a likelihood of short termism and the emergence of unpredictable political risk.  One example of this phenomenon is Ontario, whose deregulation experiment was cancelled due to a spike in electricity prices, followed by another period of restructuring.  A study conducted by Guy Holburn and colleagues at the University of Western Ontario found that in Ontario wind companies ranked policy stability as a higher priority than subsidies, and that policy uncertainty raised the price of wind energy for ratepayers.

Another example is the UK, where – regardless of any claimed earlier merits – the privatised energy supply and distribution model is now recognised to have placed Great Britain in a situation where strategic investment has failed and risks of system breakdown are now actively discussed by industry leaders.  Nuclear energy and renewable energy investments have simply not emerged on the scale that the UK requires.  As a result, and given European Union carbon targets, the UK is now actively seeking to totally reform its electricity markets amid much controversy and multiple resignations of senior government officials.

In contrast, the  consistency and stability of Nova Scotia energy policy which existed between 2007 and 2010 led to a number of important considerations: i) how to maximise the contribution of energy efficiency to system cost-effectiveness and resilience; ii) how to phase out coal fired power generation consistent with Federal requirements; iii) how to maximise the development of competitively priced wind energy consistent with system absorption capability; iv) how to develop community interests in energy production and distribution; v) how to develop and make provision for natural gas; and ultimately vi) if and how to develop the Maritime Link.

It might be argued by officials in the Department of Energy (DoE) and commentators elsewhere that the result has been a finely balanced and systemically hedged strategy which accommodates many possible scenarios with respect to Provincial energy needs, new technology development (including marine renewables),  and a wide range of projections in energy prices.

Conversely it could be argued by critics of the Maritime Link investment that DoE officials have failed to achieve a level of policy consistency and stability that extends to the inclusion of the Maritime Link, regardless of its undoubted successes in other areas.

Some interveners have highlighted the risk-reducing benefits of more modular technologies such as energy efficiency and wind, and clearly Nova Scotia has created effective policy frameworks to maximize the use of both of these resources in recent years.  However it must be noted that the non-Maritime Link scenarios all place a significant reliance on the build-up of new natural gas infrastructure within the Province, to meet coal plant phase-out regulations and to help integrate more wind generation.  In  stakeholder consultations conducted in 2008 and 2009 we discussed how the Province of Nova Scotia made a precipitate transition from oil to coal, and many stakeholders concluded that we are paying the price of those decisions today.  It would seem unwise to repeat this experience given everything we know about the finite and volatile future for natural gas.

So the test of policy consistency and stability now, is not simply “do we trust the Department of Energy to effectively achieve policy consistency and stability in order to deliver optimum investment strategies for the Province?” – although this would indeed be a reasonable test.    Rather we must require an even higher test which is: “is there sufficient robust evidence for the Link being a poor investment to justify breaking the imperative of energy policy consistency and placing an alternative wager on natural gas?”

Test 3: The Policy Integration Test

It is perhaps the most complicated part of the assessment of the Maritime Link to determine its costs and benefits with respect to different policy objectives ranging from Federal carbon policy to the regional economic development benefits of greater grid capacity.

It is simply not possible to predict with total certainty what will be the price of carbon in 5 years’ time, let alone 25 years.  And it is not possible to guarantee that a significant marine renewables industry will emerge in the Province in the next 15-20 years to provide some level of predictable if variable base load.  We do not know how the mandate of Efficiency Nova Scotia will play out in terms of reducing net consumption of electricity and other forms of energy the next 20-30 years or the extent to which electric vehicles and heat will develop and place significant new burdens on Provincial energy supplies.  We do not know with any certainty what price New England will be prepared to pay for green energy from Atlantic Canada or Quebec in 5 or 10 years’ time.  We do not know how many low income households will be trapped in fuel poverty in the future.

And yet, it is these sorts of variables that will determine the real risks and benefits of the Maritime Link investment.   Under these circumstances the main question is “to what extent does the Maritime Link help manage multiple forms of uncertainty in different policy areas, reducing system risk and improving the wellbeing for Nova Scotians?”

While the renewable electricity energy consultations in 2009 sought to find the best way to meet existing policy targets, it also sought to ensure flexibility to allow for increasingly stringent targets to get set in the future, at both national and international levels.  As noted above, Nova Scotia progressed from renewable energy targets of 18.5% by 2013, to 25% by 2015; to 40% by 2020.

Canada is a federal system and thus the Province’s energy strategy is affected by federal policy and in turn federal obligations to follow international agreements.  Nova Scotia’s renewable energy targets and GHG caps provide it with a firm basis to negotiate an equivalency agreement to comply with federal coal-based GHG regulations.  Certainly, policy uncertainty exists at the federal level that Nova Scotia must consider.  Federal governments have changed energy and climate change policy on numerous occasions, but today most Federal parties are calling for more aggressive action on climate change and some form of carbon pricing.  Hence, given the relative clarity of current Federal Government policy on coal-based GHG caps and current opposition stances on climate change more generally, it is unthinkable that fossil fuel based energy supplies will see a significant long term resurgence.

Other jurisdictions are moving more aggressively than Nova Scotia.  Germany is targeting a 65% share of electricity from renewables by 2040, and 80% by 2050.  Denmark is targeting 100% of electricity and heat from renewable energy by 2035, as a step towards a fully renewable energy system by 2050.

With these trends in national and international policy, and with the possibility that political change may occur at the Federal level at some point, it is essential that Provinces like Nova Scotia are not blind to the national and international contexts for decision-making.    Equally, it is vital that Nova Scotia makes its own ‘joined up’, integrated policy case for energy infrastructure investments that takes the broadest possible view of global trends, but relates those trends directly to local priorities and needs.

It is not usual for power utilities to make a case for their investments with direct reference to the full range of possible social and economic policy impacts; this is more properly the domain of multiple Departments and agents of Provincial Government.  In the case of the Maritime Link investment, it is clear that the Department of Energy has a lead coordinating role.  But there are implications for many other departments and their stakeholders, including : Agriculture; Economic and Rural Development and Tourism; Environment; Finance; Health and Wellness; Intergovernmental Affairs; Labour and Advanced Education; Natural Resources; Service Nova Scotia and Municipal Relations; and Transportation and Infrastructure Renewal.

If objectors to the Maritime Link can make an effective case that the mechanisms for considering national and international policy trends or joined up government have failed in this case, ie that the Provincial Government has not succeeded in integrating its agenda with respect to the broader implications for economic development, environmental protection and the wellbeing of Nova Scotians then a case can be made for failure of the test of Policy Integration.  However, if the Provincial Government can demonstrate that it has considered the broader costs and benefits, risks and opportunities flowing from the investment then this test is passed.  Our question for policy integration, is then “is it reasonable to assume that the Provincial Government has properly considered the broad range of external policy drivers and related them to the local economic, social and environmental benefits and costs of the Maritime Link?”

Test 4: The Future Generations Test

The Board has a mandate to take into account the interests of not only the stakeholders represented in the hearing, but the interests of future generations as well.

As previously noted, some proposed scenarios have eliminated consideration of economic impacts outside the time period by excluding “end effects”.  It may be argued therefore that this would appear to overlook the interests of electricity consumers in coming decades.

Even more important perhaps is the question of climate change mitigation and adaptation.  The recognition of the need to reduce GHG emissions to deal with the urgent threat of climate change was a major factor in the establishment of the policy consensus discussed earlier.  Thus it is surprising that few of the scenarios before the Board in this hearing seem to have considered the impact of severe tightening of future environmental regulations, or included the prospect of meaningful carbon pricing.

The Environmental Goals and Sustainable Prosperity Act, which received all-party support expressed GHG reduction targets as “at least” minima.  Recognizing that a fundamental energy transition will be required during this century, it would seem prudent for the Board to also consider existing regulatory constraints as minimums.  This would allow for the possibility that there is greater risk in undersupplying renewable energy to meet GHG targets, than there is in “oversupplying” renewable energy requirements based on a broad range of assumptions.

In Nova Scotia, some have asserted that the Province may have “maxed out” its ability to integrate more variable renewable electricity, due to our limited interconnections and inflexible coal-based electricity system.  There are many valid questions on the extent to which the Province can integrate more renewables, but no one denies that increased interconnections, especially to a hydro-electricity resource, will alleviate some technical barriers, and thus give the Province new options moving forward, including the possibility of integrating large scale tidal energy resources that may be important to the industrial and manufacturing base in the Province.

Thus, much of the debate is now focused on future demand projections.  If demand is lower than expected, Nova Scotia may not need new clean energy imports over the fixed link or the extra capacity to integrate variable renewables, and as Synapse warns, we might “oversupply” renewable energy.  I would suggest that this eventuality need not be seen as a threat, but a potential opportunity to further optimize the larger energy system and indeed integrate industrial policy goals under the justification of policy integration.  “Surplus” renewable electricity supply provides the opportunity to support strategic electrification of transport, heat, and relevant industries.  It is not necessarily the UARB’s mandate to promote certain types of electric load, but the UARB will not wish to inadvertently constrain future policy decisions by not taking this potential strategic opportunity into account.

Supporters of the Maritime Link would assert that while a transmission line is a large infrastructure project it also enables a much greater degree of supply diversity.  Rather than becoming overly reliant on one resource i.e. natural gas with potentially highly variable pricing, this corridor connects Nova Scotia to all resources along the entire grid network.  This not only includes Muskrat Falls, but also the Upper Churchill, and the hydro-electricity resources on Newfoundland.  It opens the door for Newfoundland and Labrador to develop its wind resources.  And while some might fear that electric load in Newfoundland and Labrador will be higher than anticipated, in Nova Scotia we know that effective energy efficiency strategies can help manage load growth.

The question I would pose therefore in applying the fourth test is this: “how will future generations of Nova Scotians view this decision in 30 or 50 years time: as an expensive investment or as a vital enabler of energy resilience and independence; as an unnecessary gesture or a bold response to climate change mitigation and adaptation?”

Conclusions

Under the Maritime Link Act, the UARB must approve the project if i) the project represents the lowest long-term cost alternative for electricity for ratepayers in the Province; and ii) the project is consistent with obligations under the Electricity Act, and any obligations governing the release of greenhouse gases and air pollutants under the Environment  Act, the Canadian Environmental Protection Act (Canada) and any associated  agreements.

Whilst the criteria for the decision are clear, in this paper I have suggested four tests to be applied to the decision on the Maritime Link which may provide further clarity.  I have captured those tests in the form of four questions:

1 – “is the Maritime Link likely to be one of the lowest cost options under most plausible scenarios?”  – this question addresses criterion (i) in the Maritime Link Act.

2 – “is there sufficient robust evidence for the Link being a poor investment to justify breaking the imperative of energy policy consistency and placing an alternative wager on gas?” – this question is supplementary to consideration of criterion (i) in that it invites us to address the wisdom of establishing an over-dependence on another fossil fuel, namely natural gas.

3 – “is it reasonable to assume that the Provincial Government has properly considered the broad range of external policy drivers and related them to the local economic, social and environmental benefits and costs of the Maritime Link?”- this question invites us to address broader issues of good governance in decision-making and therefore goes beyond the criteria stipulated in the Maritime Link Act.  And

4 – “how will future generations of Nova Scotians view this decision in 30 or 50 years time: as an expensive investment or as a vital enabler of energy resilience and independence; as an unnecessary gesture or a bold response to climate change mitigation and adaptation?” – this question takes criterion (ii) in the Maritime Link Act beyond the satisfaction of regulatory obligations today and invites us to consider satisfying future regulatory conditions deriving from the need for climate change mitigation and adaptation and indeed  to consider opportunities driven by the eventual decarbonisation of energy supply.

I have suggested these tests because I am concerned that some of the assertions that are presently debated in the media risk being unnecessarily polarising and may not be taking full account of national and international policy trends or indeed of our own local policy-making in recent years, which has been largely consensus-based and long term in its outlook.

I also believe that if – as seems likely – the two questions addressed to the UARB and the four tests I have applied above are met, and as a Province we do decide to commit to the investment in the Maritime Link, there is further work to be done:

The Province should immediately:

  • Conduct a thorough assessment of what strategic long term advantages the Maritime Link can provide in the coming years and beyond.  This should include eliciting more detailed information from Nova Scotia Power on their view of the potential to integrate more variable renewable energy resources and what types of energy that will involve and from where.
  • Create a long term strategy to optimize purchases over the Maritime Link through improved wind forecasting, information systems, and coordination of energy trades between Nova Scotia Power and Nalcor and indeed with other third parties in the region and New England.
  • Recognize the need to re-iterate the Province’s consensus-based energy strategy in order to take full advantage of the Maritime Link.  This could include
    • a strategy to reduce the province’s oil dependence in heat and transportation sectors by switching to low-GHG electricity;
    • Continued emphasis on energy efficiency to reduce electricity bills (particularly for the poor), potentially enable lucrative electricity exports, and to complement strategic electrification initiatives where appropriate;
    • Develop domestic renewable energy innovation strategies given the alleviation of technical system integration barriers, and to link this to industrial policy and manufacturing industry opportunities eg in marine renewable energy.
* This paper represents my personal academic optinions and does not represent the policy of Cape Breton University.