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Home > Speeches and Presentations > Speeches and Presentations 2010 > Energy, Regulation and Integration

Energy, Regulation and Integration

Presented by
Gaétan Caron
Chair and Chief Executive Officer
National Energy Board

2010 CAMPUT Conference
Montréal, Québec

3 May 2010

Good morning.

I was very pleased to receive an invitation from CAMPUT and to be a part of today's panel. This conference is a wonderful opportunity to learn and share best practices. I'd like to take these next fifteen minutes to give you the NEB's perspective on energy, regulation and integration.

Outline

The North American continent is rich in energy resources, conventional, unconventional and renewable.  I will examine the relationships between energy resources, energy security and energy opportunities, through the lenses of free trade, smart regulation and sustainability.

Active and Effective in Canada's Pursuit of a Sustainable Energy Future

I'd like to begin with some background on the National Energy Board (NEB). I'm sure most the attendees here today are familiar with the NEB so I will be brief.

The Board's regulatory function is to ensure the safety, environmentally integrity and economically efficiency of proposed and built facilities. Our specific regulatory responsibilities include: oversight of the construction and operation of international and interprovincial pipelines, international power lines and designated interprovincial power lines; authorization of pipeline tolls & tariffs; and authorization of energy exports (oil, natural gas, natural gas liquids and electricity) and imports (of natural gas).

The Board's other function is to provide energy advice. This includes informing the government, industry and the public at large, about developments in energy supply and markets through our Energy Information Program.

These two roles are performed under the guidance of what the NEB's strategic plan refers to as our Vision. It states that "The NEB is active and effective in Canada's pursuit of a sustainable energy future." What I'd like to focus on here is the phrase "a sustainable energy future". This concept can be described as a 3-legged stool, with environmental, economic and social considerations representing the 3-legs. I'd like to closer examine how this concept dovetails with the topic of energy integration.

Energy Integration Trends

Over the past two decades, the North American energy market has grown increasingly integrated. This chart shows Canada's combined exports and imports of oil products, natural gas and electricity. Energy moving in and out of Canada has more the doubled since 1990. New pipe and power lines, pipeline capacity increases, new Canadian, American and global supply sources and increasing global demand have driven this trend.

For instance, in 1990, there were 5 connections importing natural gas into Canada. At present 10 such connections exist with more being proposed. Likewise, imports of gas have increased from about 60 million cubic feet per day in 1990 to almost two billion cubic feet per day in 2009. This 30 fold increase has been a result of increased imports into Ontario as gas buyers look to increasing U.S. production as a source of diversification for their supply portfolios.

The Myth Around Energy Security

It is sometimes argued in today's energy debate that a country should strive to produce as much energy domestically as possible and it should be a priority to be self sufficient in energy. However, basic economic theory tells us that nations are generally better off when markets are open and nations can trade freely.

In 2007, as part of the Board's Energy Information Program, we examined this theory from a Canadian perspective. In the 2007 Energy Futures Report, the Board produced a number of forecasts based on different scenarios, two of which are shown here. Triple E was characterized by well-functioning energy markets, cooperative international agreements and effective environmental policies. It sought to balance economic, environmental and energy (Triple E) objectives. In contrast, Fortified Islands represented a setting wherein security was at the forefront of public concern. Geopolitical unrest, a lack of international cooperation and trust, and protectionist government policies characterized this scenario.

The results of our analysis showed lower Canadian GDP growth in the Fortified Islands scenario compared to Triple E. Also, Fortified Islands resulted in higher and more volatile energy prices due to uncertainty resulting from security concerns and unacceptably high risks in making major international investments. Also, despite higher economic activity in Triple E scenario, forecasted greenhouse gas emissions were notably lower compared to Fortified Islands.

Of course, these results stemmed from the concept of comparative advantage. The idea is that trade allows nations to specialize in producing more of the things they do well, while being able to import more of those that they produce less efficiently than other countries. As I am sure you are all well aware, one of Canada's key comparative advantages is its abundance of a wide variety of natural resources. Take for instance Canada's many major energy projects such as the large scale development of the WCSB, the oil sands, hydroelectric generation projects, and the Canaport LNG facility. All of these projects were made economic because of access to broader markets than just the Canadian economy. They were all able to capture the necessary economies of scale.

Restrictive trade policy can impede the economic advancement of nations. Clearly, the integration of energy markets has served Canada well in the past and will equally well in the future.

Protectionism and Barriers to Trade

Source: istockphoto

As we look towards that future, there will often be challenges to overcome as we adapt to changing conditions in an integrated North American energy market. Examples could include product nationalism, regulatory and jurisdictional incompatibilities, or product standards. These barriers represent challenges that are difficult to identify and can often be well meaning efforts resulting in unintended consequences.

Continentalisation and a Sustainable Energy Future

While energy integration has and is expected to continued to benefit Canada economically, what about other goals that are important to Canadians? Happily, energy integration has and will continue to strengthen the other two legs of the metaphorical stool I mentioned earlier, enhancing both environmental and social objectives. The goal of energy integration walks hand in hand with the goal of a sustainable energy future.

Consider environmental goals. The concept of comparative advantage can be easily extended from an economic concept to an environmental one. The many sources of renewable power in North America, from hydro to wind to solar to tidal, each have their own unique benefits and drawbacks. Green forms of energy are often located far from demand centers, may be productive only intermittently, or may have high upfront costs. With this variety of advantages and disadvantages, the gains from improving integration between different energy sources and regions may be substantial.

Evolving Continentalisation

There are many examples of how the goal of a sustainable energy future is being progressed by energy integration across North America. Likewise, there are many opportunities to continue these efforts as we look towards the future.

One example of two renewable energy sources that stand to benefit greatly from further integration is wind and hydro. On its own, electricity generated from wind suffers from variability since the wind does not always blow. As a result, other generation, like gas-fired plants, are usually needed to backup wind resources. Similarly, hydro jurisdictions benefit greatly from their water resources but, in low water years, other forms of generation may be needed to supplement output.

However, if these two resources could be better integrated, via links between the regions, the disadvantages of both energy sources can be reduced to the mutual benefit of both regions, environmentally and economically. Wind power can be exported to hydro regions during times when the wind is blowing, saving the hydro jurisdiction water. In this way, the hydro dam acts as a battery for the wind power. And when the wind is not blowing, electricity from hydro jurisdictions could then be imported to the wind jurisdiction instead of running fossil fuel plants. This example demonstrates an opportunity for substantial gains from trade for both parties via strategic transmission links.

Transmission Integration

In addition to pipes and power lines, roads, railways and telecommunication technology are some examples of the transmission links that extend across borders. It is important that these links demonstrate consistency and transparency so that participants on both sides of the border know what to expect when they utilize these links. The more standardized the transmission across North American borders, the more trading partners can benefit from each other's comparative advantage.

One example of continued integration through standardization across regions is the North American Electric Reliability Corporation (NERC). NERC develops and enforces standards to ensure the reliability of the bulk power system in North America. In addition, the NERC furthers this goal by assessing long term system adequacy, evaluating market participants for emergency preparedness and training industry personnel. By developing a set of standards that are consistent across electricity jurisdictions, market participants can more easily integrate electric systems across regions, to further reliability and prevent interruptions to power service. Likewise, efficient trade is enhanced by standardization, thus advancing the goal of a sustainable energy future.

The Role of Regulators

As the North American market continues to become more integrated, regulators have an important role to play. Effective, timely, goal oriented and value-added regulation allows markets to achieve optimal outcomes while keeping environmental, economic and social goals in balance. In addition, continued cooperation between regulators allows cross-jurisdictional energy transportation projects to be better managed through the application process and approved projects to be regulated in a more comprehensive and coherent manner.

One success in this vein is the memorandum of understanding (MOU) between the NEB and the Federal Energy Regulatory Commission (FERC). This MOU was in fact signed at this very conference in 2004. The agreement recognizes that the two agencies oversee interconnecting facilities or activities, and assists both parties to coordinate their responsibilities. It is another step in Canada's commitment to smart regulation and the development of regulatory strategies that protect the health and safety of Canadians and of the environment, while contributing to economic efficiency.

Key Messages

I'd like to wrap up with a quick overview of the key messages of my presentation.

• Integration of energy markets has served North America well in the past and will equally in the future.
• Benefits from continentalisation are more than economic, as environmental goals have much to gain from a more integrated North American energy market.
• Regulators have and will continue to support an integrated North American energy market through effective regulation, cooperation among regulators at all levels and impartial energy information.

If you are interested in knowing more about the topics I discussed today, I would be happy to answer any questions you may have. A copy of my presentation has been made available electronically through the conference's website. Or, if you prefer:

• try our website: www.neb-one.gc.ca
• call us at 403-292-4800 or toll free at 1-800-899-1265
• drop by our Library in Calgary: National Energy Board, 444 Seventh Avenue SW, Calgary, Alberta
• reference our recent publications (Energy Futures, Infrastructure EMA, Briefing Note on Attitude and Behaviour etc.)
• we are also currently updating our Energy Futures Scenarios - stay tuned!

 

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Date Modified:

2011-10-28