Keep electricity affordable

Affordability is at the front of everyone’s minds. The past year has seen the return of inflation and cost increases in all parts of our lives: food. Interest payments. Energy. The cost of things is what everyone is talking about.

And let’s be realistic: no one likes getting a bill, electricity or otherwise. We also know that cost increases that are a frustration for some Canadians can be existential for others.

Rising costs, inflation, and affordability are also top of mind for Electricity Canada’s members. Our members are leading the energy transition and are making strategic investments both on the demand and supply side of the electricity system. They also must consider aging infrastructure, grid hardening due to extreme weather and ongoing system maintenance. All that is before any consideration on building out the system to meet the country’s net zero goals and new demand from electrification.

Where affordability begins: our customers

Electricity companies are doing all of this in an environment where there’s limited appetite or capacity for increased rates from the people that actually pay the bills, our customers.

The ability for Canadians to afford increases to their energy bills is a major conundrum. Energy poverty, measured by how much household income goes to paying these bills, is increasing in Canada. According to an article published in Energy Research & Social Science in November 2021, between 6% to 19% of households in Canada experience some degree of “energy poverty” and struggle to pay for their home energy needs.

This is most prevalent in Atlantic Canada, where almost one in three households are considered energy poor.

Energy needs aren’t really discretionary. You need to heat your home and power your fridge. The reality in Canada is that people are having to make tough choices between housing, food, and energy. In the long term, the energy transition can mitigate some of these pressures, but additional supports will be needed to control costs in the near and medium term.

Households that spend more than 6% of their after-tax household income on home energy services (or roughly twice the national median) have high home energy cost burdens, and are said to be experiencing energy poverty.

Rate caps: a short-sighted strategy

As a response to inflation and rising costs, provincial governments are using legislative tools to impose low-rate limits, or rate caps, on utilities which circumvents the process and independence of utility regulators. This happened in Nova Scotia last October as they capped non-fuel rate increases to 1.8% in total until 2024.

The problem with rate caps is they assume that the only problem to solve is one of cost. But the governments implementing such caps are not considering the aging infrastructure and grid hardening due to extreme weather events which in the long term both affect economic growth. There’s no getting around that investing in the grid costs money.

There are other concerns, including:

• The caps will hinder build-out of the grid to meet both provincial and federal net zero goals, as well as create other trickle-down negative economic impacts.

• Rate caps are a detriment to the credit ratings of investor-owned utilities, making it more costly to access capital, which in turn increases the utility’s costs, with no benefit to service, and passes those costs onto customers.

Emera, Nova Scotia’s investor-owned utility, recently stated that they are putting all clean energy projects on hold after the recent rate cap announcement by Nova Scotia’s provincial government.

In the medium to long term, rate caps will ultimately hurt customers, especially vulnerable customers. Deferring needed investments will only make them more expensive in the future and increase the risk of making the grid less reliable.

Ratepayer vs. taxpayer

To preserve customer affordability, Canada will need to consider how tax base funding can support electricity investment. Relying exclusively on the rate base to fund tomorrow’s grid will inevitably put undue pressure on individual customers, especially the most vulnerable.

Electricity bills charge for use: everyone pays the same rate per kWh, no matter their income. That rate covers the cost to produce, transmit, and deliver the power to your house, including all associated infrastructure.

If some of these costs are borne by the tax base – through infrastructure funding, tax credits and incentive schemes – it would provide a wider, more progressive, base for funding.

Government investments would reflect the public good that a cleaner electricity system offers. Low-income families would not be adversely impacted with the burden of paying for grid modernization.

Affordable electricity is important for households and the competitiveness of Canadian industry. Low-cost electricity not only empowers customers to choose electricity over higher-emitting options, it gives them confidence in further electrification. However, if the energy transition is borne exclusively by the ratepayer, it will not be affordable.

What needs to be done

Canadian electricity companies have been ensuring that electricity remains affordable for customers during the energy transition, but there is more that can be done by all stakeholders, including:

Develop a Canadian electricity strategy, centred on affordability.

Part of the work of a federal electricity strategy needs to effectively fund large-scale infrastructure projects to build out the electricity grid to be more adaptable and less carbon-emitting so that customers aren’t on the hook for infrastructure costs.

Exempt regulated utilities from planned changes to Excessive Interest and Financing Expenses Limitation (EIFEL).

Under EIFEL, some companies that deduct interest from their incurred debt will now see that tax deduction reduced, initially to 40% in 2023 and then to 30% starting in 2024. This limit was implemented without thinking about how it might impact a utility’s capital projects, as interest can no longer be deducted and every dollar of denied interest will be passed on to customers or increase the cost of capital. The legislation needs to recognize and reflect the unique situation of utilities and provide a targeted exemption, similar to the United States.

Implement more efficient incentive programs.

Although energy efficient measures are the easiest way to reduce emissions, the upfront costs of implementing home energy retrofits and upgrades are often a barrier for many Canadian households. The federal and provincial governments offer rebate programs for energy efficiency retrofits and for the installation of technology like heat pumps. Programs such as the federal government’s Greener Homes Loan can help Canadians make their homes more energy efficient by offering interest-free financing while saving money on their bills. These programs need to increase in scale, but

also in terms of overall access.

Provide energy efficiency and demandside management services.

Energy efficiency programs have been an important part of utilities’ outreach for decades. However, with buildings accounting for approximately 13% of Canada’s greenhouse gas emissions, demand-side management and energy efficiency are key for Canada to achieve net zero and help customers to save on their energy bill. Utilities are offering innovative solutions like on-bill financing so homeowners can more easily access heat pumps and other energy saving technologies.

For the Canadian economy to achieve net zero by 2050, electricity companies will need to double or triple the amount of of electricity being currently produced, while ensuring that electricity continues to be affordable, reliable, and resilient for Canadians now and into the future. There are outstanding questions on how affordability will be maintained for all customer segments as we build out infrastructure, and how these costs will be distributed equitably. This is a critical issue for the electricity sector as we continue to move down the path towards a netzero future.