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Outdated Canadian Utility Model Hampers Rural Sustainable Energy Development

Ditching an out-of-date costing model for electricity would help utilities source more renewable energy, align with climate change goals, and support energy sovereignty in remote Indigenous communities, the Pembina Institute concludes in a recent release.

The Cost of Service (CoS) model—currently the standard business approach for utilities that provide service to remote Canadian communities—“acts as a deterrent to the purchase of renewable energy from independent power producers, to the adoption of energy efficiency measures, and, by limiting energy decision-making opportunities, to energy self-determination for Indigenous peoples in remote communities still heavily reliant on diesel fuel,” Pembina explains.

Utilities current establish power rates for consumers by calculating their operating costs and profit margins, then adding capital recovery costs proportionate to their assets. Operating and profit revenues are fixed and fairly constant, but utilities have more freedom to increase revenue by acquiring more assets.

Because of this structure, “the CoS model incentivizes utilities to both sell more energy and own more assets, as doing so increases revenue. Conversely, utilities do not benefit from promoting energy efficiency, which decreases demand,” says Pembina.

As a result, both the emerging climate goals being set at various levels of government and increasing consumer preference for renewable energy work against a utility’s overall profit. Utilities can also lose revenue from independent energy projects, such as those sought by Indigenous communities trying to reduce dependency on diesel generation as they strive for energy sovereignty.

“To compensate, utilities, and the regulatory bodies that govern them, will need to explore other options for revenue generation, ones that align with climate action goals and offer pathways that will reduce diesel dependency,” Pembina writes.

Northern utilities experience a unique set of challenges in servicing remote communities. Small customer bases, limited internal capacity, reliance on diesel subsidies to cover poor economies of scale, and limited ability to interconnect with other grids can all affect implementation of alternative energy models in remote areas. Various strategies—like changing the way rates are set by regulatory bodies, or improving incentives to adopt renewable energy sources—could help transform current practices. 

Those changes can also create opportunities for Indigenous participation, offering “new ways for Crown utilities to implement some of the Truth and Reconciliation Commission’s Calls to Action and to recognize, through practice, the United Nations Declaration on the Rights of Indigenous People,” Pembina writes.