The federal government should provide what amounts to bridge financing to help provinces rapidly build out the country’s electricity systems, without today’s ratepayers seeing higher costs to underwrite a project with longer-range benefits, the Canadian Climate Institute concludes in a policy brief co-authored with energy transition analyst and BloombergNEF founder Michael Liebreich.

The brief proposes a “federally-underwritten” Powering Canada Forward Fund (PCFF) that would be repayable over time, while allowing provincial utilities to keep electricity rates stable as the energy transition unfolds.

“Electricity regulation is well-designed to guard against the cost of overbuilding, but has no equivalent mechanism for recognizing the cost of underbuilding given an economy-wide shift towards electrification, and no way of recouping the investment of anticipatory build-out until new demand arrives on the system,” the five-page policy brief states [pdf]. “The federal government can play a role in breaking this cycle by sharing risk and using its balance sheet strength in the transition,” in a way that aligns with Ottawa’s new National Electricity Strategy while minimizing fiscal costs to taxpayers.

The policy brief points to some of the key granular details of how to deliver on a the promise of wider electrification and a decarbonized grid, at a time when economies around the world are seeing “a surge of growth in demand for electricity, on a scale not seen in many countries since the 1970s,” write Liebreich and three Climate Institute co-authors—President Rick Smith, Executive Vice President Dale Beugin, and Director, Clean Growth Kate Harland—in a summary of the paper issued Wednesday.

An ‘Entirely Positive Development’

“This is very good news,” the four authors say, “since deepening the use of electricity in our economy holds the key to resolving the well-known energy trilemma—providing energy that is affordable, clean, and resilient—and doing so with sufficient abundance to drive economic growth and improve living standards.”

But this “entirely positive development” could be derailed by rising electricity rates to cover the initial capital cost of the new infrastructure. “Deep electrification of the economy requires substantial anticipatory investment,” and “if the cost of this investment is immediately levied against existing power users, it could drive up bills to levels that deter the very electrification that is required.”

A Powering Canada Forward Fund would “align costs and benefits for ratepayers over time,” allowing utilities “to charge ratepayers for the growing system once it has scaled rather than before they have seen the advantages,” the policy brief says. That would be a change from today’s system, where “the benefits of a scaled system would mostly accrue to future ratepayers, yet the costs must be paid by current ratepayers in order to unlock such investment.”

The fund would also shift the financial risk from provincial utilities and ratepayers to federal taxpayers—enabling a larger, Canada-wide grid where the benefits of a particular transmission, clean energy, or battery storage project might show up far beyond the province where the actual investment is made.

To make that work, however, a PCFF would need a mechanism to set a level of ambition for the projects it supports and create guardrails against what the policy brief calls the “moral hazard” of provinces gaining access to a pool of federal funds with nothing to prevent them from overbuilding. It should also take a flexible approach that reflects the needs and opportunities in different provincial grids and complement the capital already available from the Canada Infrastructure Bank, the authors say.

A Policy Window Opens

Beugin acknowledged that the policy brief is “a little specific” in its focus, but said it addresses a question in the National Electricity Strategy about using federal spending power to “square the circle” between immediate electricity rates and a longer-term agenda to expand the system.

“That’s the level of resolution the conversation needs,” he told The Energy Mix in an interview. “It’s not enough to say, ‘let’s shift it from ratepayers to taxpayers’. The ‘how’ really matters.”

The timing is right, as well, Beugin added, with the wider strategy still in draft form and the government still accepting comments. “There’s a policy window here. There is appetite for creative policy-making about how to both expand the grid and keep rates affordable.” And “by providing some specificity, we’re hoping to contribute to that emerging conversation that maybe culminates in the fall budget,” either this year or next.

So far, the Climate Institute hasn’t done the math on what Beugin called an initial proposal. “This is a concept rather than a fully-baked budget submission”

Some form of national benefits test would be an essential part of the plan. “You do need some kind of guardrails,” he said. “The concept of trying to ensure that the dollars are flowing to projects and proposals that make the most sense is really important in the federal context.”

Beyond the Power Price Doom Loop

In a post last month in his Thoughts of Chairman Michael newsletter, Liebreich cited the current structure of Canada’s electricity system as a “particular challenge” for energy transition planning. “The country doesn’t have a single national high-voltage grid,” he wrote. “It has a bunch of them, running north-south, linking different provinces to their newly-unreliable southern neighbour.”

Completing an east-west transmission system “would bring enormous benefits to its power system in terms of cost, reduced emissions and, most critically, resilience,” Liebreich said. “It could turn out to be the type of nation-building project that brings Albertans back from their flirtation with independence. And it’s no fantasy: in March this year, 10 provinces [and territories] signed an interprovincial-territorial partnership to build transmission infrastructure needed to power the country’s next generation of growth.”

In his post, Liebreich listed a number of jurisdictions in different parts of the world that currently “look like they are stuck in a Power Price Doom Loop: volume expectations drive up investment, which in turn causes costs to increase, which destroys the volume growth on which the investment was predicted.”

But “the good thing about doom loops is that they can work in reverse, too. If power prices start to come down, demand will grow,” while additional system flexibility and continuing price signals limit grid investment. “Scrape off some additional barnacles,” he wrote, “and we could end up with an Electrification Virtuous Circle instead.”