Resources Article

Harmonizing North American Electricity Policy and Planning: An Action Agenda

Summary

Key players in Canada, Mexico, and the United States recently came together to explore the wealth of opportunities to lower electricity costs, increase reliability, and tackle climate change more effectively through coordinated electricity policymaking and planning.


Electricity production in Canada, Mexico, and the United States is evolving rapidly, providing the continent with an opportunity to reap economic and environmental benefits from tri-national coordination of both policy and system planning. To inform these efforts, RFF partnered with the US Department of Energy (DOE), Canada’s International Institute for Sustainable Development, and Instituto Tecnológico Autónomo de México to host two workshops that convened key players from federal, provincial, and state governments; academic institutions; nongovernmental organizations; and the private sector. The result is an action agenda that highlights the diversity of opportunities for greater energy harmonization—from streamlining approval processes for new cross-border transmission projects to developing a North American Intended Nationally Determined Contribution (INDC) for 2050 to guide efforts to address climate change.

“We use the word harmonization in the context of North American energy to cover a broad spectrum of activities, ranging from sharing information to considering impacts on neighboring countries to fully integrating energy policies.”

We use the word harmonization in the context of North American energy to cover a broad spectrum of activities, ranging from sharing information to considering impacts on neighboring countries to fully integrating energy policies, as one would in a customs union or common market.

Many examples of harmonization already exist in North America. For instance, in 2014 the three countries signed a memorandum of understanding on the sharing of energy-related data and definition of terms. The linked greenhouse gas cap-and-trade programs of California and Québec—soon to be joined by Ontario and Manitoba—provide an example of broad policy integration. More complete policy harmonization is illustrated by Canadian automobile emissions and fuel economy policies, which mirror those of the United States in stringency over time.

Benefits of Harmonization

Why might countries choose to invest the time and energy required to share information, coordinate policymaking, or even fully harmonize policies? Harmonization is not automatically beneficial, but it can lead to favorable outcomes under certain conditions.

First, harmonization is beneficial if it facilitates a worthwhile activity, such as power generation or emissions reductions, occurring where it can be accomplished at the lowest cost. Linking emissions cap-and-trade programs, enabling the free flow of power, and equalizing the marginal tax rate on generation, for example, are harmonization actions that can result in this benefit.

Harmonization is also advantageous if it reduces transaction costs. If regulatory requirements are sufficiently similar on both sides of a border, for instance, companies can use just one set of procedures for complying with them, saving the expense of having to follow two different sets.

Finally, harmonization can be constructive if it takes the form of coordinated decisionmaking that makes additional options possible. Considering the integration of assets and markets on both sides of the border through coordinated decisionmaking enables market access and system efficiency gains. For example, deciding to meet a system’s needs with a new transmission line instead of a new power plant is possible only with coordination.

Steps toward Harmonization

In its 2015 Quadrennial Energy Review, DOE highlights the benefits of North American integration, noting it “expands the size of energy markets, creates economies of scale, lowers capital costs, and reduces energy costs to consumers” as well as increases electricity reliability. Among the report’s recommendations is the establishment of “collaborative programs in each country for academic institutions and not-for-profits to develop legal, regulatory, and policy roadmaps for harmonizing regulations across borders.”

This served as the impetus for the RFF workshops, during which key players from the three countries examined policies, regulations, and planning associated with the electricity sector and identified many opportunities for harmonization (see the box). The following four broad recommendations from the workshops may be particularly worthy of near-term attention as stakeholders work to prioritize specific action items.

1. Embark on foundational research efforts. A need exists for additional tools to better estimate the benefits and costs of North American energy policy harmonization actions and of potential new transmission and pipeline links. Building an inventory of cross-border research to understand what analysis has already occurred and building tools for better and more extensive analysis are both essential.

2. Expand participation in already-existing organizations. Considering the low cost of effort, looking for opportunities to expand tri-country participation in existing organizations seems to be a clear priority: no new institutions are needed for it, and the value of information imparted to new participants (particularly from Mexico) could be quite high. For example, Mexico’s power grid entities could join or closely coordinate with the Western Electricity Coordinating Council—a nonprofit group that assures a reliable bulk electric system in 2 Canadian provinces, 14 western US states, and northern Baja California—to enable mutual improvements in power system operation, planning, and acceptance of new transmission ties.

3. Work toward greater climate policy integration, potentially leading toward a North American INDC for 2050. Underlying a number of recommendations resulting from the workshops is the idea of closer, continent-wide collaboration on climate policy. As part of this, participants recommended setting a goal of developing a North American INDC for 2050—a set of climate commitments to achieve under the United Nations Framework Convention on Climate Change—and working backward from that goal to lay out the necessary steps to achieve it.

“Underlying a number of recommendations resulting from the workshops is the idea of closer, continent-wide collaboration on climate policy.”

These steps could range from development of government-to-government working groups, to information sharing and planning for a coordinated INDC, to real greenhouse gas policy integration. Indeed, climate policy is one area where the United States, Canada, and Mexico have already announced a number of intended collaborative steps, including expanded linking of cap-and-trade systems and closer collaboration on methane reduction policies.

4. Implement closer coordination of electricity system operation and planning. Closer cross-border coordination would provide cost reductions and reliability improvements. Some specific targets include wide-area planning, improved benefit–cost analysis, streamlined project approvals, and an agreed-upon method of calculating cost allocations. In addition, regulators could enable greater coordination by modifying incentives for utilities.

The idea of integrating North American energy is not new. However, the significant changes over the past decade in particular—seen in the development of Canadian oil sands, the shale gas revolution in the United States, and major institutional energy reforms in Mexico—offer much to gain for all three countries, individually and together. Although moving on these recommendations is certainly no small undertaking, nor is addressing any—let alone all—of the specific action items, they hold real promise for continent-wide economic growth as well as opportunities to meet environmental and climate goals.

Opportunities for Harmonization

The two workshops yielded a large number of ideas that DOE, other government agencies in all three countries, research groups, academics, stakeholders, and others could consider to move toward harmonization of energy policy and planning affecting the electricity system. These action items are grouped around systems operation, planning, and environmental regulations.

Action Items for Systems Operation, Reliability, and Transmission Pricing

  • Coordinate operation between neighboring systems more closely, including those on opposite sides of an international border, to increase reliability and reduce the total cost of the electricity supply.
  • Where transmission prices include extra charges in addition to the difference in marginal cost of supply, explore whether those extra charges are more distortionary than the alternative means of collecting the necessary revenues, such as higher income taxes or sales taxes.
  • Examine the extent of taxes that apply specifically to imported or exported power, such as Ontario’s electricity export tax, and whether they should be eliminated.

Action Items for Planning, Siting, and Approval Processes

  • Assess whether US permitting of proposed cross-border transmission infrastructure investments can be streamlined. Related to this, assess whether the border crossing point can be agreed upon in an international review process.
  • Improve and apply benefit–cost analysis methods and standards for potential new transmission lines and other investments that increase cross-border transmission capacity.
  • Examine whether disagreements over cost allocation may prevent beneficial future cross-border infrastructure from being built. If so, attempt to establish a process for determining cost allocation that will prevent such disagreements. Calculating compensation for those who are likely to be hurt by such infrastructure could further improve the effectiveness of such a process.

Action Items for Harmonizing Environmental Regulations

  • On cross-border policy for conventional air pollutants (sulfur dioxide, nitrogen oxides, and ozone), evaluate whether cross-border pollution issues among the three countries warrant expanded policy harmonization beyond what is already covered in the US–Canada Air Quality Agreement—and also understand how any such pollution is distributed among the three countries.
  • Implement clear criteria to define renewables consistently in all three countries, including for purposes of facilitating trade in renewable energy credits and/or allowing imports of renewable energy to satisfy domestic greenhouse gas reduction requirements.
  • Conduct research on the subsidies, incentives, and taxes that exist for renewables in the three countries, as well as how electricity market competition compares across the three countries. Evaluate whether the differences create distortionary outcomes in terms of renewable energy siting.
  • Study how to facilitate Mexico joining California and the Canadian provinces in their linked cap-and-trade programs, or another large emissions trading program.

About the Authors

Alan J. Krupnick is co-director of the RFF Center for Energy and Climate Economics and a senior fellow at RFF.

Daniel Shawhan is an assistant professor of economics at Rensselaer Polytechnic Institute and an
RFF visiting fellow.

Kristin Hayes is assistant director of the RFF Center for Energy and Climate Economics.

Further Reading

Krupnick, Alan J., Daniel Shawhan, and Kristin Hayes. 2016. Harmonizing the Electricity Sectors across North America: Recommendations and Action Items from Two RFF/US Department of Energy Workshops. Discussion paper 16-07. Washington, DC: RFF.

US Department of Energy (DOE). 2015. Quadrennial Energy Review: Energy Transmission, Storage, and Distribution Infrastructure. Washington, DC: DOE.