Idea of the Year
Why electricity holds the key

Government climate spending is at a crossroads. Governments are grappling with where to direct spending that will yield the greatest emissions reduction benefits and aid in transitioning to a low-carbon economic base. The RBC Climate Action Institute analysis shows Canada can make a significant dent in emissions over the next decade if it focuses its efforts on growing and decarbonizing the country’s electricity grids.

We estimate that provinces will need to spend nearly $160 billion to double their electricity supply with clean energy. The climate and economic benefits are substantial. Greening and expanding the grid creates the foundation for another 27% reduction in buildings and transportation emissions, and the large and secure energy supply that businesses seek when deciding where to locate their operations^{Endnote 1}. It’s also one of the most cost-effective solutions, costing an average of $75 for each tonne of abated emissions^{Endnote 2}. In comparison, the cost of abating one tonne of auto emissions is four times greater^{Endnote 3}.

The cost of inaction

The risks and costs of inaction are great. Failure to expand grid capacity can erode provincial energy security and sovereignty, by forcing provinces to import a greater share of their electricity, and compete for a limited supply of power, as grids in Canada and the U.S. face a looming supply shortage. This can erode provinces’ ability to manage and control prices for consumers and businesses, or to maintain their carbon emissions goals. British Columbia has one of the cleanest electricity grids in the Canada, with 98% of power generated clean and renewable energy sources^{Endnote 4}. The province undermines its emissions reduction goals whenever it imports electricity from neighbouring U.S. states and Alberta, where more than 60% of electricity is generated from natural gas.

Provinces also risk losing out on foreign direct investments if they fail to ensure their grid expansions are green. Honda’s decision to invest $15 billion to build out its electric vehicle supply chain in Ontario was partly motivated by the availability of clean energy in the province^{Endnote 5}.

When these costs and climate considerations are weighed together, the best bet is to double down on growing and greening provincial and territorial electrical grids. Greater decarbonization in this sector will have the added benefit of amplifying and enabling further gains in electrifying the rest of the economy.

Breaking the gridlock

The success of the provinces’ efforts to green and expand their power grids is contingent on their ability to deftly handle a number of other emerging challenges.

1. The rise of NIMBYism

Canada is a vast country with massive energy resources, but with limited developable land. We’ll need to deploy 337 gigawatts of wind and solar energy by 2050 to keep our climate goals on track, based on modelling developed by the Canada Energy Regulator^{Endnote 6}. That could require at least 38,000 square kilometers of land, more than double the existing amount of developable land^{Endnote 7}.

In addition to the competition for land, conflicting views on its optimal use are creating tensions within non-Indigenous and Indigenous communities, businesses, and governments. Conflicts regularly arise over the most appropriate use of land and which stakeholder’s interest takes priority: Is it housing, jobs, or energy? Disputes that have gone to local and provincial land-use planning bodies for adjudication have resulted in delayed or cancelled projects. In Alberta, an estimated $10 billion in investments were diverted elsewhere after 46 projects were cancelled because of the province’s moratorium on renewable energy development on agriculture land^{Endnote 8}. As the rollout of green projects intensifies, these types of disputes will become more common.

Communities across Canada have also opposed wind and solar projects based primarily on their visual and physical impacts. They have used the land-use planning system to block them by taking advantage of unclear policies on permitted land uses. This has played out most publicly in Alberta and to a lesser extent in Ontario. These problems will persist unless provincial and local governments, working with Indigenous communities, jointly develop a formalized and integrated policy framework that provides clarity on rules governing land-use, economic and energy development priorities.

2. Navigating supply chains

Securing the physical and human resources needed to build out green-energy infrastructure is essential for projects to run smoothly. In terms of sourcing key supplies and technology for nuclear, wind, and battery storage, which will be the dominate energy mix, in addition to hydroelectricity, the country’s net-zero ambitions are reliant on four jurisdictions: China, Russia, Europe and the U.S.

• China and Russia are the main suppliers of nuclear fuel, in particular the fuel used in certain prospective models of SMRs, which have become a more attractive option than building the large-scale plants that dominate the industry.
• Europe and China are the main suppliers of wind turbines, controlling more than 80% of global manufacturing capacity^{Endnote 9}.
• Our main source of electricity transformers is the U.S., where wait times are as long as two years due to high demand from the rollout of renewable energy and grid modernization^{Endnote 10}.

An expected shortage of workers in the coming years could pose another threat. The situation is expected to worsen as multiple provinces start work on expanding their grids, while the overall labour pool is projected to shrink as more workers retire.

How governments navigate trade relations with these jurisdictions and deal with other supply chain challenges will affect provinces’ ability to secure low-cost critical supplies and stay within project timeframes.

3. Opening up electricity markets

Federal government support for growing and greening the grid has helped increase domestic and foreign investment in Canada’s energy transition. Investment tax credits (ITCs), for clean technology and electricity, are keys to reducing the costs of capital-intensive projects and boost returns for investors.

The challenge for provinces is how to continue attracting institutional capital in the event federal ITCs are withdrawn as political spending priorities shift.

Opening electricity markets to greater competition may be a partial solution. Only three provinces use a competitive bid process to procure generation capacity for their grids: Alberta, Ontario and, B.C. In this model of grid expansion, provinces put out a public call that stipulates the amount of generation capacity and the energy sources they are seeking. Energy developers who win these contracts then finance and construct the generation assets. In exchange, provinces sign a multi-decade contract to buy a specified amount of power at pre-established prices.

This energy-as-a service model shifts a province’s position from power producer and asset owner to energy buyer. It means governments don’t need to finance, operate and maintain costly capital assets. Offtake agreements come with risks for project developers and buyers. Buyers could lock themselves into a decades-long contract of high electricity prices if interest rates decline and remain low, subsequent to the deal closing.

For their part, developers could be exposed if interest rates increase after the contract is signed, squeezing the profitability of their investments. The 1969 Churchill Falls offtake agreement between Newfoundland and Labrador and Quebec is a high-profile example of the financial risks involved in signing multi-decade energy contracts. The contract, which until recently provided Quebec with 85% of the electricity generated at the Churchill Falls hydroelectric dam, allowed Quebec to purchase power at 0.2 cents per kilowatt hour, at least four times below the market rate^{Endnote 11}.

4. Increasing Indigenous participation

Policies mandating Indigenous participation in power-generation projects through equity ownership requirements could also attract more capital into the sector. Hydro One leads the country in this regard, requiring a 50% Indigenous equity stake in its projects^{Endnote 12}. B.C. Hydro’s recent competitive procurement for nine wind projects, and a requirement for 25% Indigenous equity ownership, attracted $3 billion in investments from nine First Nations communities, half of the total $6 billion price tag^{Endnote 13}.

Indigenous loan guarantee programs could further accelerate access to Indigenous participation and capital. An estimated 110 low- to zero-carbon grid expansion projects are in the planning stages, requiring $21 billion in capital^{Endnote 14}.

Greater end-to-end technical capacity building–on such subjects as project finance, project development and legal expertise–could help more First Nations gain the technical know-how to participate in or lead grid expansion projects.

A year of hard choices

Provinces have hard choices to make in 2025 and beyond. Do they roll out their electricity expansion plans in their current state, predicated on a certain amount of federal subsidy support, or do they wait for greater clarity on climate, trade and political shifts. Given looming electricity shortages and the crucial role electricity plays in achieving economic and societal objectives, delaying construction could hurt the country’s wider interests.

The provinces may not have signed onto the 2015 Paris Agreement, but a vastly different landscape from ten years ago behooves them, willingly or reluctantly, to double down on their efforts to decarbonize and grow one of the most important services they provide–the provision of clean, reliable and affordable electricity.