Two provincial energy regulators recently passed rulings that signal it is no longer business as usual when it comes to traditional energy infrastructure in Canada.
The decisions considered whether new natural gas infrastructure will become underutilized before its costs are fully paid – known as stranded-asset risk. The shift represented by these decisions is sorely needed if Canada is to ensure the transition to a low-carbon economy is efficient, equitable and in line with its climate targets.
That said, at least one of the rulings will almost certainly be overturned by legislation introduced by the Ontario government which politicizes energy regulation, claiming that it will increase housing costs.
The rulings
In British Columbia and Ontario, energy regulators were concerned that the transition away from fossil fuels would reduce demand for natural gas when they ruled on two applications for new gas infrastructure. Regulators act in the public interest while protecting the interests of consumers.
The British Columbia Utilities Commission (BCUC) rejected a proposal for the construction of a new $327.4-million natural gas transmission pipeline to meet forecast increases in peak demand in the Okanagan region.
The BCUC ruled the forecast by FortisBC Energy Inc. failed to adequately account for provincial and municipal plans for zero-carbon new buildings and provincial initiatives to support the adoption of heat pumps.
Meanwhile, the Ontario Energy Board (OEB) was asked to rule on proposed 2024 rates for Enbridge Gas to recover the cost of delivery infrastructure to new residential developments.
The OEB ruled those costs should be paid upfront by the developers rather than through connection and delivery fees over the 40-year lifespan of the infrastructure to avoid creating stranded assets that risked increasing costs for customers.
Responses
Both FortisBC and Enbridge Gas are moving to appeal the decisions.
However, just one day after the OEB decision was released, the Ontario government vowed legislation to override the decision, arguing that it would “slow or halt the construction of new homes” and “could lead to tens of thousands of dollars added to the cost of new homes.”
On Feb. 22, Bill 165, the Keeping Energy Costs Down Act, was introduced which threatens the independence of the OEB and politicizes an institutional process that has been and should remain non-partisan.
Implications for housing affordability
The Ontario government is wrong to suggest that making developers pay the cost of new gas infrastructure will hurt housing affordability. Enbridge estimates the average added cost per home would be $4,412, a mere 0.47 per cent of the average Ontario home price as of May 2023.
Ultimately, developers can avoid the cost altogether by building all-electric communities.
As pointed out by the OEB, obligating developers to cover the cost of installing gas delivery infrastructure is an incentive to choose the most cost-effective energy option.
In some cases, this will mean building all-electric communities that use high-efficiency heat pumps for space and water heating. This in turn improves housing affordability by reducing the cost of operating the new homes.
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The two rulings aimed to protect ratepayers from the cost of new infrastructure that risks becoming stranded assets as our society decarbonizes.
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In the long term, these costs are far more likely to fall on low-income households because wealthier households can afford the upfront costs of purchasing electric home appliances such as heat pumps.
Those households will continue to benefit because heating with a heat pump is more cost-effective than with gas, in part due to rising carbon taxes, and because they may avoid paying monthly gas connection fees.
As homes increasingly move away from gas, paying for that infrastructure will fall to a shrinking customer base.
The energy transition will reduce gas use
Both regulators determined that natural gas use will decline in response to the transition from fossil fuels to electricity. In addition, the federal government has committed to reducing Canada’s greenhouse gas emissions by 40 to 45 per cent by 2030 and to achieving net-zero emissions by 2050.
Electric heat pumps are widely held to be the best option for decarbonizing buildings. Heat pumps are the most efficient heating system available, and most homes and businesses in Ontario and B.C. with a heat pump will save money by replacing gas heating systems.
Moreover, unlike gas appliances, all-electric homes do not produce health-harming pollutants indoors that result in increased rates of asthma in children and are linked to other serious health problems, or vent pollutants outdoors.
Policy implications
What these recent rulings and the aftermath demonstrate is that good policy in the public interest is vulnerable to politicization.
The OEB and BCUC should be applauded for recognizing the stranded-asset risks of new gas infrastructure as the energy transition unfolds. It is in the public interest to avoid such risks and to protect ratepayers from these unnecessary costs that are also bad for public health and threaten housing affordability.
In turn, governments should respect the independence of energy regulators, recognizing that their decisions are based on careful analysis of complex systems after engagement with major stakeholders and industry experts.
Housing affordability is a complex issue that is directly and indirectly impacted by energy regulator decisions and government policy.
As society takes the necessary steps toward decarbonization, more work is needed to understand the impact on low-income and vulnerable Canadians so that policies and programs can be developed and applied equitably for a cleaner more affordable future for all.
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