The switch from fossil fuels to clean electricity can buffer Canadians from energy price shocks.
The evidence is clear: a big switch from fossil fuels to clean electricity is required to achieve Canada’s emissions reduction targets and attract global low-carbon investment. Last week, the federal government released its draft Clean Electricity Regulations, a major step forward in building clean electricity systems across Canada to power this big switch.
Beyond its climate and economic advantages, switching from fossil fuels to clean electricity also has affordability benefits. Previous analysis by the Canadian Climate Institute shows households will spend on average 12 per cent less on energy by 2050 than they do today as they transition away from fossil fuels.
But affordability isn’t just about lower costs, it’s also about price stability and predictability. This is one more benefit of transitioning to clean electricity—it can buffer Canadians from volatile energy prices.
More clean electricity, less volatility
Spending on energy makes up a significant share of household budgets in Canada. This means that any sudden increases at the pump or on monthly energy bills can put stress on households, especially lower-income ones as they typically spend a larger portion of their income on energy and have fewer savings to draw on.
The majority of household energy use in Canada comes from fossil fuels. The prices of these fuels are inherently volatile and difficult to predict, as they’re determined internationally and are sensitive to global supply chains, markets, and geopolitical events. Russia’s invasion of Ukraine, which led to record-high spikes in gasoline and fossil gas prices, is just one recent example.
Electricity, on the other hand, is more stable and predictable.
Figure 1 compares the energy components of the consumer price index (CPI) for Canada over the past two decades. The CPI is a measure of the monthly change in prices paid by consumers for a representative basket of goods and services and is a primary measure of inflation. These components of the national CPI are not a precise measure of the energy costs facing consumers, given that each household will spend differently, depending on their energy use and which province they live in. However, these averages help illustrate the trends in energy prices for Canadian consumers.
What ultimately matters in this chart is the stability and predictability of prices.
As Figure 1 shows, average electricity prices in Canada have risen slowly and steadily over the past two decades, with little to no price spikes, and are largely tracking in line with overall inflation (“all items”). By contrast, fossil fuels have experienced significantly more price volatility, especially gasoline, which is less regulated than fossil gas and a major driver of inflation.
What’s driving price stability?
A couple of big factors contribute to the relative price stability of electricity. First, electricity prices in Canada are highly regulated, with regulators mandated to ensure just and reasonable rates for consumers. While fossil gas prices are also regulated, they face more volatility than electricity as they’re tied to global supply and demand. Alberta is the main exception—electricity (as well as fossil gas) rates are less stable and predictable as both are determined on the competitive energy market.
Second, rates are most stable in provinces with large shares of non-emitting electricity, since they are largely insulated from fossil fuel volatility. Making electricity systems cleaner, by growing non-emitting sources of generation like renewables and phasing out fossil fuel ones, can further protect households and the economy against volatile energy markets.
Figure 2 compares the trends in energy prices in Alberta, Saskatchewan, Manitoba, and Quebec to illustrate the role of rate regulation and clean supply on the relative price stability of electricity.
While both Saskatchewan and Alberta get most of their electricity from fossil fuels—86 and 85 per cent in 2021, respectively—the trends in prices are vastly different, largely due to different electricity market and price structures. Saskatchewan, like most other provinces, has cost-of-service regulations, which (for several reasons) shields consumers from price volatility and keeps rates stable.
In Alberta, electricity prices are volatile, since rates do not face the same kind of regulation as in other provinces and territories, leaving consumers more exposed to fluctuations in global commodity markets. In Alberta, the “regulated rate option” only regulates how the energy provider procures power contracts and how they pass those costs onto consumers. When the costs of procuring power are subject to market price volatility, so too are the rates. However, consumers in Alberta can sign on to competitive, fixed-rate retail electricity contracts in order to reduce their exposure to market price volatility.
Finally, in addition to having some of the lowest electricity rates in Canada, Manitoba and Quebec also have little to no volatility in their prices–thanks to strong cost-of-service regulation as well as cheap and abundant clean electricity.
GOVERNMENT POLICY NEEDS TO POWER The big switch
Switching from fossil fuels to clean electricity can help shield Canadians in all provinces and territories from volatile energy prices. But getting off fossil fuels at a household and system level won’t happen on its own. Government policy is needed to accelerate the transition—to electric vehicles on our roads, heat pumps in our homes, and clean electricity on our grids.
The proposed Clean Electricity Regulations are a critical step towards ensuring that Canadians in every region have access to clean and reliable power, and energy prices that are divorced from volatile fossil fuels.
Anna Kanduth is a Research Lead with the Canadian Climate Institute and manages the 440 Megatonnes project.