The Infrastructure-Economy Link

A study on the economic impact of investing in Canada’s electricity infrastructure released today by the Conference Board of Canada argues that investments in electricity generation, transmission, and distribution will have a widespread positive impact on Canada’s economy and produce hundreds of thousands of employment opportunities across the country.

The report, Shedding Light on the Economic Impact of Investing in Electricity Infrastructure, estimates that investment will peak between 2011 and 2015. It builds on an April 2011 Conference Board report that found Canada’s electricity sector will require more than $15 billion in investment annually over the next 20 years to replace or refurbish aging infrastructure.

Canadian Electricity Association (CEA) president and CEO Jim Burpee says, “The 2011 report from the Conference Board breaks the infrastructure need down between distribution, transmission, and generation, the largest percentage being generation. This second [report] was done because these investments should be seen as more than just a cost. They will have a positive impact on [Canada’s] GDP.”

“The report goes beyond asserting the important role of electricity in providing households with the conveniences of electrical power, and affirms that a modern and reliable electricity system is vital to Canada’s competitive advantage,” says Burpee.

Burpee says the estimated $347.5 billion (in current dollars) of electricity investment from 2022 to 2030 will come from a variety of sources. [The report] doesn’t differentiate between provincially-owned and investor-owned utilities. Some of the investments won’t even come from traditional utilities.”

The report analyzes the direct, indirect, and induced impacts of this long-term investment and  concludes that for every $100 million (inflation adjusted) invested in electricity generation, transmission, and distribution infrastructure, real GDP will be boosted by $85.6 million and 1,200 jobs will be created. In total, that is an average addition of $10.9 billion per year to real gross domestic product (GDP).

It also finds that federal and provincial governments can expect to accrue a sizeable benefit with increased annual revenue of $4.2 billion and $1.9 billion respectively.

But the Conference Board also recently released a report recommending that government cut spending and possibly raise taxes.

Terence Corcoran argued in a Financial Post op-ed that this more recent Conference Board report contradicts a 2010 report that found stimulus spending on infrastructure would also boost productivity, offset the recession, and set the stage for recovery. Corcoran essentially argues that stimulus spending has done nothing but sink Ontario deeper into a recession (though he fails to mention that a deficit is the expected consequence of government stimulus).

Given TD Bank chief economist Don Drummond’s recent recommendation that Ontario make significant cutbacks, maybe Corcoran has a point?

Burpee says electricity infrastructure is different than some other sectors. “Even the payment mechanism is different, because you’re not necessarily funding [the infrastructure] with government debt that you then have to pay back, nor are you using funding that was collected through taxes; it’s collected through people who use electricity,” he says. “In the case of municipal infrastructure,” says Burpee, “you can’t always determine who the customer is and who’s paying for what.”

That is true for some electricity infrastructure, though when it comes to generation, often substantial amounts of ratepayer funds are invested.

Burpee says on top of the differences in how it’s funded, electricity infrastructure is one of those asset classes that the public expects will be maintained at a high level. “No one is going to argue that you don’t need to keep your water systems running at a high level,” he says, “electricity is same way. We have an expectation of what the service level should be, and there’s a price to be paid for that. When money is going into roads, for example, it’s harder to see the long-term economic benefits—they’re probably there, but it’s a harder thing to measure.”

When the electricity system goes down, says Burpee, it’s less acceptable than the odd road closure or pothole.

Why, then, is it so difficult for a utility like Toronto Hydro to raise rates in order to pay for infrastructure upgrades?

“No one has really identified access to capital as a problem,” says Burpee. “The problem is getting the regulator to understand the requirement.”

Toronto Hydro is also in a unique position because the cost of electricity in Ontario is, as Burpee says, “an election issue.”

“There’s a lot of pressure on price because so much money went into the Feed-in Tariff,” says Burpee. “That starts putting pressure on some of the regulators. But they shouldn’t ignore the fact that we have significant infrastructure that’s aging and needs to be addressed.”

The challenge, says Burpee, is acceptable price and acceptable level of service don’t seem to be lining up right now—at least not in Ontario.

If this attitude shift is going to happen, it had better happen sooner rather than later. For this infrastructure work to get done, there will need to be a new wave of skilled workers. One of the main foundations of the Conference Board’s claim that future electricity investment will boost Canada’s economy is the creation of about 156,000 jobs each year. Those jobs won’t materialize if students aren’t trained in the right trades now.

“There’s no doubt that the investment will contribute to the growth of the economy,” says Burpee. “A notable challenge that requires attention is the ability of the labour market to meet the demand for workers with the appropriate skills.”