Electricity Co-operation in North America: Effect on Price Electricity Co-operation in North America: Effect on Price

ELECTRICITY CO-OPERATION in North America

Import and Export of Electricity between the USA and Canada in 2009 Import and Export of Electricity between the USA and Canada in 2009 Source: Canada, National Energy Broad (NEB) Source: Canada, National Energy Broad (NEB) Note: Electricity Export and Import, January 2009 to December 2009(GWh) Note: Electricity Export and Import, January 2009 to December 2009(GWh)

Increase electricity supply for excess demand countries Provide an economic gain for excess supply countries Decrease levels of CO2 emissions from electricity generation Electricity Trade Benefits

However, future growth in demand for electricity in Canada and the U.S. will need to be met by a corresponding growth in supply. Increases in the order of 25% for generation capacity by 2025 are projected to satisfy the higher demand. Hence, both countries will face the problem of rising electricity prices from increased demand together with the need to reduce Carbon Dioxide (CO 2 ) emissions from electricity generation.

This study investigates whether North American electricity co-operation can reduce electricity price, while also examining which renewable energies are the best options. This study investigates whether North American electricity co-operation can reduce electricity price, while also examining which renewable energies are the best options. Research Question

ELECTRICITY CO-OPERATION in North America

Data Set

Descriptive Statistics Dependent variables and independent variables are measured on different scales. Hence, logarithms of all variables are taken for easier interpretation.

Descriptive Statistics Dependent variables and independent variables are measured on different scales. Hence, logarithms of all variables are taken for easier interpretation.

Household and Industry Electricity Prices for Canada

Household and Industry Electricity Prices for the U.S.

1 Unit Root Test 2 Correlation Test 3 Serial Correlation Test 4 Run Time Series Steps of Analysis

Correlation Test The results of correlation test show that there is no problem of Multicollinearity. The results of correlation test show that there is no problem of Multicollinearity.

Testing for Serial Correlation For results to be consistent, there is a requirement of no serial correlation in the error terms (Green, 2008; Wooldridge, 2009). This is tested by means of the Durbin-Watson statistic, after running the regression for every model. The statistic results of all models are substantially less than 2, thus indicating serial correlation. In addition to the Durbin-Watson statistic, this paper employs two Lagrange Multiplier tests for serial correlation, using Durbin’s alternative test for autocorrelation and the Breusch-Godfrey test (Green, 2008; Wooldridge, 2009). For both tests, the null hypothesis, that there is no serial correlation, is rejected at the 5% level of significance confirming that serial correlation is detected for all models. In order to deal with the problem of serial correlation, this paper adopts the method of adding lagged values of the dependent variable. For results to be consistent, there is a requirement of no serial correlation in the error terms (Green, 2008; Wooldridge, 2009). This is tested by means of the Durbin-Watson statistic, after running the regression for every model. The statistic results of all models are substantially less than 2, thus indicating serial correlation. In addition to the Durbin-Watson statistic, this paper employs two Lagrange Multiplier tests for serial correlation, using Durbin’s alternative test for autocorrelation and the Breusch-Godfrey test (Green, 2008; Wooldridge, 2009). For both tests, the null hypothesis, that there is no serial correlation, is rejected at the 5% level of significance confirming that serial correlation is detected for all models. In order to deal with the problem of serial correlation, this paper adopts the method of adding lagged values of the dependent variable.

Conceptual Framework Source: OECD/IEA, 2012

Electricity Price Functions for Canada

Electricity Price Functions for the U.S.

ELECTRICITY CO-OPERATION in North America

Discussion (1) The result for Canada shows that a rise of 1% in import significantly decreases household electricity price (- 0.05%), following trade theory assertion that import increases electricity supply, thus lowing price. For the U.S., Model U1(d) shows that electricity import from Canada significantly increases household electricity price by a tiny amount (0.01%). This lends support to the finding of Bernard et al. (2003) that electricity imports from the Canadian regions are not large enough to reduce the marginal costs of the U.S. regions, and as a result, electricity deregulation across the border is not expected to significantly decrease prices.

Discussion (2) Even though an increase in export should cause a rise in price, the econometric analysis for Canada gives the opposite result for both household and industry electricity prices. An explanation for this may come from international trade, the benefits of which include promotion of specialization in production from division of labor and economy of scale as well as lower opportunity costs, thus reducing electricity prices (Odgaard, 2000). However, the results are not statistically significant. For the U.S., an increase in total export causes a tiny rise in both household and industry prices, with the results being not statistically significant.

Discussion (3) The price difference between household and industry, which is the proxy variable for industry subsidy, gives an interesting finding for both Canada and the U.S. showing that it plays a highly significant role in reducing industry price. Even though this price difference is included in the model, there remain other subsidies and taxes which can compromise the market process. Subsidies, whether to electricity producers or electricity consumers, provide benefits for the economy. Producers gain higher profits and consumers gain by a lowering in the price of electricity resulting in increased demand for electricity.

Discussion (4) For Canada, electricity generation from solar is shown to be highly significant in decreasing household and industry electricity prices. In addition, hydro is found to be significant in decreasing electricity price for both household and industry. Hydro and solar sources, therefore, shed light on the future direction of electricity generation in Canada under the increasing pressure to reduce greenhouse gas emissions in the industry. The results for the U.S. indicate that no type of renewable energy reduces electricity price for household or industry, however nuclear energy shows a significant lowering of household electricity price.

Discussion (5) Increasing demand for electricity in both the U.S. and Canada requires investment in electricity infrastructure and supply for the years ahead. A major recommendation of this study is that close co- operation between Canada and the U.S. is essential in looking to the future, with electricity trade vital for economic efficiency, security of energy supply and containment of greenhouse gas emissions.

Electricity ranks as a special commodity since it is vital to the running of every economy. Because of this, countries trading in electricity require a high level of mutual trust. Electricity import and export involves more than just buying and selling - it is founded on co-operation. Discussion (7)

In a study addressing Canada and the U.S., time series analysis of yearly data for each country from 1978 to 2009 is used to determine the electricity price functions. For Canada, electricity import is found to be highly significant in decreasing household electricity price, but not so for the U.S. Renewable energies such as hydro and solar are seen to be the future of electricity generation for Canada, but the results for the U.S. indicate that no type of renewable energy can reduce electricity price. Conclusion

“If we live as if it matters and it doesn't mat ter, it doesn't matter. If we live as if it doesn't matter and it matters, then it matters. " Norman Myers quotes from an international conference on the environment

Acknowledgement