Connecting to the North American Grid: Time for Newfoundland to Discontinue Inefficient Price Regulation

Abstract

The island of Newfoundland has an isolated electrical grid. In recent years, its regulated price of electricity has deviated substantially from marginal cost. This has led to economic inefficiency, causing significant welfare costs, higher electricity consumption, and excess reliance on thermal generation. In the next few years, substantial but costly hydroelectric capacity will be constructed, largely displacing reliance on thermal generation. In tandem with that new generation, subsea transmission facilities ending Newfoundland's isolation from the North American grid will be put in place. However, without a change in the governing legislation and the regulatory framework, economic efficiency will remain unattainable. Policy reforms that support efficient pricing and adapt the regulatory regime to the new circumstances are called for.