Speaker 1
Welcome to EY’s Energy Drivers podcast. I'm Lance Mortlock, Managing Partner of EY’s Energy and Resources business here in Canada. Today I'm joined by Chief Financial Officer of Hydro One, Chris Lopez. Welcome, Chris.
00:00:15:10 - 00:00:31:14
Speaker 2
Thanks for having me, Lance. I'm looking forward to an engaging discussion.
00:00:37:09 - 00:00:45:14
Speaker 1
Chris, can you maybe kick us off by introducing yourself, your background and a little bit about Hydro One for our listeners?
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Speaker 2
Absolutely. As you introduced me, my name's Chris Lopez. I'm the Chief Financial Officer for Hydro One. I've been in the electricity space in Australia, Canada and the United States for approximately 25 years, so it's been a while. I've been with Hydro One for six years. As I said, currently the Chief Financial Officer. In addition to the financial accountabilities of the Chief Financial Officer,
00:01:11:00 - 00:01:16:18
Speaker 2
I also have shared services, which is predominantly supply chain, strategy and growth.
00:01:17:04 - 00:01:32:23
Speaker 1
Thanks for that, Chris. I guess electrification is a very popular buzzword at the moment. Can you please describe the concept through your perspective and its significance to the Ontario energy system?
00:01:33:14 - 00:01:59:15
Speaker 2
Sure Lance. As you said, Hydro One is predominantly, it's actually only in Ontario and it's the largest transmission supplier, about 99% and about one third of distribution. So when we think about electrification, it's really about how we get power from the generator to the consumer and vice versa. I would just caution your listeners in thinking about electrification as a subset of energy transition.
00:02:00:00 - 00:02:24:06
Speaker 2
Energy transition is a broader term that that really captures, you know, the desire of, most countries and most citizens to transition from carbon fuels to non-carbon fuels. And a big part of that is electrifying the economy and using non-carbon sources of electricity like renewables and nuclear, things like that.
00:02:24:23 - 00:02:34:13
Speaker 1
Given the uptake in electrification, Chris, what do you expect the power and utilities market to look like in the next 20 to 30 years?
00:02:35:00 - 00:02:57:22
Speaker 2
Yeah, a really good point Lance. We expect significant change. So if I take a step back and I think about that question on energy transition, approximately 16% of our energy comes from the electricity system in Ontario. So where does the rest come from? Around 76% comes from refined petroleum products and natural gas. So that's the majority of it.
00:02:57:23 - 00:03:26:17
Speaker 2
So really you're talking about how do I expand the electricity system to displace a portion of that? And then you're still going to have to have significant investment in helping liquid fuels become non-carbon based. It's not going to be all electricity, but a substantial part will be. There are many studies around the globe that talk about the size of investment in the power and utilities space doubling or tripling by 2050 to achieve that.
00:03:26:23 - 00:03:45:08
Speaker 2
So again, using those numbers, if the amount doubled in Ontario, it would go from 16 to 32. It could go up to 48 if we triple it. That still says 50% of the solution must come from somewhere else. So substantial change over the next 25 or so years.
00:03:45:18 - 00:03:56:19
Speaker 1
And given the huge amount of change, how do utilities handle that? You know, from a leadership perspective, from a strategy and operations perspective, in your mind?
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Speaker 2
Yeah, good point Lance. Now, as the highway for electricity in Ontario, the transmission and distribution side, we really think of Hydro One as being the enabler. So how do we enable choice? Choice at the generation side and choice at the consumption side? And there'll be some blurring of those lines. So I would expect to see generation occurring in the household in some way where any excess energy or capacity could be put back on the grid.
00:04:24:13 - 00:04:45:03
Speaker 2
So how do we do that? How do we ensure that electricity is there when they need it? And a really good example of that will be is how quickly EVs, electric vehicles, are taken up by society. The faster that occurs, do we have enough supply there at the right price? And affordability will be a big question on that, too.
00:04:45:03 - 00:04:58:16
Speaker 2
So how do we bring all of these things together so the consumer is presented with the right opportunities and are not constrained in how that’s done? So I would say the key word there is open and choice.
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Speaker 1
What is going to be the biggest challenge, Chris, in your mind, for utilities to really handle that massive amount of change that's going to happen? What's that single-biggest challenge going forward?
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Speaker 2
You know, the question about the single-biggest challenge. That's interesting because I do think there are many challenges. I think the biggest one is to start soon. If we don't start now, then reaching those goals that we have by 2050 will become near impossible, or if not impossible, very expensive to achieve because that runway would have been shortened dramatically.
00:05:35:14 - 00:06:00:22
Speaker 2
So to make some courageous decisions today, and I would call those no-regret type of investments. So what are those investments today that can be made that keep those options for the future open? You're not going to have the perfect answer. You are going to have to make a series of investments and trials to work out what the best mix and the best solutions are for the consumer and for society as a whole.
00:06:01:07 - 00:06:25:13
Speaker 1
Yeah, and maybe Chris, in a rate-regulated business and the nuances that go with that kind of business model, does that create in your mind complexities in terms of making those long-term investments and, I suppose, getting the support from broader stakeholders around making those investments?
00:06:25:22 - 00:06:50:11
Speaker 2
Yeah, probably the best thing I could point to, the Independent Electricity System Operator, the ISO in Ontario, released a report on pathways. It is not a conclusive report, but it was very clear that it talked about we needed to start soon. We needed to consider all possibilities and it would require some regulatory and policy developments along the way.
00:06:50:20 - 00:07:18:08
Speaker 2
And really what that means is the marketplace isn't sufficient to encourage all the investment that's required at certain points. So that ability to come together, regulate our markets and so on to start the process, that's really important. So I don't believe it precludes making the right investments today, Lance. I think it's a case of pacing, but it does need to start now.
00:07:18:08 - 00:07:37:08
Speaker 2
So my biggest concern would be that we all think that we don't need to solve this till 2050, but then we know to build the power station and the transmission lines, it takes 5 to 10 years. So we know with certainty you've got to be pretty much all ongoing by 2040. But if you back up, you're going to create more choices.
00:07:37:19 - 00:07:50:22
Speaker 2
The important thing for your listeners to remember is, it's not all or nothing. It's going to be a series of decisions with a series of options along the way. The first option we pick may not be the best one, but we're going to have plenty of time to optimize that.
00:07:51:15 - 00:08:14:20
Speaker 1
Maybe explain a bit more about how that trifecta of, you know, the utility, the regulator, the system operator, given the massive amount of change that needs to happen to support electrification, the investment that needs to happen. What in your mind does success look like with those different stakeholders working together?
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Speaker 2
Yeah, very good question again, Lance. I always talk about it as everybody needs to be in the tent. And we're not all going to have the same opinion. So and it's broader than just electrification, it's the energy transition. So we know that we're going to transition away from using carbon fuel so that some investments there will be reduced and it'll be increased on the electrification side and the new technologies that we're going to encounter.
00:08:40:00 - 00:09:03:02
Speaker 2
I think you need to understand the role of each party. So the independent electricity system operator is really responsible for planning, and hence the Pathways report that talks about a possible pathway to electrification — it doesn't say it’s the only one. And then it has some conclusions around you need to start now and there needs to be alignment with regulatory and policy.
00:09:03:09 - 00:09:26:11
Speaker 2
So that's the planning side. The utilities need to work in the right capacity. So if you're a regulated entity, usually the assets that get put into the regulatory construct are those that really need to be provided only once. I think of a transmission line, we don't want four transmission lines going to the same area when we know we only need one . Or four power lines going to your house when you only need one.
00:09:26:11 - 00:09:46:13
Speaker 2
So they're the kind of times we would use the regulatory construct. For everything else, it really is an open market and inviting capital to be efficient and productive. A lot of that capital is going to make investments and it won't work. So we don't want to make those investments in the regulatory construct. We want industry to take on that risk.
00:09:46:20 - 00:10:08:05
Speaker 2
And to the extent they get it right, there'll be very, very significant rewards for that. If they get it wrong, there's a consequence to that. So I think it's knowing the role of each participant, which I think the question you had, Lance, was getting at, and then inviting everybody in the tent to share the different perspectives and on pacing and technology
00:10:08:05 - 00:10:12:09
Speaker 2
and so on. So I can't stress that more, that everybody needs to be involved.
00:10:13:18 - 00:10:54:14
Speaker 1
You know, we know that or we're forecasting that with increased demand for electricity in the future, with increased electrification of society, that's going to put increased demands on utilities and the grid of the future in terms of transmission and distribution. Do you believe that the current transmission and distribution system can cope with that? And if not, what kind of investment are we talking about? And where maybe specifically does that investment most likely need to occur more so than maybe other areas?
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Speaker 1
Like what's your perspective on that Chris?
00:10:56:01 - 00:11:19:11
Speaker 2
The key to your question or the premise, if you like, Lance, is you’re really asking about pacing and where it will occur. There are three key policies at the Canadian Government level that's really trying to get at this idea that you don't leave it too late in terms of how fast it will occur and how big those investments will need to be.
00:11:20:02 - 00:11:42:15
Speaker 2
The three policies are one is a carbon tax. It's currently at $50 and that's going up $15 per year. It will end at $170 by 2030. The second one is that the grid must be net zero by 2035. What that really means is significant investments in greening the grid. In Ontario, that's not as big because we're already 90% or 94% decarbonized.
00:11:42:15 - 00:12:06:07
Speaker 2
So in Ontario it can be fairly simple, but in other parts of the world that is a big ask. And the final one is no internal combustion engine vehicle sales beyond 2035, which really means shifting a large amount of that energy consumption from liquid fuels to electricity. So that's the pacing piece. We know that it's not going to happen tomorrow, but it's going to be quite significant by 2035.
00:12:06:07 - 00:12:33:04
Speaker 2
It won't all happen in 2050. And then where are those big investments? I think if you were greening the grid, the big investments today would be in the generation space. In Ontario, not quite as needed, but you need to increase generation and capacity to transmit the generation to allow for more electricity to come on. At the beginning, Lance, I think I said somewhere between 2x and 3x or two or three times the current investment. That is significant.
00:12:33:04 - 00:12:59:20
Speaker 2
We're talking hundreds of billions of dollars. It is spread everywhere. It's in generation. It's in transmission as well as in the household. Next question you might have is around affordability. Really what you're thinking of there is that today if I'm a consumer, I'm getting a bill from my electricity company. I'm getting a bill from my gas company, natural gas, that is.
00:13:00:05 - 00:13:23:11
Speaker 2
And I'm getting a bill when I go to the fuel station. The question, the big question, will be and this is what we're driving for, is can I make the electricity bill of the future be the same as the three combined bills I have today? That would answer the question on affordability, that I can get a better, greener system at the same total price for my household.
00:13:24:06 - 00:13:55:21
Speaker 1
Chris, you kind of touched on elements of my next question, which is, I think about some of my own family living in Europe and the astronomical electricity bills that they have, which is making it really unaffordable. Any kind of thoughts on what we can expect as Canadians in the future in terms of affordability and how we balance the kind of trilemma of affordability, sustainability and security?
00:13:56:03 - 00:14:19:09
Speaker 2
Yeah, look, Lance, I think depending on where you are in the world, so you just spoke about Europe, the importance of any one of those elements may be different. So security in Europe right now is number one, even though it's costing higher. I think if you ask the question of any European today, the availability of electricity is number one on their mind.
00:14:19:09 - 00:14:38:12
Speaker 2
And you know, one thing I'll tell you that's been very positive in North America, even state by state, energy security has been number one for a long time. So we've actually done a fantastic job of ensuring that each state is secure in its own right, and then we're secure as a continent. So I don't share the same concern for the energy security side.
00:14:38:12 - 00:15:02:11
Speaker 2
But any future system needs to have the same thing in mind. They're not entirely unrelated, either. So if I think about affordability today, there are different parts of the grid that have been impacted by the cost of commodities. So if I'm taking energy or electricity in an eastern province in Canada or even in the central prairies, that's dependent on natural gas today and those prices are quite high.
00:15:02:18 - 00:15:27:21
Speaker 2
So those affordability questions are coming up even here in North America. If I'm in Ontario, you know, we are in the very fortunate position that, you know, like I said, a very small amount of electricity is coming from carbon sources. So we've got a very stable electricity bill in Ontario, the majority coming from nuclear and hydroelectricity. So that's the benefit of having one security of supply.
00:15:28:04 - 00:15:53:00
Speaker 2
Number two, not being sort of exposed to that volatility. But your broader question on affordability, I absolutely agree. So will electrification be economical for Ontarians or for all Canadians? The answer is it must be. I don't think you'll get support for an unaffordable transition, and I refer to that as a just transition. So I'm glad you asked that question.
00:15:53:17 - 00:16:14:17
Speaker 2
If you think about the energy transition I spoke about earlier, I also interchange that with a just transition. It must be fair for all. It must be affordable. It must support the economy through economic growth. One thing that we've failed on in the past is there's always been a cost of carbon, we've just never charged for it. Now you’re charging for it.
00:16:14:17 - 00:16:39:17
Speaker 2
So it's become obvious. But different parts of the economy were paying for that before Lance. Today, we're making it very clear and as a society, we've decided that we want to remove that from our economy. So in short, it must be affordable. And I think it links back to the answer I gave on the last question around, you know, can we take all the sources of energy today and provide you with a cleaner supply of energy in the future at approximately the same cost?
00:16:41:00 - 00:17:09:13
Speaker 1
My next question, Chris, may be kind of touching more on the technology and the innovation side of broader innovation, transition and electrification that's occurring. When you think about intelligent grid technologies, distributed energy resources, what role do you think emerging technology will play in the future as it relates to electrification?
00:17:10:11 - 00:17:38:15
Speaker 2
Yeah, technology today plays a big role already today, and today the main role for technology really is: how do we make investments in a more economic way? So in the past we would have a transmission line and, you know, we'd need people to go out and find a fault manually. Today we have technology that can isolate that fault remotely, which means a lower cost of operating that grid for all Ontarians.
00:17:38:21 - 00:17:57:12
Speaker 2
That's a really good example of using technology today. How will it affect us in the future? The more you want from your grid, the more that we're going to demand, which is, we see is increasing, we said that earlier today, the more we will need technology to assist us like it does in all of our everyday lives today with our mobile phones and so on.
00:17:58:00 - 00:18:26:04
Speaker 2
So, you know, I think the choice word here is that the utilities will be the enablers of electrification. The enabling part will be enabling consumers, generators, using different technologies to satisfy their energy requirements. So how do we embed those choices in the grid? How do we enable that? How do we ensure, Lance, that when you want to buy power overnight cheaply, you can do that? When you want to sell power back because you have an excess supply of it, you can do that too.
00:18:26:19 - 00:18:48:05
Speaker 2
That will all be done through technology. It will not be done through people. So staying open to that is really important. The small part I will not sort of caution everybody, but things we need to bear in mind, the more we open up our grid to those kinds of technologies, the more on guard we will need to be with regard to cybersecurity.
00:18:48:13 - 00:19:06:22
Speaker 2
So we've seen examples of that in other parts of the world. You know, we are going to, we call it the Internet of Things, it’ll be the grid of things. And as it becomes the grid of things and we blur those lines, the cybersecurity will need to be, you know, military grade or better to ensure that you get what you want.
00:19:06:22 - 00:19:08:20
Speaker 2
And we all live in a safe society.
00:19:09:12 - 00:19:24:05
Speaker 1
I guess as we wrap up this dialog, is there anything else that you would share, Chris, in terms of the change that is happening and the change that will happen in the future?
00:19:25:00 - 00:19:44:15
Speaker 2
I suppose there's a couple of points. I think at Hydro One you all have different views of what that future might be. One thing I can tell you is nobody knows that answer. So that is absolutely for certain. At Hydro One, we have a saying: there is no transition without transmission. I'm fairly confident that the grid will play a role in the future.
00:19:45:14 - 00:20:12:13
Speaker 2
Will it grow two or three times or will there be investments in other parts of that system today that allow us to move power from the generator to the consumer? I think the key message, and I've said it throughout today, is open our minds to all possibilities in the energy transition and ensure it's a just transition. I think those two things go together, a clear reminder that, you know, I think back to days of significant change.
00:20:12:14 - 00:20:38:15
Speaker 2
The motor vehicle, for example, changed the face of the planet by putting roads all over the planet. Electrification and the energy transition is going to do something very similar for the planet. So I think it's a very exciting time for all and for all those that are involved in our industry. And I leave a key message: together we can, we will, we must, create that better and brighter future for all.
00:20:39:00 - 00:20:50:17
Speaker 2
And I love the platform that we're being given today through society to take us through that energy transition and have a cleaner society for the future.
00:20:51:18 - 00:21:21:09
Speaker 1
Yeah, thanks for sharing those great insights, Chris. So I wanted to kind of conclude the conversation today by just sharing, look, change is constant. And as the age-old saying goes, the speed of change today will never be this slow again. And with all of that change, we as society, as business leaders need to embrace disruption and innovation like never before.
00:21:22:18 - 00:21:49:12
Speaker 1
It's important to balance risk and opportunity constantly, as well as managing the energy system in terms of energy security, energy affordability and energy sustainability. So I wanted to wrap up by saying thank you to Chris Lopez for joining and sharing with our listeners some really great insights and perspectives.
00:21:49:21 - 00:21:57:22
Speaker 2
Thanks Lance. Thanks for having me. And thank you to your listeners for engaging in such an important topic to all Canadians.