Canada’s electricity is a bargaining chip to end U.S. tariffs

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With United States President Donald Trump announcing 25 per cent tariffs on most Canadian goods over the weekend, the first question on everyone’s mind is how to hit back, with some focusing on energy as an Achilles heel for our neighbour to the south.

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Energy is the lone carveout in Trump’s tariff plan, subject to a 10 per cent levy — rather than the 25 per cent applied to other goods — which many economists attribute to the fundamental role it plays in people’s lives and the economy.

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The U.S. relies on Canada for its energy, and not just oil. Canada has for more than two decades exported significantly more electricity to the U.S. than it has imported.

For example, Canada in 2023 sold US$3.2-billion worth of power to the U.S. and imported US$1.2 billion — a $2 billion difference. That surplus held up even as dry conditions forced Quebec and British Columbia to curtail hydroelectric generation, which moved the trading far closer to balanced than it had been in previous years.

In December, Ontario Premier Doug Ford said he would consider restricting electricity flows to New York and other states in the event of tariffs.

“You attack the livelihoods of Ontario and Canadians, we’re going to use every tool in our toolbox to defend Ontarians and Canadians across the border,” Ford said on Dec. 12.

He described electricity restrictions as a “last resort” to head off a trade war that many economists say will punish both sides’ economies and likely lead Canada into recession.

But electricity experts question whether it is even possible for Ontario and other provinces to strategically restrict electricity exports so as to inflict maximum political pain on Trump  — by creating rolling blackouts or by drastically raising electricity bills for millions of homeowners — thereby forcing him to back down on his tariffs.

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They point out that electricity flows in both directions, and both countries buy from the other at key times of need.

“Like all trade battles, it’s clear both sides would lose if the electricity sector gets pulled into this,” Cy McGeady, a fellow at the Washington, D.C.-based Center for Strategic and International Studies, a think tank, said amid uncertainty about a potential trade war.

But he said the U.S. is unlikely to face a severe shock if Canadian electricity suddenly disappears.

“Broadly stated, the immediate impact is the U.S. power markets would be fine,” McGeady said. “Except on the coldest days, in the most tense conditions, those imports won’t be missed, so, broadly stated, prices would not go up.”

The other problem is that the electricity trade with the U.S. occurs because it’s more efficient.

For example, Ontario may generate excess electricity because it doesn’t make sense to shut a nuclear reactor down overnight when energy demand declines.

In turn, electrical grid operators in the U.S. may choose to purchase that energy chiefly because Ontario is willing to sell it at a discounted price, said Andrew Leach, a professor at the University of Alberta’s Department of Economics who studies energy markets.

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But if that electricity supply becomes unreliable or its price rises because of an export tax, he said the U.S. is likely to look for substitute sources, including generating more of its own electricity, which is likely the outcome Trump wants.

Leach said restricting electricity flows at times when it’s needed could also have dire consequences — such as people losing heat and freezing or medical devices that no longer have power — that would escalate the conflict with Trump.

“It doesn’t take a lot of messing around with the electricity system to cause a cascading failure that puts a lot of people in danger,” he said. “We see how President Trump reacts: there’s no sense of empathy or proportionality necessarily.”

There is also a broader issue that the U.S. and Canada have traded electricity for more than a century, and that connection has only been growing in recent years.

Bruce Lourie, a member of Canada’s Electricity Advisory Council, said the trend has been to build more connections between the grids because that makes electrical systems more resilient, lowers the average price and makes it easier to decarbonize.

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“It’s just such a fundamental concept to creating a resilient electricity system,” he said. “What Trump is doing is really going back on over 100 years of history of cooperation between Canada and the U.S. It’s what I would describe as mind-boggling ignorance.”

Michael Sabia, chief executive of Hydro-Québec, wrote an op-ed in La Presse on Friday that begins — translated from French — by acknowledging that “we are undeniably in a period of political and economic turbulence,” and he then goes on to ponder what the best strategy is.

Electricity rates in the U.S. Northeast and Midwest are rising faster than in Quebec, he said, because the “Americans have invested little in their electrical generation capacity.”

But Sabia concluded that Quebec’s reservoir of cheap, clean electricity is going to be an advantage whether the U.S. or Canada places restrictions that impede trade.

“In a world where Quebec businesses are facing a lot of turbulence, this access is a solid competitive advantage that we can give them to propel their growth and decarbonization projects,” he said.

• Email: gfriedman@postmedia.com

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