A Trade War Threatens Your Electricity Bill Too

For most people, electricity costs whatever the utility charges. They have a faint sense that it’s produced in a variety of power plants many miles away, perhaps, but few are aware of the actual process by which the electricity that charges their iPhones, runs their coffee makers, or turns their lights on is sourced. It’s more complicated than one might think.

Because of interconnectivity and differences in cost for various energy production, the electric grid uses a “merit-based” trading system that matches energy demand to the lowest-cost electricity generator available, and then the next lowest-cost generator, and so on as demand waxes and wanes.

Larger, more interconnected grids provide more reliability and flexibility by having more generators to choose from and more pathways to direct power flows. Big grids can usually withstand the loss of a generator or a transmission line better than small grids can. And they can certainly select the generation mix that is the lowest cost at any given moment. They are also cleaner. From the standpoint of economy, efficiency or engineering, there’s not much reason to be independent of Canada in electricity. The system’s value is in matching the grid’s energy needs instantaneously, with the most cost-efficient supply. But the emerging trade war with Canada may throw a spanner in the works.

With the Eastern Interconnection running from Halifax to New Orleans and the Western interconnection from Vancouver to San Diego, plus a small slice of Mexico, cross-border interactions are key. Trump’s on-again, off-again tariffs on Canada—which include a 10 percent import tax on Canadian electricity, and a threatened 25% retaliatory export tariff from Canadian officials—throw off the existing relationship between U.S. and Canadian electricity supply. The cross-national grids, which could previously buy cheap hydro and nuclear-produced energy from Canada at lower costs than local fossil-fueled electricity production, will now pay a higher price to “Buy American.”

Free Trade in Electricity Benefits Both Sides

On an island with a single electric company, system planners would likely build one plant with a high construction cost but low operating costs, and run it every hour of the year, or as close to that as the engineers can manage. They would size it to meet the minimum load, which is probably in the middle of the night, and call it a “baseload” plant.

When demand exceeds the capacity of that baseload plant, system planners would start up the plant with the next-lowest cost of production. In industry jargon that would be a “mid-merit” plant. And when demand hits the peak of the “mid merit” plant, the system operator turns to a “peaker” plant with high operating cost, which is tolerable because it only runs a few hundred hours a year. Utilities like these “peaker” plants because they can be built cheaply and installed quickly, but they are generally the dirtiest and cost the most to run when they are needed.

When demand declines over the course of the day, the plants are shut down in reverse order. As demand increases with the evening peak, plants are started up by price in ascending order until there is enough energy being produced to match demand.

But in an interconnected system, the operator keeps neighbors in mind. If the operator thinks the system will need another 100 megawatts of power in the next hour, and that the next plant in line to start up will cost $30 a megawatt, the operator can check with neighboring systems. If the neighbor can provide the electricity for $28, then the operator can buy it for $29. The system that’s buying will save $1, and the system that’s selling will earn $1, spreading the capital cost of the plant over more megawatt-hours of production. Both sides are happy. Marginal pricing and trade across interconnections helps ensure efficient allocation of resources and lower prices for consumers.

Marginal pricing is very important within a regional grid as well, because it determines how producers get paid. Within a grid, every producer is paid the price of the marginal megawatt hour, not the producer’s own cost of production. A trade war can increase the price of that marginal megawatt. Michigan or New York may turn down $30-a-megawatt-hour power from Ontario if the province puts a 25 percent export tax and the United States imposes a 10 percent import tariff. Instead, an American state may take local power at $32 or $34. Then, everybody in those places pays an extra $2 or $4 a megawatt-hour.

So the price impact of a trade war on consumers is not that some of the incoming electricity is more expensive; it’s that all the electricity is more expensive. That raises costs for brewing coffee in the morning, keeping the street lights lit, running the refrigerators at the supermarket and manufacturing the auto parts that we no longer import from Canada. The benefit of trading between systems is reduced when prices are artificially inflated from actual cost to a politically-inflated number.

In North America, the Eastern Interconnection and the Western Interconnection allow this cooperation among systems, and extend up into Canada. Texas, for reasons of history and temperament, is only weakly tied to the rest of the continent, which is one reason that it sometimes runs short of power.

This model got somewhat scrambled in the last two decades as the system moved to “deregulated” trade, in which ownership of the generators was separated from the transmission and distribution systems, but plants still start up and shut down in cost order, and if they can do it over a wide geographic area, total generation costs fall, and use of peakers is minimized, making the system cleaner. For some generators, like wind or solar or hydro during high flow periods, the energy is available on a “use it or lose it” basis, so if it can’t be used locally, trading it to a distant service area where a coal- or gas-fired generator can be shut down is a good deal for everybody.

And between markets, the trading is still organized on a marginal-cost basis; that is, each system keeps track of what the next increment of power will cost it to generate itself, and arranges a purchase or sale if prices are different elsewhere. And since demand is often driven by weather, a grid that stretches from Halifax to New Orleans lets one area challenged by weather lean on neighbors who have more moderate demand.

Switching Back to Fossil Fuels

The trading is largely managed by computers running optimization models. These know, for example, the daily price of natural gas or coal, and thus the generator’s cost to produce electricity. The computers also know which systems are running expensive peakers, and which ones have lower prices because they have lots of spare capacity. The generators will put in offers to sell their electricity, both in the day-ahead and in real-time, usually setting their prices close to their marginal cost. Operators will place similar offers in import-export markets, trying to sell generation when external prices are high and buy when those prices are lower than their internal market.

For an instantaneous view of trading, a good source is the New York Independent System Operator’s “real time dashboard.” It shows flows in all directions, and prices. The Energy Information Agency has put together a grid monitoring dashboard that is updated hourly and provides a bird’s eye view of the United State’s grid. The white nodes floating north of the border are the Canadian grid operators.

The emerging problem is with Canada, which has long had a helpful connection to New England and New York and the midwest (and places that border those places). Generally, Ontario and Quebec help U.S. utilities meet peak air conditioning demand, and U.S. utilities help with heating systems in Canada. But the flows occur every day of the year, to reduce costs and help balance the grid.

On March 4, 2025, the Trump administration placed a 25% tariff on all imports from Canada excluding energy imports, which are taxed at 10%.

In response, Ontario said it would put a 25 percent export charge on electricity that it sends to New York, Michigan, and Minnesota, meaning energy prices from Ontario would increase by more than a third. Then it backed down when Trump rescinded some tariffs. But the situation changes daily.

To the extent that tariffs take effect, that would mean burning more natural gas and perhaps coal, at higher cost, in those states, because fewer trades will occur. If the best megawatt-hour to be had was a $30 product from Canada, and the export charge is 25 percent, or $7.50, plus an additional 10% import tariff of $3.00, bringing the total price of that megawatt-hour to $40.50. That doesn’t mean that U.S. companies will pay it; instead, they may find that the best place to get the next megawatt-hour is from a domestic supplier for $32 or $34. Most power generation from Quebec and Ontario is produced by carbon neutral technologies (hydro, nuclear, and wind), but the units replacing the now-too-expensive imports will be natural gas, combined cycle, oil, and diesel. Because of the artificial fees on energy flows between countries, prices will rise. Costs will rise in Canada, too, because of decreased sales across the border and the export fees levied on production will not be distributed back to the producers.

Bad as an export fee may be, it could easily get worse; in Ontario, Doug Ford, the premier, told reporters, “If they want to annihilate Ontario, I will do everything – including cut off their energy with a smile on my face.”

Energy Secretary Chris Wright recently stated it was “too early to say” what impacts tariffs would have on energy prices. Wright is perhaps too optimistic; the retaliatory charges by Canada in response to the tariffs will have immediate effect on the grids and infrastructure that are fundamental to our way of life. Americans and Canadians will feel the effects of these increased prices and costs sooner rather than later. The building of new infrastructure and increased energy independence may alleviate some of these concerns, but such goals are both lofty and years away. In the meantime, consumers will have to deal with higher prices and decreased energy reliability.