Carbon Pricing of Electricity in Ontario

Much is being said about carbon pricing these days as inflation and the overall cost of living continue to increase. Electricity is impacted by carbon pricing as some generation comes from fossil fuels. The actual carbon cost is not broken out on the electricity bill like it is on a natural gas bill, making it a bit of a mystery.

So let’s clear that up…

Abbreviations to know:

The following information sources are used in the commentary:

• the Government of Ontario
• the Independent Electricity System Operator (IESO)
• The Ontario Energy Board (OEB)
• The Government of Canada

Electricity carbon pricing is not the same as fossil fuel home heating

The Ontario-specific industrial carbon pricing plan is set by the provincial Emissions Performance Standards (EPS) program, (O. Reg. 241/19) under the Environmental Protection Act. The regulation applies to a wide range of industrial facilities including natural-gas generators. It was accepted by the federal government on September 20, 2020. Without an Ontario program, the federal Output-Based Pricing System (OBPS) would apply.

The principle of the EPS program is to establish a benchmark for carbon emissions, above which a carbon price would apply. Pricing does not apply to the fuel supply, but rather the generator’s output. The benchmark was 370 tCO₂e/GWh in 2022 . It has been lowered through legislation to 310 tCO₂e/GWh for 2023 and is subject to legislative change at any time.

The benchmark applied to natural gas generation

Carbon pricing is applied against a generator’s output emission that exceeds the prescribed benchmark. The average output of a combined cycle (CC) gas turbine in Ontario is 415 tCO₂e/GWh (2022 APO Carbon Pricing Module). Using the 2022 benchmark emission of 370 tCO₂e/GWh, the carbon pricing would apply to 45 tCO₂e/GWh or roughly 10% of actual emissions produced to generate electricity from a CC gas generator.

Note: Not all gas generating facilities are combined-cycle. Peaking or simple-cycle gas plants will likely have a higher emission output but a lower utilization than combined cycle.

Carbon pricing in 2022 and beyond

The federal government determines the carbon price. It was $50/ tCO₂e in 2022, $65/ tCO₂e in 2023 rising by $15/ year each April until it reaches $170/ tCO₂e by 2030. Refer to O. Reg. 241/19: Greenhouse Gas Emissions Performance Standards.

Generating totals for 2022

The total cost for generating electricity in 2022 was $16.8 billion (Market Settlement + Global Adjustment). Natural gas generation provided 15,370 GWh or 10.2% of Ontario’s energy at an approximate cost of $2 billion. Natural gas generation made up 11.9% of the total annual energy cost.

Based on the federal carbon price of $50/t, the total carbon cost would be:

45 tCO₂e/GWh x 15,370 GWh x $50/tCO₂e = $34,582,500 or $34.6 million

The carbon cost represents about 0.21% of the total pool cost of generation.

How does that cost filter down to an average rate payer?

There are several steps in the process of cost allocation to get from the total generating costs down to the ratepayers in the Regulated Price Plan (RPP). The steps are described in the Ontario Energy Board’s Regulated Price Plan Report (RPP) which is published annually. A precise calculation of the RPP impact requires data than is not readily available to the public since gas generator compensation is paid through contracts with confidential terms, however, a reasonable estimate of carbon pricing cost is entirely possible.

First approximation – proportional sharing among ratepayers

The simplest approach to estimating cost impact is to apply proportional sharing across ratepayers.

The average residential ratepayer uses 750 kWh of electricity per month or 9 MWh annually. That works out to roughly $900/year at the average Class B rate of 9.98 cents/kWh as posted by the IESO in 2022.

At 0.21%, the average residential ratepayer paid $1.89 in 2022 for carbon pricing (not including tax) for the year.

Sources of error

In reality, with the cost allocation that applies to Class A and Class B customers, the carbon pricing is not shared proportionally because of the Industrial Conservation Initiative (ICI). A more accurate estimate would require accounting for the differences in allocation to the two classes of rate payers. The Government of Ontario introduced Non-Hydro Renewables Funding – now called the Comprehensive Electricity Plan – in 2020 which hides a portion of the cost of generation (Global Adjustment Modifier) from ratepayers. The Ontario Electricity Rebate (OER) is also applied to the carbon pricing amount, reducing the impact on ratepayers.

The net effect of the sources of error is close to a wash as the ICI adds to the carbon pricing cost and the hidden Global Adjustment Modifier combined with the OER subsidy reduce it. The estimate of $1.89 a year is probably accurate to better than 10%.

The bottom line?

For an estimated ratepayer cost of less than $2 a year, it’s just not material enough to justify a second estimate – or any more time obsessing over it.

Where does the carbon pricing go from here?

It goes up…

The amount paid for carbon pricing will change in the future based on the following factors:

• The federal government carbon price
• The carbon pricing threshold set by Ontario under Reg. 241/19: Greenhouse Gas Emissions Performance Standards
• The amount of electricity supplied by natural gas generation
• The emission rate of natural gas generators

If carbon pricing were the only thing to change, an average residential ratepayer would pay $6.43 per year in 2031. That’s about how much a Caffè Americano will cost at Starbucks by then.

Derek

Author: Derek Hughes

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