Why are the Electricity Rates so high?

‘High’ is a subjective term
Our costs in Ontario are among the highest in the country but not in the world by any means. In Denmark they pay 3 times[1] the Canadian average cost for electricity. In Quebec, they pay the lowest rates in Canada (less than half what we pay in Ontario) but that doesn’t stop them from complaining about how much their electricity costs[2]! It is one of Canadian’s favorite things to complain about.
The OEB did a comparison of some major jurisdictions in Canada and the US in 2016.

The cost of electricity is tied to the cost of fuels used to produce it

Most jurisdictions employ a mix of generation sources with hydroelectric being cheapest and solar being most expensive. When you examine the mix of generation in Ontario, it is easy to see why we are the most expensive jurisdiction in Canada.

We will never have the lowest cost energy in Canada

Since demand outstripped the capacity of our hydroelectric resources we lost that battle (circa 1950) and have experienced steadily increasing costs. Adjacent jurisdictions in Manitoba and Quebec are primarily supplied with hydroelectric power, are publicly owned and enjoy the benefits of lower rates.

Hydro Quebec also benefits from importing hydro supplied by Newfoundland’s utility (Nalcor) Churchill Falls generating station at less than a cent per kWh. They sell that power for more that 10 times that rate to make a profit. They have a contract for Nalcor’s energy until 2041.

Source: Statistics Canada CANSIM 127-0009
Capacity is only one part of the picture. It shows the power capability of the generation but does not indicate the actual energy provided from the source (utilization). We are billed for energy so it is worth knowing where it comes from.
The energy mix provided from the generators in Ontario for 2016 looked like this:

The nuclear supplied portion of energy is much higher than the capacity share because nuclear is used as the ‘base-load’ generation for the province and is running all the time. Assuming that the generators were available all of the time, nuclear capacity utilization was 79% compared to the lowest cost generation (hydro) which had 45% utilization in 2016.

We have generation capacity in excess of our needs

The IESO manages the capacity requirements and they take into consideration issues like peak demand, spinning reserve, weather and outage requirements. Looking at 2016 and 2017 figures we average 58% excess capacity in our system. Considering the embedded generation, the number goes up to 62% excess capacity. Utilization of generated energy is approximately 42% without embedded generation and 38% with. While this is a seriously complex and difficult situation to manage, it does appear as though we have more generation than needed.

The IESO calculates the Ontario Reserve Margin Requirements annually and publishes it in December. In 2018 the 5 year projection of reserve capacity requirements hovered around 20%.

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In Ontario, we pay for generation capacity whether we use it or not

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It is important to note that renewable energy sources are considered intermittent and have very low utilization potential (solar, for example in Canada has a capacity factor of 17% or less) and other sources of energy must be available to meet demand. As renewable sources increase, the excess capacity margin will increase.

We contract generation to independent power producers

Ontario has a long history of contracting independent power producers (IPP) to build generation. Various methods have been used to attract IPPs to Ontario and the mechanisms chosen have resulted in very high energy unit costs for ratepayers. The nature of the contracts is such that the rate-payers assume the risk of profitability of these facilities. The bottom line is that power producers make money regardless of whether or not they sit idle.
In some cases excess power may impact segments of the grid negatively and generators will be required to ramp-down or curtail output. In order to ensure that private generators will comply to IESO directives there is a Congestion Management Settlement Credit (CMSC) mechanism that pays them to not generate.
The IESO reported that the Congestion Management Settlement Credit[3] (CMSC) designed into the Wholesale Market has cost $1.6 Billion since 2002. The 2011 Auditor General Report showed that from 2006 to 2010 the IESO paid more than $420 million in constrained-off CMSC payments to generators and traders whose power cannot be fed into the grid because of the transmission system’s capacity constraints. In the 2015 Auditor General Report it is estimated that curtailment of contracted generation cost $339 million from 2009 to 2014.

We export energy and sell to neighboring jurisdictions at a loss… or not

Ontario is a net exporter of energy as shown below. The price paid for exported energy is less than what it sells for in Ontario. Does that mean we lose money? Maybe, maybe not. See the separate article Exporting Power: Win or Lose?

The Ontario electric utility business is ‘power for profit’

For those of us old enough to remember, the electricity industry was once  ‘power at cost’. Restructuring in 1998 split Ontario Hydro into successor companies and changed the utility business to ‘power for profit’. The initiative did not lower rates. Instead they skyrocketed, led to a rate freeze and contributed to the demise of the government that orchestrated the change. The impact these changes had on rising cost is highly debatable and impossible to quantify. 

You can find an extensive analysis of the restructuring in a York University Master’s Thesis by Lawrence Gluck from 2015 titled ‘Ontario’s Electricity Supply Industry after the Restructuring: An Economic and Environmental Impact Analysis’ .

Utility worker wages and benefits… or not

This is a bit of a distraction from the other issues.
Of course wages and benefits are cost factors, however there has been plenty of evidence presented to the Ontario Energy Board over the last decade to demonstrate that labour costs are not excessive.
To get a grasp of the context on one of the issues have a look at my case study on the impact of labour increases Case Study – Labour Cost
It has been my observation that publicly run companies pay highest to the lower skill level jobs and lowest to the highest skilled or management roles. In multiple benchmark reports commissioned by Hydro One, Mercer points that out. Private sector does the opposite.

About Hydro One

The most glaring example of this situation is with Hydro One – which is now investor owned. With the disclosure that the CEO earned over $6 million in 2017 and the board of directors voting themselves $25,000 increases in 2018 the politicians have their shorts in a knot. Running a multi-billion dollar private sector company pays many times more than any public sector equivalent. The reality is that the multi-million dollar payout has an immeasurably small impact on the rates of a multi-billion dollar business. It make great fodder during an election campaign though. See my commentary on the Hydro One Executive Compensation.
The contention that high costs are due to wages provides an opportunity for politicians to leverage support from people who either don’t know what is going on or simply resent others earning a decent living. Utility workers today do more with less and are required by the OEB to continuously improve efficiencies. But nobody would notice because it doesn’t have a large enough impact on ratepayers to be worth mentioning.
See the article The Cost of Labour

Derek

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[1] Electricity 101, The Canadian Electricity Association December 8, 2017

[2] Montreal Gazette “Hydro-Quebec bills: Stop taxing them!” February 3, 2014 http://montrealgazette.com/life/hydro-quebec-bills-stop-taxing-us-on-them

[3] Congestion Management Settlement Credit – needed to maintain the reliability of Ontario’s electricity system

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