Costs and Rates – they are no longer directly tied together

There once was a time when electricity costs were paid by ratepayers through their rates, however, that is no longer the case in Ontario. Faced with rapidly rising costs and ratepayer concerns, the Ontario government now pays a significant portion of the electricity cost through various subsidies. Costs continue to increase, however, rates increases have been capped to the rate of inflation.

Why are Electricity Costs Increasing so Rapidly?

Electricity Costs in Ontario have increased dramatically over the last decade. See my article on what factors have contributed to the energy portion increase here.

Delivery costs are rising due to sustainment investment and infrastructure expansion to accommodate increased industrial, agricultural and urban load growth.

 

Here is a high level summary of the factors contributing to the increase:

Artificially set electricity rates

Artificially set electricity rates have been in place on and off throughout the history of the electricity industry. While rate freezes and subsidies may temporarily silence the uproar of rate payers, the industry must eventually recover costs and get on with essential sustainment and expansion to meet the Province’s need for accessible, reliable energy.

The retirement of coal-fired generation has impacted energy costs significantly

Coal generation was cheaper than the alternatives that have been implemented to replace the capacity. Natural gas, wind and solar energy is more environmentally friendly but costs more.

The source of generation is migrating

The source of generation is migrating from lower cost regulated publicly owned sources to higher cost private ownership with contractually guaranteed rates. As of 2017, 76% of our generation capacity was contracted[1]. The following chart shows how the price of energy ramped up as the contracted generation came on-line. Note that I had to chart this in per-unit values due to the limitations of the blog. The base numbers are from 2017 and are 76% for contracted generation capacity and 11.55 cents per kWh for energy.

Private ownership and gaming

 

The shift in generation ownership has not benefited rate payers at all. It has exposed ratepayers to private sector gaming to increase profit margins of market participants. Examples of this behaviour can be found by browsing the reports from the Market Surveillance Panel of the OEB.

 

Here are just a few examples;

In September 2017 the panel issued a report on the abuse of market processes by a gas generator[3] that cost ratepayers $89 Million from 2009 to 2012.

The MSP found a generator had ‘gamed’ $432,000 from December 2010 to August 2011[4].

The MSP found ‘gaming’ by two market participants[5] from January 2010 to August 2010 amounting to $20.4 Million.

Nuclear power has had more than its share of challenges

Nuclear power has had more than its share of challenges since the introduction of large-scale generation in Pickering in 1971. Cost overruns from Darlington, premature tubing failures at Pickering and safety shutdowns of Bruce A and Pickering A (1995 to 1998) put the former Ontario Hydro in a dire financial position. In order to save face, the government split up Ontario Hydro, created a shell corporation to manage much of the debit and spread repayment across the entire electricity sector.  The lease of Bruce Nuclear, costly refurbishments of Pickering A ($2.2 Billion) and Bruce A ($4.8 Billion) have impacted rates. Nuclear energy now accounts for 44% of the Global Adjustment and costs 10.1 cents/kWh (2022 RPP Report – OEB).

To see what some of the actual historical costs were and to gain some insight into the true cost of Nuclear energy, see the article Nuclear Generation – Past, Present and Future

Electricity demand is declining at the same time costs are increasing

As demand decreases volumetric rates tend to increase as Suppliers seek to recover their fixed costs. Electricity demand has not recovered from the 2005 level of 157 TWh of energy consumption, The 2021 energy demand was 134 TWh (IESO Year End Report).

Embedded generation

Embedded generation has been steadily increasing for more than a decade. This is generation that is connected to the low voltage distribution system and not visible to the system operators. According to the OEB, embedded generation supplied an estimated 5% of energy demand in Ontario in 2021. This generation is mostly solar which is the most expensive and least grid-friendly source of energy in the province.

Creation of two customer classes to reduce industrial rates

In 2010, new customer classifications were created to move costs from industrial users – Class A and Class B. Industrial customers participating in an Industrial Conservation Initiative were ‘Class A’, with all other customers being ‘Class B‘. Class A customers are given a significant discount on their Global Adjustment for reducing their peak load. The discounted amount is shifted to Class B customers, increasing their rates.

Rising electricity prices are a global concern

Electricity prices are rising dramatically world-wide.

In a recent report by the Institute for Energy Research in the United States identified that electricity prices had increased by 34% over the 10 year period from 2005 to 2015. During the same period the price of natural gas delivered to electric utilities declined by 60%.

In Colorado the average electricity price rose by 67% from 2000 to 2014 while the inflation rate was only 34%. A large part of the price increase is attributed to environmental regulations surrounding greenhouse gases and heavy metals. Renewable energy is also mandated in some jurisdictions which increases the average energy cost.

Other parts of the world have little or no concern about environmental impact of energy production and produce much lower priced energy. China and India rank 1st and 3rd in greenhouse gas emissions in the world. They continue to build more coal-fired generation to bring electrification and low-cost energy to areas in need of economic growth.

Derek

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[1] Source – IESO 2017 18 Month Outlook September 21, 2017, calculation by author

[2] IESO – MODULE 1: State of the Electricity System: 10-Year Review. August 2016

[3] Investigation No. 2010-2 February 2015 “Report on an Investigation into Possible Gaming Behaviour Related to Congestion Management Settlement Credit Payments by Abitibi-Consolidated Company of Canada and Bowater Canadian Forest Products Inc.”[2] Regulated Price Plan Price Report May 1, 2017 to April 30, 2018, Table 2, Ontario Energy Board April 20, 2017

[4] Report on an Investigation into Goreway Station Partnership September 2017

[5] Investigation No.2011-04 “Report on an Investigation into Possible Gaming Behaviour Related to Congestion Management Settlement Credit Payments by Greenfield Energy Centre LP”

[6] Regulated Price Plan Price Report May 1, 2017 to April 30, 2018, Table 2, Ontario Energy Board April 20, 2017

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