Ontario’s Dim Electricity Policy will Shock

Worth A Look, Energy, Frontier Centre

The lights were on yesterday in Ontario, and what a luxury that was. When ample juice should have been available — a day too cool for air conditioners, too warm for heaters — the province still had to import electricity because about one-third of the generating capacity was under repair and out of commission. It did so at horrendous cost.

In the morning, paying for imports pushed the average hourly price to 15.4 cents a kilowatt-hour, or 3½ times higher than the 4.3-cent rate freeze imposed on half the market — big industrial and commercial users still pay market rates — by Ontario Premier Ernie Eves.

By the afternoon, the price had fallen to 6.15 cents, still substantially above the fixed rate. And who paid for the difference? Taxpayers did. The extra cost is piled on to the debt of Ontario Electricity Financial Corp., one of the successor companies to the old Ontario Hydro.

Since May 1, 2002, when the Ontario electricity market was opened, only to be slammed shut a few months later by Mr. Eves, who saw votes vanish as the deregulated price rose, the farcical economics of deploying taxpayers’ money to subsidize taxpayers’ electricity bills has cost an estimated $500-million to $700-million. In theory, new generating capacity, combined with acts of God in the form of moderate summers and winters, are supposed to drop the price below 4.3 cents during big chunks of the year, thus paying off the subsidy.

This hasn’t happened. According to the Independent Electricity Market Operator, the trading hub of the wholesale electricity marketplace, the average electricity price since last May has been 5.84 cents, or 36 per cent above the fixed rate.

So here we are, on the first anniversary of the historic opening of the Ontario electricity market, with a closed market that is providing the taxpayer with a negative return on investment. As the costs to the taxpayer have climbed, so has the electricity market’s unreliability factor, to the point that brownouts and rolling blackouts are distinct possibilities this summer.

How do we know that shortages loom? If the government were certain it could manage with existing generating capacity, topped up by imports now and again, it wouldn’t be installing two diesel-fired emergency generators in Toronto.

The plan to install the temporary generators was revealed a few days ago. The reversal is remarkable. Ontario’s move to an open electricity market originally came with a commitment to shunt generating capacity into the private sector, and make it cleaner by phasing out the old coal and oil burners that are Kyoto’s public enemy No. 1.

Now, the government is back in the generating business and has picked the dirtiest way to produce electricity (Eliot Spitzer, take note; the New York State Attorney-General is using NAFTA to press Ontario to reduce pollution from three coal-fired Ontario plants).

Still, the presence of the emergency generators may not be enough to keep the lights and air conditioners on.

The electricity brain trust at Queen’s Park apparently miscalculated a couple of things. The first was the return of the massive Pickering nuclear station, where four of the eight generating units, each capable of pumping out 500 megawatts, have been idle for more than five years.

The overhaul of the units is costing billions (original estimate: $800-million), and the first of the four units was supposed to be back in action at the end of 2000. All four are still inactive and the latest target date for the startup of the first — June — seems fantasy. Without Pickering, combined with startup delays in the Bruce 4 nuclear reactor, the potential for electricity shortages this summer can only soar.

Basic economics was the other monster miscalculation. When you price a product at artificially low prices, customers tend to take advantage of the discount.

So it is with Ontario’s electricity. Users know that, no matter how much they use, the per-kilowatt price remains the same. So leave the Christmas lights on all year.

Energy Probe’s Tom Adams, whose predictions on the unravelling of the electricity market were prescient, conservatively estimates the rate freeze has boosted demand by about 500 megawatts, equivalent to almost 2 per cent of Ontario’s theoretical generating capacity of 27,000 megawatts. His calculation is based on electricity price elasticity data, where, over the short term, a 10-per-cent price increase cuts demand 1 to 2 per cent (over the long term, the same price increase would reduce demand by 7 per cent).

Put the two factors together — rising demand because of the artificially low price, and a severe shortage of generating capacity — and you have a recipe for a fine summer’s day electricity blowup. Watch for a diesel generator to be installed in a neighbourhood near you.