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Ontario’s Power Trip: Generating losses

Parker Gallant

For the first 10 months of 2011, the province of Ontario, via the
Independent Electricity System Operator (IESO), exported 11.1 TWh
(terawatt hours) of electricity. That’s enough to power 1,156,000
average Ontario households for a year, or about 25% of total Ontario
residential electricity demand, or 10% of total non-industrial
consumption.

According to the government, these exports are a huge benefit to
ratepayers. In a Nov. 10 release, the Ministry of Energy said exports
keep “costs down for families.” The IESO reports on its webpage that
Ontario generated $375.3-million in revenue selling electricity to
Quebec, New York, Michigan and other regions so far this year. That
implies an average price of about 3.38¢ for each kilowatt hour (kWh),
or slightly less than half a cent higher than the official Ontario
average market price of 2.98¢ per kWh. It looks like the IESO is doing
a good job of capturing value in the spread between Ontario and non-
Ontario electricity prices.

That’s what they claim to be doing, but they are not. Behind the
numbers and claims of making a profit on exports, one finds a
different story. Rather than making money, Ontario is losing hundreds
of millions of dollar selling this power to New York and other regions
at low prices that are up to 50% below the actual final price of
electricity in Ontario. The power exported at an average of 3.38¢ a
kWh looks good only when compared with the essentially fictitious
Ontario market price. The real average price of electricity in Ontario
through the first 10 months of this year is about 7¢ per kWh, which
means the province is in effect losing almost 4¢ on every kWh
exported. Since the province exported 11.1 billion kWh, the loss works
out to $420-million.

That loss is paid by Ontario ratepayers. The exports keep costs up,
not down. The real cost of electricity is buried in an arcane pricing
structure that seems to have been designed to hide the facts.

The provinces and states purchasing Ontario’s surplus electricity
don’t have to pay the full cost of building, maintaining and expanding
Ontario’s out-of-control electricity regime. On top of the so-called
market price for electricity, Ontario ratepayers must foot the bill
for Ontario’s multi-faceted politically micro-managed power system.
All these other costs are accumulated and calculated under an
accounting conceit called the “Global Adjustment” (GA).

According to the IESO, the Global Adjustment includes “the rates paid
to regulated and contracted generators and for conservation and demand
management programs.” In such few words are packed a multitude of
hidden costs.

The market price, based on trades in the wholesale market among major
generators and buyers, is merely the base for a series of Global
Adjustment add-ons. The average market price of 2.98¢ must be adjusted
to pay for electricity the province has contracted to buy at above-
market prices. Wind power generation is paid at 13.5¢ a kWh and solar
at 80¢ a kWh. Another cost is the province’s policy of paying
generating companies not to produce electricity. If wind power is
being generated, displacing gas plants, the government pays gas plants
not to produce electricity.

All these costs add up. The Ontario Power Authority reports that the
GA for the 12 months to the end of October 2011 exceeded $5.1-billion,
or about 30% of total system revenue of about $14.5-billion

Here’s a rough breakdown of the key GA electricity price add-ons:

Non-utility generation (NUG) Private companies that hold long-term
contracts to provide power to the system (hydro, gas, biomass). Many
of these are money-losing legacy contracts that the province is
obligated to honour and are held by an off-balance-sheet operation
called the Ontario Electricity Finance Corp. Total NUG payments: $1.06-
billion.

Nuclear generation and certain hydro power Nuclear plants are
guaranteed an average 5.58$, and receive the bulk of this GA payment
of $1.28-billion.

Renewable energy Payment of special 13.5¢ and 80¢ feed-in tariffs for
wind and solar, plus the cost of paying standby gas plants to not
produce electricity, accounts for the largest portion of the Global
Adjustment: $2.8-billion.

The power sold for export fetched only 3.38¢ per kWh over the past 10
months, which means Ontario ratepayers picked up 3.62¢ to cover the GA
costs for wind, solar, nuclear and other electricity sources. In
effect, the $375.3-million in revenue generated selling “surplus”
electricity cost ratepayers another $420-million (11,100,000 MWh times
the average GA). Put another way, ratepayers in Ontario paid 3.8¢ per
kWh so out-of-province electricity buyers would take our surplus
power.

The benefit is no benefit. If the exported electricity (equal to about
25% of total Ontario residential demand) had not been produced and
sold, ratepayers would have saved $420-million. How can the ministry
claim selling our surplus power at a subsidized cost per kWh of 3.8¢
helps to “Keep costs down for families”?

The Ontario government is hiding the fact that adding intermittent
wind and solar production to the province’s baseload generation
capacity has done nothing more then drive up the price of a basic need
and benefited companies in New York and elsewhere.

This is not a new development. Last January, the Toronto Star reported
that “Ontario electricity customers have subsidized power exports to
the tune of $1-billion since 2006.” The article promised that a C.D.
Howe Institute study would be published later in the year. Jan Carr,
the former CEO of the Ontario Power Authority (OPA) was quoted and
referenced several times and traced the cause of those costs to
ratepayers “to about 2005 when the Ontario government increasingly
took electricity pricing away from the open market.”

The C. D. Howe study promised in that article never saw the light of
day, for some reason. Which is unfortunate. It might have ended the
Ontario Ministry of Energy’s claims to be saving money when the
opposite is true. At least 10% of electricity output in the province
is unneeded production, mostly from wind, that is exported at a loss
to all ratepayers.

Financial Post
Parker Gallant is a retired banker who looked at his electricity bills
and didn’t like what he saw.