This post is in response to a report released two weeks ago by the Auditor General (AG) of Ontario, which argued that Ontario has been vastly overspending on its electricity sector for the past decade. The Auditor General, Bonnie Lysyk, revealed that Ontarians have spent $37 billion more than market price for electricity over the past 8 years, claiming that the majority of this overspending stemmed from the province’s failure to take advantage of low cost electricity prices, in addition to lofty investments made in power-generating companies, including those in the wind and solar sectors.
Since the report was released on December 3rd, there has been a flood of mixed feedback from those involved in the energy sector. Most prominently, Jatin Nathwani, Professor and Ontario Research Chair in Public Policy for Sustainable Energy at the University of Waterloo, wrote a response piece that was published in the Globe and Mail last week.
The AG’s report highlighted that the elevated prices paid to renewables via the province’s FIT program were one of the main contributing factors to the higher electricity prices that Ontario’s consumers have been paying. According to Dr. Nathwani, this is an oversimplification of the issue, as the landmark shut-down of coal generation plants in the province in 2011 led to the need to transition to alternative sources of generation, i.e. a combination of nuclear, hydropower, natural gas, biogas, wind, and solar. Subsequent investments of more than $30 billion in these power generation industries resulted in total capacity addition of 12,000 MW and a quarter million new jobs—this should be perceived as value creation and not “excess costs”.
It is also important to note that in Ontario, new renewable energy (i.e. excluding legacy hydro power) only accounts for less than 10% of our electricity supply, and rates paid to renewables like wind and solar by the province have been steadily dropping over the past decade, and will continue to drop in the foreseeable future. Judith Lipp, Executive Director at TREC, argues that the main problem leading to the surplus in our supply is the inflexible nuclear power source that cannot be easily adjusted to meet demand.
In fact, compared with the pricing mechanism for renewables under the FIT program, which are clearly documented, the cost for nuclear in Ontario has been generally vague and lacks transparency. In a recent blog post, Solar Share did some digging to find out how Ontarians have been paying for the province’s immense reliance on nuclear power. Firstly, Atomic Energy of Canada Limited, which funds the construction of nuclear reactors used in Ontario, is subsidized by millions of government dollars annually. Secondly, subsidies for nuclear generators constitute the largest percentage of the global adjustment fees paid by each Ontarian each year. In addition, through the debt retirement charge, taxpayers have been paying down the billions of dollars of stranded debt that resulted from the development of the first nuclear plants in Ontario. Finally, rates for nuclear power, such as the recent Bruce Power refurbishment deal, could escalate over time whereas FIT rates for renewables are fixed over a 20-year contract.
In his opinion piece, Dr. Nathwani made an important point to address the global adjustment (GA) fees, which increased from $650 million in 2006 to $7 billion in 2014 (as stated in the AG’s report); the lack of electricity supply and consequently volatile prices in 2003-04 resulted in the need to attract contracts to fill the gap in supply. The increase in GA fees merely reflected the payments made to contracted electricity generators who have invested in Ontario within this time period. Dr. Nathwani believes that the declining cost of renewables is promising in the long run, as it could add tremendous value to our energy system, especially when combined with cost-effective storage technologies.
Matt Zipchen, General Manager at Solar Share, commented on the fact that the report compared Ontario’s FIT prices with Historical US Average Costs; the dissimilarities in the energy landscape between U.S. and Canada make this an unfair comparison. In addition, unjustified comparisons were also made between FIT prices and those of the old Renewable Energy Standard Offering Program (RESOP) program, back when solar generation was sparse.
These arguments imply a lack of validity and accuracy in the information put forth by the AG in her report. We urge Ontarians to do a bit of their own digging and investigation into the information presented before accepting them as facts.
1. Global Adjustment (GA): The GA covers the cost for providing both adequate generating capacity (such as building new infrastructure), conducting demand-response programs, and delivering conservation programs for the province. It is calculated based on the difference between the hourly Ontario electricity price (HOEP) and the rates paid to regulated and contracted generators (i.e. OPG nuclear and hydropower generating stations and contracts with OPA for new gas-fired and renewable facilities, and nuclear refurbishments). The GA varies from month to month, responding to changes in both the Hourly Ontario Electricity Price (HOEP) and contract terms. Generally, when the HOEP is lower, then the GA is higher in order to cover the additional costs mentioned above. (Source: IESO)
2. Wholesale Price: This price is determined by matching supply with Ontario’s demand for electricity, set based on the bids and offers that are settled in the electricity market. It is dynamic and changes hourly based on supply and demand changes. It takes into account consumer behaviour, weather, time of day, day of week, and economic conditions.
3. Commodity Price: Wholesale Price + Global Adjustment (Source: IESO)