The shocking truth: Ontario’s power rates are soon to become the highest in North America 

Average Ontario household power rates will be the highest in North America except for Prince Edward Island by the end of 2013. The pace of Ontario’s rate increases will pick up in 2014 due to commitments already locked in. With power rates in the U.S. trending downward, Ontario’s lead is going to widen.

The Ontario Government’s Long Term Energy Plan (LTEP) issued in the fall of 2010 forecasts that monthly residential costs would rise from $114 for a typical monthly usage of 800 kilowatt hours in 2010 to $167 for the same quantity in 2015 – a 46% nominal increase or a 33% inflation-adjusted increase. To dampen political heat over these increases, the government later implemented a program it calls the Ontario Clean Energy Benefit, which transfers 10% of household bills from ratepayers to the provincial deficit.

Since the LTEP was issued, the McGuinty government has added new cost pressures driving up rates more rapidly than previously expected.

The LTEP did not include Global Adjustment cost shifting. Implemented in January 2011, a new allocation method was introduced for recovering the Global Adjustment, which reflects various policy-created costs, mostly above-market government power procurement contracts and conservation programs. Under the new approach, the largest industrial users are now shifting an increasing portion of Global Adjustment costs to small and medium-sized consumers. Global Adjustment cost shifting will add about 2% to residential rates by 2015.

The LTEP did not break out its price projection by cost element, such as the costs for distribution, energy and wholesale market services, so it isn’t easy for consumers to track their own bills relative to the government’s plan. However, the LTEP did provide an illustrative bill for June 2011 using time-of-use energy rates. The actual energy rates last June were higher than the LTEP forecast by 8%-12%, depending on the time slice.

The LTEP assumed that wind power would provide 10% of system energy in 2030 and solar would provide 1.5%. Much more rapid expansion of ultra-expensive wind and solar is actually underway. On the current pace, wind power will produce an amount of electricity equivalent to more than 12% of demand in 2015 and more than 14% in 2017. Solar development is also far ahead of the LTEP outlook. Only a fraction of this wind and solar power will be delivered to the grid, but almost every bit of it will be paid for by consumers, along with costs for grid connection and backup.

The delivered cost of residential power by 2015 appears to be on track for rates in the order of $180 for a typical monthly usage of 800 kWh, or a cost per kilowatt hour of 22.5¢, before counting the offsetting effect of the Ontario Clean Energy Benefit.

Although the McGuinty government claims that its energy program is promoting the interests of future generations, the government focuses on cost-concealment measures that shift costs onto future ratepayers and taxpayers. On top of the Ontario Clean Energy Benefit, other examples include government directives to Crown energy utilities limiting their cost recovery. Another example is taxpayer-backed subsidies for Northern Ontario consumers, large and small.

Two weeks ago, the Commission on the Reform of Ontario’s Public Services, chaired by Don Drummond, properly decried these cost-concealment measures, pointing to their devastating impact on the deficit and Ontario’s long-term economic prospects. Premier Dalton McGuinty has already pledged to continue the Ontario Clean Energy Benefit.

Meanwhile, power rates in the U.S. are trending down. Rates in most of the highest-cost U.S. states have been dropping fastest. The national average rates for residential, commercial and industrial customers have dropped 3%, 5% and 6% respectively since 2009, excluding inflation. The respected U.S. Energy Information Administration’s latest national price forecast says residential rates should decline slightly in inflation-adjusted terms for the foreseeable future. Rate for commercial consumers should drop 3% over the next two years and 4% for industry before stabilizing, again ­excluding ­inflation.

Ontario is in the midst of a policy-created power crisis of profound significance to the future of the provincial economy. In 2009, average Ontario household power rates blew past the U.S. average. In 2010, Ontario rates exceeded California’s. By late 2013, Ontario’s residential rates will exceed the highest rates in the contiguous U.S. states and Alaska. By then Ontario will only need to beat P.E.I. to take the North American lead.

Financial Post
Tom Adams is a Toronto-based energy ­consultant.