The Real Price of Electricity

Last updated 2006.02.18

The Price of Subsidized Electricity in Ontario

Shocked to find what it means if you consume over
150,000 kWh/year and are not a "designated customer"?

This page is aimed primarily at the residents of Ontario and uses Ontario data, but the concepts are applicable elsewhere. The reality is that electricity prices are rising throughout North America, because the primary conventional energy sources used to make electricity are becoming increasingly scarce and more expensive. That includes nuclear (with its stranded costs), hydro (due primarily to increased costs for environmental assessment for new installations), coal (due to increased recognition of the environmental damage it causes, both in its mining and use, and the costs of remediation), and the current darling of the industry, natural gas, which has more than doubled in price in just seven years. In most jurisdictions, this has created the price signal to consumers that they can lower their expenses by reducing the amount of electrical power they buy. The message was not well received, and the Ontario government went into a serious damage-control exercise (see next paragraph). Worse, while the Ontario government talks about a creating a "conservation culture", it is clear their experts don't even understand the concept. The 2005 Ontario Power Authority (OPA) recommendations show a forecast for steady increased demand for the next few decades in excess of what has been experienced for many years in the province. Further, the government announced in February 2006 they would continue to subsidize electricity prices for industry (the largest consuming sector) indefinitely. The message is that residential consumers will be expected to conserve (shades of the federal One-Tonne Challenge that didn't work either), while their taxes will be used to provide corporate welfare to Ontario industry addicted to cheap electricity.

Paying the Price

Partial tab for price cap to Ontario taxpayers for electricity price subsidy (Price Cap)
from December 1, 2002 to February 29, 2004 (4.3 cents/kWh)

$ 2,433,846,903.46 (that's a severe underestimate, and it isn't over yet!)

Please note: the government of Ontario made several announcements in November 2002 regarding electricity pricing, increasing generating capacity and introducing alternative energy sources into the mix. So for the short to medium term, the price signal has been removed and the pressure is off consumers of electricity with regard to conserving to reduce their electrical bills, at least until 2006. (Sorry folks, but breaking a specific election campaign promise to maintain this subsidy until 2006, the McGuinty Liberal government scrapped that 2 years early, with higher rates as of April 1, 2004. The joke is on Ontarians.)

Will taxpayers get off so lightly? That seems unlikely. The Independent Electricity Market Operator (since renamed the Independent Electricity System Operator – when there's a problem, change the name) announced that for December 2002, the first month for which the price cap was in effect, the cost of the cap was Cdn$110,000,000.00. Assuming there are 5 million actual taxpayers in Ontario, that comes out to $22 per taxpayer (based on the December 2002 gap), or probably about $45 per average household. That's for just one month, and a month that traditionally doesn't consume much of the really expensive electricity like the cooling season months from June to September. Presuming that the same figures hold for eight months of the year, and the cost for the cooling season months is only four times that figure, and there are two taxpayers per household, then the cost of the price cap can be expected to appear as an annual hit of over Cdn$1000 per household. If not in the form of a tax hike in the short term, then in the form of an increased deficit to be paid off in the future. Admittedly, the increased hydro bills of 2002 were a shock, but do you really want to see a $1,000 increase in your household's provincial income taxes instead? At least with the charges on the hydro bill, you have some opportunity to control the cost by controlling your electrical consumption, or shopping around for another supplier. By hiding the real cost in the tax bill, you have no direct way to try to reduce your costs, and those that consume electricity and do not pay income tax have no incentive to reduce their electrical consumption because those paying taxes will be footing the bill.

January 2003 results from the IMO show that higher electricity prices are not limited to hot weather, but that cold weather is having an unpleasant price effect as well. It appears the average generation price for Ontario consumption in January 2003 was approximately 5.9 cents/kWh, well in excess of the 4.3 cent price cap. The cost gap for January 2003 was Cdn$135,000,000.00.

Figures in the table below have come from various Ontario government agencies and ministries.

These figures do not include the stranded debt of Ontario Hydro when it was broken up as part of the deregulation of the Ontario electrical market on May 1, 2002.

These figures do not include an estimated $100,000,000.00 spent on establishing temporary peaking power facilities to be available around Toronto for the latter half of 2003.

These figures do not include the retroactive payments made under the price cap to Ontarians for their hydro bills incurred from May 1, 2002 to November 30, 2002, as those figures have not been released by provincial government officials.

These figures do not include money spent on bringing old reactors back on-line.

These figures do not include the costs to come of shutting down coal-fired reactors by 2009 (originally 2007, and don't bet the mortgage on it happeing by 2009 either) without a plan on how to replace the power they produce now (about 20% of Ontario generation in February 2004).

These figures do not include any additional subsidies provided by the government or Hydro One to large power consumers, that generally pay a lower price for electricity than residential customers.

These figures include only the difference between the wholesale market price paid to producers and the price cap established by the Ontario provincial government beginning in December 2002.

Month

Revenue Shortfall

Cumulative Cost

December 2002

$110,000,000.00

$110,000,000.00

January 2003

$135,000,000.00

$245,000,000.00

February 2003

$299,000,000.00

$544,000,000.00

March 2003

$256,000,000.00

$800,000,000.00

April 2003

$83,000,000.00

$883,000,000.00

May 2003

$22,000,000.00

$905,000,000.00

June 2003

$30,000,000.00

$935,000,000.00

July 2003

Not Provided

Unknown

August 2003

Not Provided

Unknown

September 2003

Not Provided

Unknown

October 2003

Not Provided

$1,874,361,751.15

November 2003

($8,273,443.25) (1)

$1,866,088,307.90 (1)

December 2003

$34,181,281.30 (1)

$1,900,269,589.20 (1)

January 2004

$364,301,717.98 (1)

$2,264,571,307.18 (1)

February 2004

$169,275,596.28 (1)

$2,433,846,903.46 (1)

March 2004

$42,318,736.00 (1)

$2,476,165,639.46 (1)

April 2004

$3,537,404.70 (1)

$2,479,703,044.16 (1)

May 2004

$41,424,246.50 (1)

$2,521,127,290.66 (1)

June 2004

$28,909,864.80 (1)

$2,550,037,155.46 (1)

Notes to table:
After June 2004, we just gave up trying to figure out the numbers after the rules for reporting changed again. If anyone really cares, we can do the math, but will it really change anything?

(1) Econogics estimate, official figures not provided.

(2) As of March 1, 2004, the McGuinty Liberal government broke another campaign promise (to keep the 4.3 cent per kWh price cap in place until 2006), and implemented a higher price for residential properties and small businesses. The higher rates were based on a two-tier system. 4.7 cents per kWh for the first 750 kWh per month, and 5.5 cents per kWh for anything in excess of 750 kWh per month. (These were the generating costs only; other charges and taxes would apply on top of these figures.) Given that many households that did not utilize electricity for heating should easily comply with the 750 kWh / month target, and one of the objectives of the higher price tier is to get consumers to reduce their electrical consumption, our subsequent calculations will assume that all the electricity consumed will be at the targeted consumption level and priced at 4.7 cents per kWh.

The provincial government has not provided monthly figures since June of 2003. After the election, the new Liberal administration released figures for the eleven months (December 2002 to October 2003 inclusive) stating that the shortfall in that initial eleven-month period totaled $1,874,361,751.15. Despite repeated requests, provincial government officials have been unable to provide monthly figures for July to October 2003. Taking the initial 11-month total, and extrapolating it to a year, the annualized shortfall would be over $2 billion dollars, or about $900 per household in additional taxes to cover it. That's on top of the massive Ontario Hydro debt now being repaid on your electrical bill. And according to the current government policy, the generated price will be raised on a two-tier pricing structure starting April 1, 2004. Stay tuned for more increases, sooner rather than later. Remember, this is the administration that campaigned on a promise that they would not raise the cap until at least 2006, as established by their predecessors.

You can try to shop around for a lower-price supplier (or at least you could before November 2002), but most of your savings will come from reducing the amount of electricity you buy. Here are some suggestions. These apply primarily to residential use. Commercial and industrial usage varies widely. Talk to your electrician, electricity supplier (or us) about specific things that can be done in your specific situation to save on electricity costs. By all means, start by checking out our free list of electrical energy conservation tips.

Price Unprotected

Well, there's still one group suffering from "electric price shock" in Ontario; those businesses that consume over 150,000 kWh/year and are not a "designated consumer", e.g. schools, churches, charitable organizations. The word is out: you don't qualify for the price caps the provincial government is implementing for ordinary consumers (voters).

What can you do? Frankly, probably not much about the bills that have already arrived. By all means, contact your MPP and your electricity supplier to see if there is any way you can be deemed a "designated customer". Good luck. As for the coming air conditioning season, well there are a few things you can do.

If you want to run with the herd, you can do nothing, and hope everything will be much better in the future. Global climate change will suddenly disappear; there will be no more El Niño years; we will not set any record high temperatures in future summers; there will be no "air quality" days; there will be plenty of generating capacity on-line throughout North America; consumers will dramatically reduce their electrical consumption despite the fact that it is now subsidized with price caps. It could happen. On the other hand, consider that by January 8, 2003, Ontario had already set 5 new high temperature records - in just the first 8 days of the year. And for three of those, the previous historic high was from 2002. The good news about this approach is that it requires no investment or planning; and you will have plenty of company whining about hydro bills again next autumn if things don't go the way you are dreaming.

If you are prepared to consider a more proactive approach, please contact us. Sorry, but beyond a preliminary consultation, this will not be a free service. Devising unique and effective solutions is a time-consuming undertaking (on our part). We are not a utility, power generator or broker - all we can sell you is our expertise. Please be prepared to provide the following information: the amount of your electrical bill for the past year; total power consumption in kWh, preferably by month; your supplier; your major power consumers; whether you are charged on an interval basis; any discounts in effect for you.

Interval pricing will arrive with smart meters beginning in April 2006. Despite the assurances it should be revenue-neutral, it will mean higher prices for most Ontarians, and particularly for small and medium size businesses. Do you know why? Do you know how you can minimize the impact, and possibly even benefit from it? We have some ideas.

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