Background to Corporate Welfare Goes Green in Ontario

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1 Background to Corporate Welfare Goes Green in Ontario Brady Yauch Economist and Executive Director of Consumer Policy Institute (416) ext

2 I. How did Ontario s Renewable Policy Get Here? The subsidies paid to wind developers are the result of a decade-long push to increase the amount of renewable energy generated in the province and culminated with the passing of the Green Energy Act (GEA) in While the government had, prior to 2009, already taken steps to support renewable energy in the province, the GEA was meant to usher in a new, long-standing era of renewable energy policy. It would, according to the government at that time, create thousands of jobs in what it called the new green economy. 2 Lawmakers promised that Ontarians of all stripes would benefit from the new green economy (see the first part of this report for more details). It was presented as a win-win proposition for Ontario and its ratepayers tens of thousands of new jobs and cleaner air. The agency in charge of securing this new clean energy supply would be the Ontario Power Authority (OPA), which had been created in 2004 to oversee energy planning across the province. Since 2004, the OPA has signed more than 20,000 contracts with renewable energy generators (wind, solar and bio-energy) guaranteeing them a fixed rate for their power output. Those contracts account for 66% of all generation capacity in the province. 3 The renewable energy sector has benefited greatly from such a risk-free environment. The renewable capacity as a result of these contracts that are currently in commercial operation is 4,208 MW, or about 12% of the province s total capacity. 45 Prior to the OPA s creation, the province had no utility-scale, renewable generation facilities. New renewable energy generation will continue to be added over the next few years. According to the OPA, it has an additional 4,048 MW of renewable energy wind, solar and bio-energy currently under development. The lion s share of the province s push to renewable energy has gone to the wind sector. Of the new renewable generation brought on-stream since the creation of the OPA, 68% of that capacity has come from the construction of industrial scale windmills. 6 That trend will continue, as the OPA says that 71% of the remaining renewable capacity currently under development is from windmills. In total, that amounts to an additional 2,862 MW of wind capacity on top of the 2,852.5 MW already in commercial operation. 7 1 For a detailed look at those subsidies and who has received them, read the first part of our report Corporate Welfare in Ontario Goes Green See page 31: Report-OPA.pdf 7 2

3 All contracts with wind generators (and others) signed by the OPA are for a fixed price that ranges from 9.51 cents to 13.5 cents per kilowatt hour (KWh). Most contracts with wind generators are for 20 years. The contracts with wind generators also include a clause that ensures that the contract price increases by 20% of the Ontario Consumer Price Index (CPI), 8 thereby protecting a portion of the investment from inflation. II. Renewable Energy at What Cost? The support for wind farms, as the largest contributor to new renewable capacity in Ontario, has come at a cost for ratepayers. Since 2009, when the GEA was introduced, the commodity cost portion of Ontario ratepayers electricity bills which is the amount paid for electricity to generators and does not include distribution, transmission or regulatory charges has climbed substantially: The average regulated price of power (commodity cost paid by ratepayers) has increased by 56% or just under 9.3% annually (over the six years). The price of electricity paid by most ratepayers is set every six months by the Ontario Energy Board under its Regulated Price Plan (RPP). Meanwhile, overall inflation in the province during those six years has been just a little over 11%, or 1.8% annually, 9 meaning ratepayers in Ontario are now paying around 45% more for electricity when adjusted for inflation than they were in 2009, when the Green Energy Act was passed pdf 9 CANSIM table

4 Figure 1 4

5 Electricity Bill Breakdown A typical bill for Ontario ratepayers consists of five major components: Electricity, Delivery, Regulatory Charges, Debt Retirement Charge and the Ontario Clean Energy Benefit. The Electricity portion of the bill shows ratepayers the price he or she is paying for the amount of electricity used during a particular billing period. Most small-volume ratepayers, including households and small businesses, that purchase electricity from their utility pay either a tiered price or a time-of-use price. The price of electricity is referred to as the commodity cost as it is the price consumers pay for electricity and is designed so that it covers the payments to generators that produce that electricity. It is set by the OEB once every six months in its Regulated Price Plan (RPP). Utilities like Toronto Hydro and Hydro One (among others) purchase electricity from the province s wholesale market and the RPP is designed so that they recover that cost from ratepayers. The Delivery portion of a bill shows the cost of delivering electricity from generators to households. The delivery portion consists of three components: a customer charge, distribution charge and transmission charge. The customer charge is the cost to a distributor for billing, customer service and other functions. The delivery charge is the cost to a distributor to maintain the low-voltage systems used to send power to households (wires on the street, for example). The transmission charge is the cost of maintaining the high voltage power lines that send power across long distances from generators to local utilities. Regulatory Charges account for the costs needed to run the various regulatory bodies including IESO, OPA and the OEB involved in Ontario s electricity sector. Other charges included in this line are the costs of connecting renewable energy generators and for distributors that operate in remote parts of the province, among others. The Debt Retirement Charge is the cost of paying down the stranded debt of the former Ontario Hydro. The Ontario Clean Energy Benefit subtracts 10% off the final bill (including HST) of ratepayers. Prior to 2009, before the province introduced the Green Energy Act and the concerted push for new renewable energy capacity began, the increases in electricity rates were closer to overall inflation. While prices were more erratic before 2009, the overall increase in the commodity cost the price charged to ratepayers for the commodity cost of electricity between 2005 and 2009 was 13%, while inflation in Ontario was around 6% (See Figure 2) CANSIM table

6 Figure 2 6

7 Increases to the regulated rate (commodity cost) paid by ratepayers across the province have also outpaced increases to the cost of shelter, another important benchmark of consumer well-being, since 2009 (See Figure 3). Figure 3 7

8 And food. Figure 4 Ratepayers are paying higher prices for electricity. As described in the previous section, the increases are in part due to increases to the Regulated Price Plan (or the commodity cost) set by the Ontario Energy Board (OEB), an independent regulatory body. But ratepayers are also paying higher rates because of higher-than-inflation increases in distribution rates, among other costs. Hydro One, for example, is applying to the OEB for distribution (delivery) rate increases that average 6.3% annually over the next five years. 11 Toronto Hydro is seeking average rate increases of 8% over the next five years. 12 A major component to that increase in regulated electricity rates is a direct result of energy contracts signed by the OPA with a variety of generators, including nuclear, hydro and renewables. The renewable sector, in particular, received generous subsidies in the form of above market rates, and guaranteed access to the grid, for their generation. Those &sortd1=rs_dateregistered&rows= &sortd1=rs_dateregistered&rows=200 8

9 subsidies are set to increase even more dramatically over the next few years as renewable energy capacity doubles. In its most recent Regulated Price Plan report, 13 the OEB showed that renewable generators recovered only 12.5% of their costs from selling their power into the province s wholesale market. The remainder is made up by ratepayers who make up the difference between what that generation is worth and what the province has agreed to pay for it through the Global Adjustment. The increases in Ontario s electricity prices have also outpaced every other major province in Canada. Table 1 Consumer Price Index, 2011 basket, Electricity (Percentage Change (year-to-year)) 14 Canada NL PEI NS NB QC ON MB SK AB BC Annual average III. Just How Generous Are Those Contracts? Over the last decade there have been three separate procurement programs offered to wind generators: Renewable Energy Supply (RES I,II and III), Renewable Energy Standard Offer Program (RESOP) and the Feed-in Tariff (FIT) and microfit programs that were the centrepiece of the GEA. The Renewable Energy Supply (RES) program came in three different stages, RES I started in 2004, RES II in 2005 and RES III in The RES program invited different developers to place bids with the government for renewable energy contracts. While the actual prices for the different wind farms built with these contracts are not public, Ontario s Auditor General 15 estimated that the average price for these projects was 9.51 cents per KWh for on-shore wind. In total, the RES program introduced 1,510 MW of wind capacity on 20-year contracts CANSIM table

10 Yet the government faced criticism that the RES program favoured large projects backed by big investors. In response, the government launched its Renewable Energy Standard Offer Program (RESOP) in 2006, which targeted smaller scale projects and offered them a guaranteed rate 16 similar to what would later become the Feed-in-Tariff and microfit programs. The contracted price for RESOP projects was 11 cents per KWh. In total, the RESOP introduced 275 MW of wind capacity. Table 2 Due to the success of both the RES and RESOP, the GEA in 2009 introduced the FIT program, which offered even higher guaranteed rates to wind generators. In 2009, for example, wind generators that signed a FIT contract were guaranteed a price of 13.5 cents per KWh (or $135 per MWh) for their output or more than four times the market price for power. The government eventually backtracked on those rates, lowering them to 11.5 cents per KWh in 2012 where they remain today _ pdf 17 The government on September 30, 2014 raised the FIT rate to 12.8 cents per KWh. 10

11 Table 3 IV. The Price Is Not Right While the OPA has been signing contracts with wind generators, the price of power on the province s whole electricity market has fallen significantly since 2009 (See Figure 5). The price of power on the province s electricity market, known has the Hourly Ontario Energy Price (HOEP), has fallen dramatically since 2009 and was even negative for 137 hours in September of 2014 or for about 1 in every 5 hours, as the supply of energy far outstripped demand. 11

12 Figure 5 The main reason for this drop is an overall decline in demand for power since the financial crisis and an increase in supply. Since 2006 when demand peaked in Ontario the average monthly demand, considering both the peak and off-peak times of the year, has fallen dramatically (See Figure 6). 12

13 Figure 6 Yet, ratepayers haven t benefited from the decline in electricity prices because the 20- year contracts signed between the OPA and generators, particularly wind (and even more so solar). These contracts ensure generators receive a big difference between the price guaranteed paid to them by ratepayers and what that power is worth on the province s electricity market. That difference is made up through the Global Adjustment (GA), which is paid by every ratepayer and has been steadily increasing. 13

14 Since 2006, and particularly since 2009, the Global Adjustment paid each month by ratepayers has been steadily increasing (See Figure 7). Figure 7 While nuclear generators, among others, also receive above-market prices for their generation, the difference is much less than renewable generators receive. Nuclear reactors, for example, are guaranteed $55.70 per MWh, according to OEB. 18 Therefore, renewable energy is now the biggest contributor to higher electricity prices, something the OEB highlighted in its May 2014 Regulated Price Plan report, saying the primary factor contributing to the increase in the supply cost between this RPP period and the previous one is an increase in renewable generation. 19 As more renewable energy gets pumped onto the grid with wind capacity expected to more than double in coming years that cost to ratepayers will continue to rise. V. Power Not Even Needed 18 See the most recent Regulated Price Plan report

15 Wind generators often produce output when it s not needed. Using data from the IESO, it can be shown that the four highest average hours of output for wind generators come during the middle of the night and early in the morning, typically the lowest periods for electricity demand. The four hours of highest demand for power from ratepayers don t align with the four hours of highest generation from wind farms. Table 4 shows (in bold) the four hours of highest wind generation, on average, compared to the four hours of highest demand. Table 4 Wind Generation Versus Demand Hour Average Wind Output (MWh) from 2006 to present Average Ontario Demand (MWh) from 2006 to present Ontario ratepayers are paying subsidies to generators (windmills) that don t produce power when it s most needed. Doing so requires that the province build or maintain other forms of generation natural gas plants, new hydroelectric facilities or nuclear refurbishment to ensure an adequate supply of electricity during times of peak demand. This produces additional costs to ratepayers. VI. A Lost Cause? 15

16 One way to deal with this unneeded output from wind farms and the province s growing power surplus is to export it. In recent years the province has become a major exporter of power to neighbouring jurisdictions (See Figure 8). Figure 8 While none of the agencies involved in the electricity sector publicly release the price charged to neighbouring jurisdictions that import Ontario power, those jurisdictions typically pay just the HOEP and not the Global Adjustment. This means that Ontario ratepayers subsidize as they must pay the Global Adjustment power for ratepayers in Quebec, New York, Michigan and other jurisdictions that purchase power from the province. That difference between what ratepayers pay all types of generators to produce power in Ontario compared to what Ontario sells it for to other jurisdictions has grown dramatically in recent years. While the Ministry of Energy has highlighted exports as a source of revenue for the province, it is ignoring the hard truth that the cost of producing that energy through contracts signed between generators and the OPA is significantly higher than the price paid by those jurisdictions importing it. This creates a deficit for the province in the sense that nearly every MWh of power exported costs ratepayers more to produce than they receive in selling it. VII. Subsidies the Select Few 16

17 The province s push for renewable energy, particularly with windmills, has not as the government promised benefited all Ontarians. While all ratepayers are paying higher bills as a result of subsidies to industrial wind farm developers, a select few are enjoying the benefits. In the wind sector those few who are receiving benefits happen to be large, multinational corporations, not small communities or individual ratepayers. The province s renewable energy policies have also led to a surplus in electricity generation in Ontario, which is then sold at a loss to neighbouring jurisdictions. Ontario ratepayers are not only supporting the investments of a few large companies, but also subsidizing the energy consumption of residents in the U.S. or nearby provinces. And finally, the uneconomic power from industrial wind farms is being generated when demand for that power is at its lowest level. 17

Corporate Welfare Goes Green in Ontario

Corporate Welfare Goes Green in Ontario Brady Yauch Economist and Executive Director of Consumer Policy Institute (416) 964-9223 ext 236 bradyyauch@consumerpolicyinstitute.org http://cpi.probeinternational.org