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Part 2: How the Global Adjustment Ruined Ontario

By EnPowered on Apr 6, 2020 9:20:17 AM
Ontario electricity rates have historically been fairly stable and quite low. Since 2006, however, price increases in the cost of electricity have started growing exponentially.
 

In this five-part series called "Tame the Beast," the goal is to help you understand:

  1. The Different Players in the Ontario Electricity Market – Setting the Field;
  2. What Happened to Ontario’s Electricity Price – The Beginning Signs of Trouble;
  3. The Impact of Electricity Peaks and What is Global Adjustment – The Serious Situation;
  4. Companies are Trying to Reduce Electricity Costs - The Struggles of Demand Response;
  5. How Companies are Reducing Global Adjustment Costs - Tame the Beast.

Although Ontario electricity rates have historically been fairly stable and quite low, this has changed in recent years. Low electricity rates were a primary driver behind Ontario’s emergence as the manufacturing center of Canada, leading to a significant economic advantage for the Province. Since 2006, however, electricity prices have increased dramatically as associated costs grew. The cause of these price increases can be attributed to three main sources:

  1. Overdue investments in grid infrastructure;
  2. Guaranteeing rates to energy generators; and;
  3. Changing how Ontario electricity is produced.

The first is an increased investment into the physical infrastructure of the Ontario electricity grid. For many decades, similar to other jurisdictions in North America, investments into the energy grid were not a key priority. Over the past 20 years, however, significant investment has led to millions of smart meters being installed across the Province and the Ontario grid now being heralded as one of the most advanced grids in North America. That being said, according to a recent report by the Auditor General, up to 40% of the Ontario electricity infrastructure operated by Hydro One will still need to be replaced in the next decade.

The second driver is the decision by various members of the Ontario Ministry of Energy to provide guaranteed electricity rates to generators in the Province. The purpose of this policy was to encourage investment into the Ontario electricity grid, but it has also tied the Province to 20-year contracts. This policy was partially successful; the Province has stabilized its electricity generation even while energy demand has decreased in the past decade. As a result, the Province now produces 30% more electricity than it consumes.i With demand decreasing and supply increasing, Ontario’s wholesale markets have dropped the cost of electricity, now sitting at an incredible 1 cent/kWh for hydro rates.ii

Ontario consumers, unfortunately, are not seeing these amazing rates on their monthly hydro bill. Instead, they are required to purchase this electricity at the long-term guaranteed prices that were set by the Ontario government at rates ranging from 5 cents/kWh to 80 cents/kWh.iii As a result, Ontario consumers are paying the highest rates in Canada at an average of 12 cents/kWh for hydro. Meanwhile the Province sells its excess electricity to neighboring markets for 2-3 cents/kWh, costing the people of “Ontario between $732M and $1.25B."iv

The third driver, which receives the most public attention, is the decision to change the source of electricity generation in Ontario. This push to renewable power in the Province began in 2009 with the Green Energy Act (GEA), which many sources indicate may be the primary cause behind the increase in electricity prices from 2010 to 2015. According to a report by the green think-tank Smart Prosperity, the push to renewable generation composed “almost 60% of the electricity price increase.”v

Over the past ten years, Ontario electricity prices have risen at four times the rate of inflation.vi This has become a key electoral issue and is something that the Government of Ontario has increasingly begun trying to address, most notably with the recent passing of the Fair Hydro Plan, which reduced homeowner and small business electricity rates by 25% and capped rate growth to inflation for the next four years.vii

How Did This Happen?

The natural question that arises is “how did this happen?” The answer is not as simple as it may appear at first glance, but the main drivers can be linked to various policy decisions made by the Government of Ontario, rather than market factors. Whether one agrees or disagrees with these policy decisions – such as the sell-off of Hydro One, the decision to guarantee rates to energy generators, or the decision to shut down Ontario’s coal and natural gas-powered plants – it is clear that each has significantly impacted Ontario electricity prices.

It is helpful to compare how Ontario electricity prices compare to other markets around the world. While Ontarians are paying the highest rates for electricity in Canada, when compared with the rest of the world, the image is not quite as stark.

As can be seen from the graphic below, Ontarians still pay somewhat less than their neighbors in New York, and about half of the average Western European. That being said, consumers in Ontario are right to be concerned about the loss of access to cheap electricity due to policy decisions outlined earlier. The sudden increase in prices has led many to worry about “energy poverty” in the Province, and would seem to indicate that it is not necessarily the rate itself which causes concern for consumers, but rather how quickly prices have risen.viii

As outlined in Part 1 of this series, the Ontario electricity system is very complex and features many different players. Over the past 20 years, however, the players in the Ontario electricity sector have begun to change. Most notably among these changes has been the decision to move away from coal and natural gas-powered facilities and towards more renewable energy sources such as wind and solar.

These decisions have been led by the desire to further reduce greenhouse gas emissions in the Ontario electricity system. Although Ontario already had one of the cleanest energy sectors in the world, the Ontario government made it a key policy decision to remove the remaining coal facilities in 2009. As a result, Ontario was the first market in North America to ban coal power. Unfortunately, the financial impact of this decision has been called into question.

Although sources widely disagree, it is fair to assume that the closure of Ontario’s two coal-powered facilities did help to reduce Ontario’s greenhouse gas emissions. The cost of this reduction, however, has been a rapid increase in electricity costs “even as power costs plummeted elsewhere. Between 2004 and 2014, power generation costs in Ontario increased by 74 per cent."ix

The rapid increase in electricity costs has led to the electricity industry becoming highly politicized in the Province of Ontario. The Auditor General outlined in a report released in 2015 that Ontarians have already overpaid $37 billion for electricity in the time period between 2006 and 2014, and will overpay another $133 billion by 2032.x The total amount of $170 billion can be difficult to understand, but it is roughly 19 times more than the $9B that the Province of Ontario made by the controversial decision to sell off Hydro One.xi

Ultimately, it is not accurate to entirely blame conservation initiatives and renewable energy projects for the rapidly increasing cost of Ontario electricity. Instead, it is more accurate to blame the way in which these policies have been implemented. Ontario’s efforts to become a leader in renewable energy generation have been lauded by global institutions, however there is no reason that this move should have cost the Province $170B.

Most of the companies that flooded the Ontario market to offer solar panels to homeowners and businesses did so because the province was offering 20-year guaranteed electricity rates that were nearly 40 times more than the actual market value of electricity.xii Once these incentives decreased, many companies in the industry left.

A well-known example of how renewable energy projects were implemented in the Province of Ontario is the large contract signed with Samsung for 2,500MW of electrical capacity. The contract was celebrated extensively by the Provincial Government for years, until the entire project fell apart. The Government of Ontario committed to paying a set rate for electricity produced from these electricity projects, at a rate of $135 per MWh (13.5 cents/kWh) for wind power and $443 per MWh (44.3 cents/kWh) for solar.xiii At the same time, the existing market rate for Ontario electricity was significantly lower, at $66 per MWh for nuclear and $58/MWh for hydroelectric power. The promise from Samsung and the Government was that the project could create about 15,000 jobs.xiv in the Province of Ontario. Samsung created one factory which employed 380 employees.xv

Simultaneously, the Province of Ontario, as previously mentioned, developed an excess of electrical supply and, as a result, the Province became a net exporter of electricity. As electricity cannot be effectively stored long-term, it must be sold or used as soon as it is generated, and given the fact that Ontario demand has dropped over the past couple years due to the significant increases in its price, Ontario has been exporting an increasing amount of electricity at a price of roughly $30/MWh (3 cents/kWh), which is lower than the cost of generation of any energy source in Ontario.xvi

To recap, the Province has signed so many contracts for new electrical generation that Ontario now produces roughly 30% more electricity than it needs and it has no choice but to sell-off excess electricity to its neighbors. Meanwhile residents of Ontario are charged a fee called the Global Adjustment, that amounts to nearly 70% of the average residential electricity bill.xvii Ontario does not charge this Global Adjustment fee to its neighbours, however. Therefore the rate that Ontarians pay for their own electricity is far higher than the rate that their neighbours pay for the very same electricity. This situation is costing the people of Ontario $1 billion a year, or in other words is adding an additional $220 a year to the average household electricity bill.xviii

These policy decisions have led to significantly increased electricity costs for the average consumer. If these costs were separated into line-items on a consumers’ electricity bill, they would rightfully be quite concerned. However, this is not done. Instead, these line-items are buried inside of a single fee called the Global Adjustment. To make matters worse, small consumers including homeowners and small businesses, do not see the Global Adjustment charge on their bills. Instead, the Global Adjustment is misleadingly lumped into their Time-of-Use charges.

This Global Adjustment charge, previously called the “Provincial Benefit”, was once a very small portion of Ontarians electricity bills. Today, the Global Adjustment is now nearly 70% of the average consumers’ electricity costs.

The Global Adjustment replaced the Provincial Benefit in 2009 with the introduction of the Green Energy Act (GEA) with the intention of incentivizing conservation and renewable programs. Today, the Global Adjustment has grown to cover the costs of dozens of conservation programs, various policy decisions, and the costs of guaranteed electricity rates for generators.

In the next section of this series, find out how businesses in Ontario may be able to reduce these burgeoning Global Adjustment costs.

REFERENCES

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  • Boissinot, Jacques. “Exporting Surplus Electricity Cost Ontario $1 Billion in 2013: NDP.” Global News, Global News, 20 Jan. 2014, globalnews.ca/news/1094074/exporting-surplus-electricity-cost-ontario-1-billion-in-2013-ndp/.
  • “Hourly Ontario Energy Price (HOEP).” IESO, IESO, ieso.ca/power-data/price-overview/hourly-ontario-energy-price.
  • Hill, Brian. “What Is the Global Adjustment Fee? The Mysterious Cost Ontario Hydro Customers Must Pay.” Global News, 8 Dec. 2016, globalnews.ca/news/2839995/what-is-the-global-adjustment-fee-the-mysterious-cost-ontario-hydro-customers-must-pay/.
  • Green, Kenneth P, et al. “BLOG: Ontario's Flawed Electricity System Subsidizes Neighbouring Jurisdictions.” Fraser Institute, 23 Nov. 2017, www.fraserinstitute.org/blogs/ontario-s-flawed-electricity-system-subsidizes-neighbouring-jurisdictions.
  • Dewees, Donald N. “What Is Happening to Ontario Electricity Prices?” Smart Prosperity, Smart Prosperity, 7 Mar. 2012, institute.smartprosperity.ca/sites/default/files/publications/files/What%20is%20Happening%20to%20Ontario%20Electricity%20Prices%20March%207%202012_FINAL.pdf.
  • Lum, Fred. “Coming Soon: Ontario's Green Energy Fiasco, the Sequel.” The Globe and Mail, 24 Mar. 2017, www.theglobeandmail.com/opinion/editorials/coming-soon-ontarios-green-energy-fiasco-the-sequel/article29801584/.
  • Lundy, Matt, and Tom Cardoso. “Ontario Budget Highlights: 10 Things You Need to Know.” The Globe and Mail, 12 Nov. 2017,www.theglobeandmail.com/news/politics/2017-ontario-budget-highlights/article34820349/.
  • Green, Kenneth P, et al. “Higher Energy Prices Fuel Energy Poverty in Canada-Especially in Ontario: Op-Ed.” Fraser Institute, 2 Mar. 2017, www.fraserinstitute.org/article/higher-energy-prices-fuel-energy-poverty-in-canada-especially-in-ontario.
  • Lum, Fred. “Coming Soon: Ontario's Green Energy Fiasco, the Sequel.” The Globe and Mail, 24 Mar. 2017, www.theglobeandmail.com/opinion/editorials/coming-soon-ontarios-green-energy-fiasco-the-sequel/article29801584/.
  • Morrow, Adrian. “Ontarians Paid $37-Billion above Market for Electricity over Eight Years, Auditor-General's Report Says.” The Globe and Mail, 25 Mar. 2017, www.theglobeandmail.com/news/national/ontarians-paid-37-billion-above-market-price-for-electricity-over-eight-years-ag/article27560753/.
  • Jeffords, Shawn. “Liberals Land $2.8 Billion through Final Batch of Hydro One Shares Sell-Off.” Toronto Sun, 18 May 2017, torontosun.com/2017/05/17/liberals-land-28-billion-through-final-batch-of-hydro-one-shares-sell-off/wcm/be06f58c-35a4-4848-b495-f1f3ab26e43f.
  • Hill, Brian. “Ontario Energy Minister Admits Mistake with Green Energy Program.” Global News, Global News, 24 Feb. 2017, globalnews.ca/news/3272095/ontario-energy-minister-admits-mistake-with-green-energy-program/.
  • Leslie, Keith. “Ontario-Samsung Green Energy Deal Dubbed 'Colossal Failure'.” Global News, Global News, 20 June 2013,globalnews.ca/news/658399/ontario-samsung-deal-slashed-by-3-7-billion/.
  • “Samsung Deal to Bring Wind, Solar Farms to Ont.: Sources | CBC News.” CBCnews, CBC/Radio Canada, 19 Jan. 2010, www.cbc.ca/news/canada/toronto/samsung-deal-to-bring-wind-solar-farms-to-ont-sources-1.887072.
  • Spears, John. “Ontario's Samsung Green Energy Deal Ripens Slowly.” Thestar.com, 8 Feb. 2013,www.thestar.com/business/2013/02/08/ontarios_samsung_green_energy_deal_ripens_slowly.html.
  • “Power Rates.” Canadian Nuclear Association, cna.ca/why-nuclear-energy/affordable/power-rates/.
  • Hill, Brian. “What Is the Global Adjustment Fee? The Mysterious Cost Ontario Hydro Customers Must Pay.” Global News, 8 Dec. 2016, globalnews.ca/news/2839995/what-is-the-global-adjustment-fee-the-mysterious-cost-ontario-hydro-customers-must-pay/.
  • Boissinot, Jacques. “Exporting Surplus Electricity Cost Ontario $1 Billion in 2013: NDP.” Global News, Global News, 20 Jan. 2014, globalnews.ca/news/1094074/exporting-surplus-electricity-cost-ontario-1-billion-in-2013-ndp/.
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