By David Butters
Few areas of public policy are more important, more complex and more misunderstood than electricity.
We learn to appreciate it all the more when we lose it. Think of the economic and social disruption caused by the great blackout of 2003 or the significant hardships when the 2013 ice storm made the power go out for several days.
We expect, justifiably, to have a power system that is reliable and cost effective. More and more we also expect it to be clean. That is why Ontarians had a right to cringe when they read the headlines from Auditor General Bonnie Lysyk’s annual report. “Ontarians paid $37 billion above market for electricity over eight years” was how the Globe and Mail reported it.
But there is much, much more to the price of electricity than just the “market,” or wholesale price. In Ontario, electricity is a commodity which is bought, sold and traded through an electricity market (run in Ontario by the Independent Electricity System Operator). Bids and offers use supply and demand principles to set the wholesale or “market” price. This price does not include the fixed and long-run costs of financing, building and operating power plants. That is what the Global Adjustment (the GA) does, as well as providing conservation and demand response programs.
Here is an analogy that might help: how many people do you know who think that the true cost of owning a car is just fuel, insurance and regular maintenance? Of course it’s not: you have to include the costs of purchasing or leasing the car in the first place. That is far greater than the operating costs. The GA is like that. We accept it for our cars, why not for the electricity that keeps the lights on?
If the market price of power truly reflected the actual costs of building and maintaining generators, prices would have to be many times higher. The GA allows the fixed operating and capital costs to be managed through a monthly payment spread over many years.
Mark Winfield, professor and co-chair of the Sustainable Energy Initiative at York University, explained it well recently: “No new supply would have been built at all on the basis of expectations of the market price for electricity. Suppliers had to be provided with the means of covering the capital costs of new supply. These costs are not reflected in the ‘market’ price.”
The auditor general shone an important light on electricity planning in Ontario, and pointed out a number of shortcomings, and ways to improve this. Many of her points are well-made and the government has accepted these recommendations.
The auditor general was wise to call for better public information to “make the decision-making process more transparent and accountable.” We all need to do a better job of communication. The Power Producers of Ontario are committed to it. And we are happy to see that the minister of energy promises to bring better clarity to the process and to long-term energy planning.
The AG can do better, too. Her report incorporates “serious misconceptions and oversights,” as Prof. Winfield puts it, around the difference between the “market price” and a fair representation of the true “all-in” price of electricity. Referring to the GA as “excess” payments is simply wrong and does a serious public disservice.
It’s possible that we could have had cheaper electricity in the last decade. Some better process decisions could have had an impact. But if we had wanted to keep electricity rates low, all we needed to do was keep the coal plants open, run down our nuclear fleet, and not invest in renewables. But Ontario chose not to do that.
The energy sector has led the way in the fight against climate change. There were many who were skeptical that we could close our coal-fired generating stations. But we did. The power producers of Ontario adapted and delivered. Our electricity system has been modernized and now produces 90 per cent fewer greenhouse gases than it did 12 years ago. Our air is cleaner.
Yes, it was expensive but the costs of not investing in our electricity system to make it cleaner and more reliable would have been much higher.
Originally published in the Toronto Star on December 16 2015. David Butters is President and CEO of APPrO.