Contributed by Robert Lyman @2015
On December 2, 2015, Bonnie Lysyk, Auditor General of Ontario, released her 2015 annual report on the value for money received by Ontario residents from the operations of the Ontario provincial government. Chapter 3 of the report contained a blockbuster – an extraordinarily damning assessment of the actions of the Liberal government of Ontario with respect to electricity power system planning over the period from 2003 to the end of 2014. Since that time, despite the great importance of the subject, the report has received almost no follow up media attention, and prominent supporters of the present government have attempted to deny the Auditor General’s findings. The purpose of this note is to highlight the most important points in the report.
Electricity power system planning involves projecting the long-term demand for electricity and deciding how to meet that demand through adding more generation and transmission facilities and/or trying to “manage” demand through conservation measures. The Electricity Act, 1998 requires the Ontario government through its main electricity generating utility (today the Independent Electricity System Operator, or IESO) independently to plan and prepare an “Integrated Power System Plan” based on the best technical analysis available and to submit this plan for review by the Ontario Energy Board, the semi-independent regulatory body responsible to protect electricity consumers’ interests in terms of power costs and reliability of supply. Since 2004, however, the Ontario Minister of Energy has ruled the electricity planning and decision-making process through a series of political decisions issued as directives to the utilities, depriving the Ontario Energy Board of its role in assuring that decisions made were prudent, cost-effective and in the best interests of consumers.
Here are the key findings of the AG’s report:
- The Ontario Minister of Energy issued 93 directives between 2004 and 2014, many of which went against the technical advice of its officials, resulting in significantly higher electricity costs to consumers.
- From 2004 to 2014, the portion of residential and small commercial customers’ bills covering electricity generation costs increased by 80%, from 5.02 cents per kWh to 9.06 cents per kWh. The overall cost of electricity to consumers increased by 56%, from $12.2 billion in 2004 to $18.9 billion in 2014.
- Generation costs increased by 74%, from $$6.7 billion in 2004 to $11.8 billion in 2014, and they are expected to grow to $13.8 billion by 2022.
- Electricity consumers have had to pay $9.2 billion more for renewable energy (wind, solar and biomass generation sources) over the 20-year contract terms under the Ministry’s current guaranteed price (i.e. feed-in-tariff) program than they would have under the previous program under which renewable energy was purchased through competitive bidding.
- Nuclear energy provides the backbone of the generation system, in 2014 providing almost 60% of the production at 52% of the costs. Hydro followed at 23.8 % of the production at 16.2 % of the cost. Wind provided 4.9% of the production at 8.3 % of the cost, solar energy 1.1 % of the production at 7.8 % of the cost, and biomass 0.3 % of the production at 0.9 % of the cost. Natural gas generation provided 9.3 % of the production at 20.2 % of the cost, largely because the natural gas facilities produce sporadically and are needed to back up the wind and solar facilities that produce intermittently. The “Green” energy sources (wind, solar and biomass) thus provide 6.3 % of the production but represent 17% of the production costs, not counting the share of the electricity system costs due to the need to back them up.
- “Global Adjustment” fees that cover the costs of newly contracted generation capacity from all sources grew from 2006 to 2014 by a total of $37 billion.
- Consumers are expected to pay another $133 billion in Global Adjustment fees from 2015 to 2032.
- Ontario has long had an over-supply of electricity generation capacity. Annual electricity consumption decreased from 151 million MWh in 2006 to 140 million MWh in 2014. Despite this, Ontario’s generation capacity increased by 19%. From 2009 to 2014, Ontario’s electricity supply exceeded its maximum hourly consumption by 5,160 megawatts (MW) per year, on average. A significant over-supply is projected for the next decade.
- Although the average generation costs for new solar and wind technologies internationally have declined substantially from previous levels (78% for solar and 58% for wind since 2009), Ontario’s guaranteed prices remain high (around 28 cents per kWh for solar and 12.8 cents per kWh for onshore wind).
- Because of the mismatch between when wind and solar generation provides power and when consumers want it, Ontario increasingly has had to curtail generation from other sources (i.e. pay generators not to produce) and dump surplus generation on the export market. From 2009 to 2014, Ontario exported 95.1 million MWh of power; the total cost of producing this power was about $3.1 billion more than the revenue Ontario received for exporting it.
- Despite a near doubling of costs of the Lower Mattagami hydro project, the Minister of Energy directed the utility to build it anyway to meet the government’s renewable energy targets and “invest in Aboriginal communities”. The final costs of this project, completed in December 2014, were $2.4 billion; the power costs will be 13.5 cents per kWh, about three times the cost of other recent hydro projects in Ontario.
- In August 2010, the Minister directed the utility to convert the Thunder Bay coal plant, intended to provide backup (peaking) capacity, to biomass. This will cost $40 million per year, or about $1.60 per kWh, 25 times higher than the average cost of other biomass facilities. The government claimed that it would help the Ontario forestry industry, but the wood pellets needed by this plant have to be imported.
- In 2008, the Minister directed the utility to build a gas-fired generation plant in Oakville. In 2011, he directed that another plant be built in Mississauga. The subsequent cancellation of these plants during the 2011 election campaign and the construction of replacement plants elsewhere cost $1.2 billion. This is the only item in the AG’s report that has received much media attention.
- Despite the persistent over-supply situation, Ontario spent $2.3 billion promoting electricity conservation from 2006 to 2014, and has committed to spending another $2.6 billion from 2015 to 2020.
- The lack of a structured, coordinated planning process has meant that there are significant gaps in the availability of transmission lines to move electricity from generators to areas where it is needed. A number of regions, including Kitchener-Waterloo-Cambridge-Guelph and Windsor-Essex have problems in terms of capacity and reliability. A total of 2,545 small renewable projects initially could no proceed because there was not enough transmission capacity to accommodate the flood of project applications that were received in response to the high guaranteed rates.
In summary, since 2003 successive Liberal governments in Ontario have pursued an environmentalist agenda that has aimed to “save the planet” by increasing renewable electricity production. They have done so by disregarding the legislative requirement to have electrical utilities use coordinated and integrated planning procedures subject to professional technical standards and proper public oversight by the Ontario Energy Board. The result has been a significant over-building of capacity relative to Ontario’s needs at the cost now approaching $40 billion, payment to wind and solar generators of $9.2 billion more than what could have been paid through competitive procurement, much increased reliance on intermittent sources of electricity generation (with the attendant back-up costs), and losses on export sales now averaging over $1 billion per year. They have completely politicized the decision-making process that governs electricity planning, construction, and operation in the province. The government intends to continue along this path for the foreseeable future.