What’s really behind Ontario’s rising electricity prices

Ontario’s high hydro prices reflect a breakdown in the Ontario Government’s electricity planning process resulting in contradictory policies that add to costs.

On September 12, the Ontario Government announced in its Throne Speech that it was rebating the provincial portion of the Harmonized Sales Tax (HST) to residential and small business electricity users. The initiative is expected to cost $1 billion/yr. and is funded out of the provincial tax base. On September 15, Bill 13, the Ontario Rebate for Electricity Consumers Act, was tabled to implement the initative.

What the initiative means is that as of January 1, 2017, the Province will reduce residential and small business electricity bills by an amount equivalent to the 8% provincial portion of the HST.

Why the HST rebate benefits the affluent more than average hydro users

What is often overlooked is that the HST rebate provides a benefit proportionate to electricity spending meaning that the more you spend on electricity, the bigger your rebate. And, of course, the bigger your residence, the more you are likely to spend on electricity.

On September 27, Ontario’s Financial Accountability Officer (FAO) issued a report showing that the burden of home energy costs, as measured by share of income spent on home energy, falls more heavily on lower income Ontario households in spite of their lower overall energy spending. In 2014, the lowest-income 20% spent on average 5.9% of their pre-tax income on home energy, while the highest-income 20% spent only 1.7%.

The FAO also stated that the average Ontario household in the top 20% of income earners will save $160 annually as a result of the HST rebate initiative, whereas the average household in the lowest 20% will save $63.

In other words, despite the fact that low and modest income Ontarians are paying a much greater proportion of their income in energy costs, the new, $1 billion HST energy rebate benefits higher income Ontarians far more than lower income Ontarians.

Moreover, at the time that the HST energy rebate was announced, the province had two highly targeted programs already in place that dealt specifically with the energy affordability challenges of low and modest income Ontarians. The two programs are:

• The Ontario Energy and Property Tax Credit which provides up to $1,008 per year for low- to moderate-income individuals and families, and up to $1,148 for qualifying seniors. This credit is funded out of the provincial tax base.
• The Ontario Electricity Support Program which reduces electricity bills by up to $600 annually for eligible low-income electricity consumers and up to $900 for those with electric heating and certain medical equipment. This program is funded out of the electricity ratepayer base.

The existence of the two programs begs the question as to why the government chose to allocate $1 billion annually to a new program that benefits affluent Ontarians much more than modest income Ontarians, when the Province could have enriched one or both of the targeted programs at far less cost than the HST rebate. Just $500 million allocated to these existing programs would have dealt much more effectively with the energy affordability problem of low and modest income Ontarians than the $1 billion spent on the HST rebate.

Moreover, announcing a new, 8% rebate on electricity less than 2 years after doing away with the 10% Clean Energy Benefit rebate, suggests that the HST rebate is little more than a political gimmick designed to get the Liberals through the next provincial election. In a similar manner, the Clean Energy Benefit was introduced by the Liberals just before the 2011 provincial election.

For these and other reasons, the HST rebate is simply bad policy. But the HST rebate was not the only questionable energy initiative announced in the September Throne Speech.

The $1.2 billion hydro subsidy to big business that we all pay more for

Buried in the fine print of the Throne Speech and quietly introduced as a regulation (with no legislative oversight) separate from Bill 13, was the expansion of the little known Industrial Conservation Initiative (ICI). This initiative is aimed at subsidizing the electricity costs of larger – mostly industrial – business users.

Unlike the HST rebate, the ICI is funded by hydro users so the result is a transfer of costs from residential and small-medium size businesses to the mostly large, industrial hydro consumers eligible for the ICI subsidy. In other words, under the ICI, residential and most other Ontario electricity consumers pay higher electricity prices to subsidize the energy costs of large, mostly industrial, power users.

So how much more are ordinary Ontario energy consumers going to pay to subsidize the energy costs of large businesses as a result of the proposed changes to the ICI?

Let’s start with how much more average Ontarians are paying now because of the current ICI. Based on a calculation by energy consultant Bruce Sharp (using data from Ontario’s energy regulator, the Independent Electricity System Operator), for the period of October 2015 through September 2016, the total cost transfer from residential and small business energy consumers to larger business users because of the ICI, amounted to $940 million. The result of this $940 million annual transfer was that large businesses utilizing the ICI subsidy paid an average of 39% less than they would have paid had there been no ICI initiative. During this period, all other Ontario electricity users paid 9.7% more in electricity costs because of the ICI. And according to Sharp, the larger pool of businesses eligible for the ICI because of the latest change – assuming 2/3 of the newly-eligible businesses take advantage of the program – will result in an additional transfer of costs from average consumers to big business of $275 million per year.

As such, a best guess scenario is that once the expanded ICI program is in effect, residential and small to medium size businesses will be paying $1.2 billion more in hydro costs annually than they would have paid if the industrial incentive had not been created in the first place. Again, the cost of the new HST rebate on electricity bills going to residential and small business power users is approximately $1 billion. In other words, in terms of the impact on residential and small business users, the two programs largely cancel each other out. Once again when it comes to energy, Ontario’s Liberal government giveth with one hand and taketh with the other.

It is also worth noting that there is considerable overlap between those large corporations qualifying for the ICI electricity subsidy and the businesses benefitting from the government’s proposed approach to distributing emissions allowances under Ontario’s new cap and trade program.

However, to fully understand the connection requires a brief detour into Ontario’s complicated cap and trade design.

Why so many of Ontario’s large corporations are being given a free ride under cap and trade

At the heart of Ontario’s new cap and trade program is the fact that larger Greenhouse Gas (GHG) emitters must hold an allowance for every tonne of GHG they release into the atmosphere. Under cap and trade, this is generally done by the auctioning off of allowances to emitters at market prices. However, rather than auctioning off allowances to all large carbon emitters, Ontario is proposing to distribute allowances to all industrial and institutional emitters free of charge in the first compliance period (2017-2020).

The ostensible reason for forgoing badly needed government revenue by allocating free allowances to large emitters, is to help Ontario business stay competitive. This, of course, is the same rationale behind the creation of the ICI subsidy and the subsequent expansion of its eligibility in September. However, a report released by the Ecofiscal Commission, Provincial Carbon Pricing and Competitiveness Pressures: Guidelines for Business and Policymakers, suggests that the competitiveness concerns due to cap and trade are over-stated, since only a very small proportion of Ontario industry faces competitiveness pressures that would be exacerbated by emitters paying for allowances. According to the Commission, even at a carbon price of $30/tonne – over double that of the Western Climate Initiative which will soon set the price of carbon in Ontario – only 2% of Ontario’s GDP would come from sectors facing significant competitiveness pressures.

A close look at how the proposed allowance exemptions play out on the ground in Toronto makes it clear that maintaining competitiveness isn’t really behind the blanket exemptions.

In the Toronto context, for example, there is little rationale for giving free allowances to many of the local institutions covered under the cap and trade legislation. After all, emitters such as York University and the University of Toronto are hardly at risk of re-locating out of province or losing “business” to out-of-province “competitors”, because of the cost of paying for carbon emission allowances.

As with the HST rebate, the blanket exemption of all industrial and institutional GHG emitters from paying for allowances in the initial 3 year period, simply makes no sense and represents an unnecessary loss to the Ontario treasury. And as indicated above, the free allowances subsidize many of the same companies that benefit from the newly expanded Industrial Conservation Initiative.

The politics of energy prices

According to many observers, the cost of electricity is the number one issue for Ontario voters and recent polls suggest that the popularity of Ontario’s Liberal Government is taking a beating because of the issue.

Undoubtedly, the Liberals are frustrated by the electorate’s lack of appreciation for what the government sees as a series of environmentally friendly energy policies (the closure of the coal plants, the Green Energy program, badly needed investments in transmission, etc.), that only coincidently contributed to higher energy prices.

The Liberals must also be frustrated by the fact that voters are unlikely to flash back 14 years and remember that it was the Harris Conservative Government’s – not the Liberal’s – disastrous experiment in electricity de-regulation that destroyed the foundation for rational energy planning in Ontario – that prior to 2002, the institutional framework for coherent energy planning had at least existed in Ontario in the form of the publicly-owned Ontario Hydro even if many of the actual decisions made by Hydro were anything but rational.

But while the average Ontarian may not appreciate the finer points of energy policy nor remember the Conservative de-regulation initiatives of 14 or 15 years ago, they do sense that something is fundamentally wrong with the way energy policy has been done in Liberal Ontario. And the reality of Ontario’s over all approach to energy (as the Ontario Auditor-General forcefully pointed out in her scathing 2015 report on Ontario energy planning), is that there is an astonishing lack of coherence to the myriad energy decisions that have been made over the past 13 years of Liberal rule.

To be fair, many of the individual decisions (although certainly not the crassly political cancellation of the Oakville and Mississauga gas plants nor the inexplicable 60% sale of Hydro One), can be justified on legitimate policy grounds. The decision to close the coal plants is a case in point.

What can’t be justified, however, are the numerous policy reversals whereby a decision made one day is essentially canceled out by a change of course a short time later. In other words, the incoherent mess that is Ontario’s present electricity system reflects the cumulative impact of scores of often contradictory energy decisions made over the past 13 years by the Liberal Government.

For example, what can one say when a government terminates a 10% rebate on hydro bills because (it says) it is no longer needed and then barely 20 months later announces an 8% rebate? What can one say when a government introduces an extraordinarily expensive renewable energy program (with 20-year contracts averaging more than double the going price) that it promotes as the engine of a clean energy industrial strategy (wind turbines, solar panels, etc.), then cancels $3.8 billion worth of renewable projects  dealing a huge blow to the very industry that it had previously decided to heavily subsidize and that was supposed to be a key part of Ontario’s economic future.

According to Ontario’s Auditor-General, Bonnie Lysyk:

“….over the last decade, this (Ontario’s) power system planning process has essentially broken down, and Ontario’s energy system has not had a technical plan in place for the last ten years. Operating outside the checks and balances of the legislated planning process, the Ministry of Energy has made a number of decisions about power generation that have resulted in significant costs to electricity consumers”.

This is the reality of Ontario electricity planning that is sensed – if not fully understood – by the Ontario electorate and this is the reality that was on full display in the most recent energy initiatives announced in the Government’s  September Throne Speech.

Ontario’s Liberal Government may feel that the criticism leveled at its energy policies is unfair and even uniformed (the criticism it leveled at the Auditor-General at the time of her 2015 report).

But one doesn’t have to understand all the details to know that 13-years of Liberal energy policy just don’t add up and that the electricity planning system in Ontario, as the Auditor-General so convincingly argued, is truly broken.