Dicey math in ECO report on Ontario’s electricity costs

Appalling math supports agenda-laden report from the Environmental Commissioner of Ontario

How does a car in a driveway explain millions lost selling off surplus power? You have to read the ECO report to understand. Maybe. [Photo G Hills Law]
April 11, 2018

The 322-page report Making Connections Straight Talk About Electricity in Ontario is mind boggling in its attempt to redefine simple mathematics.

As one example, the Environmental Commissioner of Ontario or “ECO” deals with “energy poverty”: “According to 2015 data, Canada’s National Energy Board found 7% of Ontarians to be energy poor”.

Checking the Ontario Energy Board (OEB) annual Yearbook of Electricity Distributors for 2016, Ontario had 4,612,551 residential customers — so, 7% would represent 322,878 “energy poor” households in the province.

The OEB’s December 22, 2014 report noted: “Using LIM* as a measuring tool, and relying on Statistics Canada household data, Ontario has 713,300 low-income households. The OESP** is estimated to reach 571,000. This estimate recognizes that not all low-income households in the province pay their electricity bills directly (i.e., utilities included in rent).”  Those 713,300 low-income households represented about 15.5% of all households in the province.

So, in one simple sentence, the Commissioner’s reference to energy poverty makes almost 400,000 “energy poor” households simply disappear!

Yet another claim is made in the report where in large bold letters it states: “Ontario sells its surplus power to other jurisdictions for more than it costs to make that power.” Here is the analogy used to explain this claim in the commissioner’s report: if you lend your car to a friend to drive when you are not driving it and he pays you $20 it reduces your annual cost.  The reasoning related to the electricity sector is explained by the ECO:

“The surplus power that we export costs us little or nothing extra on top of the fixed costs, because: Our renewable power has extremely low operating costs; and Our nuclear plants cost virtually the same whether they are making power or not.”

What is deliberately omitted in the report is the unreliability and intermittency of renewable energy; favouritism towards industrial wind turbines is clearly visible in the text. ECO Dianne Saxe has demonstrated support for wind power development and even invested in one that stands at Exhibition Place in Toronto (which seldom generates power).  A plaque at the bottom bears her name.

The “how” we lose money on industrial wind is easily visible to most with a little effort. As an example, IESO rates the ability of wind to be counted on to produce power only 12.9% of the time when it will be needed.  What that means is, while average generation of wind power over one year may amount to 30% of capacity, IESO’s reliance on wind dependable for planning purposes is about one third of its probable annual output.

The foregoing has been borne out by others including a peer reviewed paper titled Ontario’s High-Cost Wind Millstone prepared for the Council for Clean and Reliable Energy. Author Marc Brouillette states: “Two-thirds (65 per cent) of wind generation is surplus to demand and must be wasted or dissipated either through forced curtailment of hydro and nuclear generation or by increased exports to Quebec and the United States, generally at low prices.”

Another recent report I wrote suggests forced curtailment of hydro, nuclear, wind, net exports, conservation and costs of backup for wind and solar generation, i.e., gas plants, were more than $6 billion in 2017 added to our electricity bills.

In other words, the ECO’s claims are not only incorrect, they are an insult to common sense and math literacy.

Parker Gallant

* Statistic’s Canada’s Low-Income Measure is simply defined as half of the median adjusted economic family income. Adjusted means family size has been factored in.”

**Ontario Electricity Support Program

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Sales of public assets: benefits for Ontarians or kudos for bureaucrats?

Selling off assets shouldn’t mean bonus time for senior bureaucrats

SOLD! But where did the money go?

April 9, 2018

Back on December 14, 2015 Energy Minister Bob Chiarelli directed OPG to sell its head office on University Avenue in Toronto, also directing them to pay all of the net proceeds “to the government”.

Just before Minister Chiarelli was moved from the Energy portfolio he issued yet another directive to OPG: sell off the Lakeview lands and pay all of the net proceeds to the government, “subject to any requirements under the Trillium Trust Act (2014) Ontario”.

In both cases the minister was using his authority as an elected representative of the province with responsibility for managing certain government-owned assets, which the government had presumably decided were not core assets of OPG.

The Head Office was sold in 2017 as stated in OPG’s annual report where they noted: “Higher earnings of $377 million from the Services, Trading, and Other Non-Generation segment, primarily as a result of the gain on sale of OPG’s head office premises and associated parking facility, a non-core asset of the business. A gain on sale of $283 million, which is net of tax effects of $95 million, was recognized in net income upon completion of the transaction in the second quarter of 2017.”

So, the payment(s) under that sale to be made to the province were $283 million plus the PIL (payments in lieu of taxes) or $378 million.

OPG’s press release of January 9, 2017 announcing the sale said not much more than “OPG would lease back four floors plus ancillary space.”

A couple of weeks ago in 2018, OPG announced in a press release they had sold the Lakeview lands for $275 million, subject to closing adjustments, and stated “The net proceeds from the sale of Lakeview lands will be transferred to Ontario’s Trillium Trust to fund transit, transportation and other key infrastructure projects across the province.”

The press release went on with quotes from Finance Minister Charles Sousa, Ehren Cory, CEO of Infrastructure Ontario, the Mayor of Mississauga, the President of the buyers group, Lakeview Community Partners Limited and Jeff Lyash, OPG President and Chief Executive Officer. (No quote came from the current Minister of Energy.)

The quote from Jeff Lyash, OPG’s CEO, was particularly laudatory: “OPG is proud of its role to transform Lakeview, a major source of carbon emissions for over 40 years, to a vibrant mixed-use community that will become the jewel of Mississauga’s waterfront. This site is one of the largest undeveloped parcel of waterfront lands left in the GTHA and the fourth former OPG coal plant site to transition to a new, environmentally friendly use.”

All ratepayers, who are also taxpayers, should be upset with how the sale proceeds of OPG’s two properties, were/are either being paid into the Ontario Treasury or into Trillium Trust. Those assets were paid for by ratepayers through their electricity bills, but they will see no benefit as the $653 million generated from the sale presumably went towards balancing the budget just concluded on March 31st.

Is it too much to ask that the electricity system be managed for the benefit of ratepayers?

Parker Gallant

Side note: Mr. Lyash topped the Sunshine List and was paid $1,554,456.95 last year up almost $400,000 from the prior year while Ehren Cory, CEO of Infrastructure Ontario’s bump was $60,000 to $470,758. Both received nice year over year increases!

NextEra renewables sale to CPP speaks volumes

Canada Pension Plan’s investment in part of a wind-solar power portfolio seems to ignore a lot of negatives, including the energy poverty rising in Ontario due to electricity bills

Canada Pension Plan contribution rates are rising again, as reported by the Financial Post December 14, 2017: “the contribution rate (i.e., the CPP tax) has increased from 3.6 per cent when the CPP was launched in 1966 to its current rate of 9.9 per cent. It will increase further to 11.9 per cent beginning in 2019.”

The Canada Pension Plan Investment Board (CPPIB) is an active investor, looking for good rates of return without taking “excessive risk.” So they either searched for assets that pay guaranteed above market rates, or were approached by U.S. Power giant NextEra who sold them their Ontario portfolio of 396 MW of wind and solar contracts. CPPIB paid $1.871 million per MW for a total of $741 million CAD and also assumed the debt (US$689 million) attached to the NextEra portfolio. The press release associated with the acquisition had this quote from Bruce Hogg, Managing Director, Head of Power and Renewables: “As power demand grows worldwide and with a focus on accelerating the energy transition, we will continue to seek opportunities to expand our power and renewables portfolio globally.”

Perhaps Mr. Hogg was unaware “power demand” in Ontario has actually fallen from 153.4 TWh in 2004 to 132.1 TWh in 2017 despite an increase in our population of approximately 450,000.  He may also be unaware industrial wind turbines create health problems, cause property values to drop and kill birds and bats including those on the endangered species list.

What the CPP acquisition means is Ontario ratepayers will be indirectly contributing additional funds to the CPP without the benefit of reducing either their annual tax burden or increasing their future pension benefits. A “win, win” for CPP and a “lose, lose” for Ontario’s taxpayers. The sole redeeming feature is that the money will stay in Canada instead of flowing elsewhere.

Ironically, the CPP by acquiring and holding those assets will also be showing their support for energy poverty. The Ontario Energy Board (OEB) in their December 2014 report noted: “Using LIM* as a measuring tool, and relying on Statistics Canada household data, Ontario has 713,300 low-income households.” At that point in time the 713,300 households represented almost 16% of residential ratepayers in the province and one should suspect that number has increased over the past three years.

So, one should also wonder why NextEra, headquartered in Florida, sold those assets and their above market returns? The press related to their announcement of the sale speaks volumes: “As discussed during our earnings call in January, we expect the sale of the Canadian portfolio to enable us to recycle capital back into U.S. assets, which benefit from a longer federal income tax shield and a lower effective corporate tax rate, allowing NextEra Energy Partners to retain more CAFD** in the future for every $1 invested.”

No doubt the NextEra sale may be a sign of the future as the Canadian economy has shown serious signs of slowing as taxes rise and foreign investment falls. The bulk of the investment in the renewable energy sector in Ontario came from offshore companies who rushed to take advantage of the above market rates and guaranteed prices offered under the Feed-in-Tariff (FIT) program available under the Green Energy Act.

Those investors will look to cash in on the sale of those assets, so we should expect to see more public and private Canadian pension funds stepping up to purchase them.

Parker Gallant

*Statistics Canada’s Low-Income Measure is simply defined as half of the median adjusted economic family income.

**Cash Available for Distribution

Ontario fights Buy American rules. Meanwhile…

April 2, 2018

Ontario’s premier fights New York’s “Buy American Act” while selling them subsidized electricity, costing the province’s citizens millions

On June 21, 2017 the New York State Senate passed the “Buy American Act” which restricts the use for all road and bridge capital projects of using imported iron and steel and requires New York government agencies to use only American-produced products.

Ontario’s Premier responded April 2, 2018 announcing Ontario is “restricting its government entities from entering into certain procurement contracts with suppliers from New York State, including provisions that restrict suppliers use of structural iron* from New York State.”

The Premier’s statement noted, “At this time of economic uncertainty, Ontario workers and businesses need to know that I am their number-one advocate.”

Ontario’s ratepayers should wonder why the Ontario government didn’t simply announce we would no longer subsidize the sale of cheap electricity to New York State — that would have had more severe implications, and been a more forceful economic response to sanctions.

In 2017, Ontario’s net exports (exports minus imports) were 8,242 GWh (gigawatts) to the State of New York and produced approximately $250 million in revenue from their sale. The cost to ratepayers, however, was about $950 million, meaning the subsidies cost Ontario ratepayers about $700 million.

If the Premier had stopped the electricity subsidies instead of restricting the import of “structural iron” it would have hit New York and the U.S. right in the pocketbook, at the same time saving Ontario’s ratepayers $700 million!

Just wondering…

Parker Gallant,                                                                                                                              April 2, 2018

*Structural iron has much higher carbon levels than structural steel.

Ontario’s IESO: electricity customers should be concerned

The province’s power agency has been found to use incorrect accounting methods and actively obstruct oversight… that’s a worry, considering their other goals

March 26, 2018

The Independent Electricity System Operator or IESO, which is responsible for managing Ontario’s electricity system, has again been called out on its abilities. Unlike prior occasions, this time the criticism is related to the manner in which the IESO engages in “irregular and improper accounting” discovered in a special audit and reported by the Ontario Auditor General.

From the report by the Globe and Mail: “Bonnie Lysyk, the Auditor-General, informed the province’s public accounts committee last week of problems uncovered during the audit, which began late last year and is now nearly complete. Her concerns included incorrect accounting, deceptive and obstructive behaviour by the IESO’s board and management, and poor financial controls.”

The dispute is related to the Fair Hydro Plan and the accounting treatment that surrounds it. Ms. Lysyk noted the accounting structure was designed to avoid including the costs on the province’s books thereby allowing the government to “falsely claim” it had a balanced budget. The claim was disputed by the Minister of Energy who said the practices are not new and are used in other jurisdictions and “endorsed” by major auditing firms.

The cost of the Fair Hydro Plan just to the end of February is in excess of $1.6 billion and is carried on the books of an OPG “trust” subsidiary — that means the debt incurred will not show on the Province’s books as debt.

Recovery of the monies will, however, become a future burden for Ontario’s electricity ratepayers, who will have to ante up the funds to repay it and the interest it accumulates. The Financial Accountability Office suggests it would be a minimum of $40 billion and perhaps as much as $90 billion depending on if the province manages to balance its budget.

Ms. Lysyk noted, according to the Globe story, “When a board or management in any other province recognizes that an AG’s office has issues with their accounting, they would have handled it differently,” the committee was also told, “They basically treated, I think, my audit team like we were subservient to KPMG. In terms of the law in Ontario, that would be the reverse.”

The AG ordered the IESO special audit when IESO’s auditors would not respond to queries about potential accounting changes and, when their financial statements were published, they used some radically different accounting practices. Those practices were used immediately for the Fair Hydro Plan.  IESO’S Chief Financial Officer, Kimberly Marshall did not consult or notify the AG prior to adopting those practices!  As a result, and because of the refusal by management and the board to sign key documents, the AG’s office was unable to provide an audit opinion.

Many followers of the electricity sector have expressed issues with IESO’s inability to provide correct or timely information related to the generation and consumption of electricity so it should come as no surprise the Auditor General is faced with the same dilemma on financial accounting issues.

IESO also has responsibility for managing data required to pay generators for their power and using data from smart meters.

It should be disconcerting to all ratepayers, big and small, to realize IESO are also spending hundreds of million to bring us a smart grid.   A concern is that IESO may be working with MaRS Data Catalyst (liberally supported by the current government) who note, “We are working with industry, regulators, consumers and government to get that data into the hands of innovators in a secure, private and usable way to drive energy conservation and spur economic growth.

All ratepayers should be concerned as IESO may once again decide to use  different standards when it comes to protecting ratepayers’ privacy, as they have done with IESO’s financial information.

Time to tax the wind?

March 19, 2018

Ontario electricity consumers are already on track this year to pay more for wind, and for the cost of wasting (clean) power from other sources due to surplus power — is it time for some fairness in the electricity sector?

The science on using wind energy to generate electricity is branded as innovation, but it’s actually very old.

Power generation via windmills was technology developed by Scottish engineer James Blyth (1839-1906). “In 1887, while a professor at Anderson’s College in Glasgow (an ancestor of the modern Strathclyde University), he constructed a windmill attached to a dynamo to light his cottage in his home village of Marykirk.”

In Ontario, government brought us the Green Energy Act touted as a revelation to clean our air and create 50,000 jobs. The government claimed: “Ontario wants green energy business. These regulations will help ensure industry and municipalities that jobs will be created, investment is committed and that the renewable energy industry grows across the province.”

To try to make that happen, we were saddled with the FIT (feed in tariff) program offering payment for generation by wind and solar generators at multiples of power already in place. Additionally, to attract the investment in renewable energy, developers and operators were granted tax breaks. Examples follow.

Tax Breaks                                                                                                                                    The Finance Minister instructed MPAC to limit their assessment of wind turbines to $40,000 per/MW of capacity, meaning municipalities would receive meagre realty taxes and had no say in accepting or rejecting them. Subsequent to that direction it was changed for large installations (over 500 kW) of both wind and solar to: “10.7% to the industrial tax class.”

Additionally, the federal government granted wind developers the ability to allow them to accelerate deductions (depreciation) of the capital costs under “Class 43.2 of the Income Tax Act.” And those rights were recently extended by the federal government, as noted by CanWEA here to 2025.

So, wind and solar power developers are paid high prices for generation classified as “baseload” power meaning the grid operator, IESO, is obliged to accept and pay for the power. That’s a guarantee whether the sun shines or the wind blows they will be paid the contracted prices, or paid slightly less for curtailed generation. At the same time, developers walk away with the cash and pay almost no taxes except for meagre realty taxes.

Cashing in                                                                                                                                    Ontario’s ratepayers have been adversely affected by the continued addition of wind capacity as IESO and its predecessor, the OPA, follow[ed] ministerial directives and continue to contract for more and more capacity. As CanWEA notes, “Ontario remains Canada’s leader in clean wind energy with 4,900 MW of installed capacity.”

The cost of grid- (TX) and distribution-accepted (DX) wind and curtailed wind in 2017 was more than $1.6 billion, and that’s without factoring in the additional ratepayer costs of steamed-off nuclear, spilled hydro, subsidized exports of surplus generation or idling gas plants (built to back-up the wind and solar generation). So far in 2018, the costs of wind (generated and accepted plus curtailed) versus 2017 for the months of January and February are $447 million — $44.7 million higher than 2017.

Evidence clearly points to wind power generation occurring during low demand hours, days and months, rather than high demand hours causing waste of nuclear and hydro power, still paid for by ratepayers.

Time for a tax?

If industrial wind power plants can’t generate power when needed, maybe it’s time to reconsider the pricing model, or find a way to recover some of those additional costs. As noted, above the only tax paid by wind power operators is realty tax at a rate of about $4,000 per turbine annually (estimated) which collectively, returns tax revenue of about $2 per ratepaying household.*

That $4,000 tax, however, is really not much more than the taxes paid for an ordinary house in Ontario. For a home assessed at $300,000, for example, the average realty tax is $3,300. Not far off from a huge, industrial-scale wind turbine which is reaping hundreds of thousands in income each year for its owners.**

The state of Wyoming has found a way to increase tax revenue: it simply levies a tax per MWh (megawatt hour) of generation.  Wyoming is currently looking at increasing that tax from $1/MWh to $2/MWh and had considered levying it at the rate of $5/MWh.

If Ontario used the Wyoming model, for example, a $5/MWh tax for grid-accepted generation (9.2 TWh) and a $20/MW tax for curtailed generation (3.3 TWh) in 2017 would have generated approximately $60 million in tax revenue. Even at those rates, it would only represent 2.2% of what ratepayers are paying for intermittent and unreliable wind power.

Perhaps it would be more fair for wind power developers and operators to pay up for the constant subsidization by the ratepayers and taxpayers of Ontario, and bring more revenues to Ontario’s stressed municipalities — tax them!

© Parker Gallant

* Ontario has approximately 4.9 million households.

** From The Toronto Star: “A turbine with a feed-in tariff contract receives 13.5 cents a kilowatt hour, or $135 a megawatt hour for its output. A two-megawatt turbine running at full speed, 24 hours a day for a year, would therefore produce 17,520 megawatt hours of power. Assuming it operates at 35 per cent capacity, in the real world it will produce about 6,132 megawatt hours. At $135 a megawatt hour, that means revenue of $827,820 annually. Assuming a more conservative capacity of 27 per cent, it would generate revenue of $638,604.” There are capital costs of course, like the “rent” paid to the landowner which might be $15,000 to $40,000 per year.

Stuff that drives me crazy…

Tall tales about electricity management in Ontario

March 13, 2018

What drives me crazy are false claims from the proponents of renewable energy (wind and solar) and bureaucrats running Ontario’s electricity system. Here are a few examples of false claims and, dare I say, “fake news.”

  1. Hydro One and all other electricity distributors submit an annual report to the OEB and the information is posted under the heading “Yearbook of Distributors”. Hydro One’s 2016 filing states “Total Service Area (sq km) 962,274 sq km”. In a video Ferio Pugliese, VP Customer Care & Corporate Affairs, clearly states during a Regulatory Commission of Alaska special public conference/panel discussion that “we have a very large base in Ontario with over 650,000 square kilometers of territory”! Mr. Pugliese was trying to convince the Alaska regulator and the concerned citizens that nothing related to their electricity bills would change if, and when, they acquire Avista. I think most would agree that losing 362,000 sq. km of service area is major.
  2. CanWEA the wind power trade association claims “Wind is delivering clean, reliable and low-cost electricity,” but express their unmitigated thanks for the recent Federal Budget by noting: “The Canadian Wind Energy Association commends the federal government for extending the ability of investors to utilize Class 43.2 of the Income Tax Act by five years, from 2020 to 2025. This fiscal measure allows investors to accelerate deductions of eligible capital costs associated with clean energy generation. This helps renewable energy developers to lower their costs”! This effectively means owners of industrial wind projects get to write off their capital costs fast and don’t have to pay income taxes. One must assume they need taxpayer support to deliver their claimed “low-cost electricity.”
  3. The government suggests “cap and trade” revenue is being handed back to us: “We’re investing all of our carbon market proceeds into projects to reduce greenhouse gas pollution.”   When the announcement was made in May 2009 about passing legislation, the press release noted: “The United States is moving to put a national program in place that could begin as early as 2012.” But that never happened, so Ontario has little company in North America with only Quebec and California also collecting this tax. The press release from the MOECC on February 28, 2018 bragged about the first joint auction with Quebec & California stating: “Ontario is now part of the largest carbon market in North America.” To the best of this writer’s knowledge it is the only carbon market in North America! Reviewing the Ontario-based companies on the recent auction list, one notes those compelled to purchase allowances include Hydro One, OPG, greenhouse operators and municipalities amongst others. Those allowances will find their way into the cost of living stream resulting in increases to electricity bills and any product emitting CO2; and will even raise your municipal taxes. The Cap & Trade tax will touch our lives in many ways. While the press release said, “All of the proceeds raised from the carbon market are being invested into Ontario’s economy through green initiatives that fight climate change and help make life better for Ontario residents.” Most taxpayers would disagree the “cap and trade” tax will make life better!
  4. IESO, which manages Ontario’s electricity grid and negotiates generation contracts with private and public companies, seems to talk out of both sides of their mouth. As an example, their forward looking planning documents suggest wind generation’s capability of delivering power (referred to as “capacity factor”) to the grid during peak demand periods is a miserly 12.9% whereas CanWEA claims: “Capacity factors of potential wind plants range from 34 per cent in British Columbia to 40 per cent in Nova Scotia.”. Additionally L. Kula, IESO’s COO and VP Planning Acquisition and Operations in a February 28, 2018 speech stated: “Ontario is at the forefront of decarbonizing our grid, something we should be proud of.   In the almost two decades since the market was established, we have retired coal as a generation source. In doing so, we have increased the amount of variable generation on the transmission system and on the distribution system. At the wholesale level alone, wind and solar combined met about seven percent of Ontario’s supply needs in 2017.” While generating 7% of Ontario’s supply wind represented 12.5% of installed capacity and performed poorly during our summer’s high demand periods. During June, July and August of 2017 it generated an average of only 4% of demand and generally when it wasn’t needed in the middle of the night! Decarbonizing our grid at a huge cost to ratepayers should not be something IESO brags about.
  5. IESO also makes claims which support the 100+ “directives” from the Minister of Energy responsible for driving up energy prices as the following example illustrates. Terry Young’s (VP, Policy, Engagement and Innovation), speech of January 23, 2018  to ROMA stated: “The conservation and energy-efficiency programs we offer help consumers of all types take greater control of their energy use and reduce energy costs. This is the most cost-effective supply resource available, at less than four cents per kilowatt-hour. Conservation savings, growing embedded generation and demand reduction programs have offset increased demand.” Mr. Young has obviously not noticed “increased demand” is fake news as it has fallen 10.7% since 2008, but the average price for Class B ratepayers has increased 99%. Most voters are under the impression bureaucrats are supposed to be neutral and just execute the directions of their political bosses and not brag about results. Spending $400 million annually on “conservation” is a direct hit to ratepayer’s pocketbooks.
  6. IESO now considers it is better to pacify their political masters rather than work to keep costs from rising. Recent examples include their ability to cancel contracts for non-compliance but for some reason they ignored their legal right to do so. Examples include: the Windlectric 75 MW wind development on Amherst Island (a major pathway for migratory birds and bats) and an 18.4 MW wind project known as White Pines in Prince Edward County. Those two projects alone will cost ratepayers almost $700 million over the 20 years in their contracts. Generation from wind turbines continues to be a waste of ratepayer dollars as easily seen in 2017 data. During the high demand months of June, July and August, wind power generation amounted to 4% of demand despite representing over 12% of Ontario’s generating capacity. During those three months turbines generated 1.355 TWh, yet Ontario exported 4.731 TWh to our neighbours in New York, Michigan, etc. at bargain basement prices. Despite the obvious, IESO’s current President and CEO Peter Gregg of IESO said in a speech to the Ontario Energy Network on January 19, 2018: “With respect to the development of new resources, we are cognizant of some of the concerns expressed by representatives of renewable resources like wind and solar and emerging technologies like storage.” Perhaps Mr. Gregg could be more “cognizant” of the effects of wind turbines on such things as human health, the killing of birds and bats and the economic hardship caused by electricity prices that have climbed by over 100% over the past few years caused by the addition of wind and solar generation being added to the grid and embedded within local distribution companies.

The points I’ve raised are not all the fake or false news emanating from the electricity bureaucrats, but hopefully the reader will understand the gist of what has happened to the electricity sector in Ontario.

Parker Gallant