The Financial Post, August 10, 2017
A Globe and Mail article of November 11, 2002 reported that Dalton McGuinty, leader of the Ontario Liberal Party (OLP), then in Opposition, was upset because Premier Ernie Eves had promised legislation to cap electricity prices.
Liberal Leader Dalton McGuinty said the true cost of the Conservative government’s hydro bungling will add billions of dollars to the debt.
“Now that families and businesses have been scared to death, now that new investment in supply has been scared off, now that everyone knows hydro has been completely mismanaged, Ernie Eves is going back to square one,” Mr. McGuinty said in a news release on Monday.
“The government should have had its act together before the market opened. And the bill for its failure to do that hasn’t been cancelled — it’s just been put off.”
Mr. McGuinty said the Ontario Liberals have been calling for action for months, but the Eves government has not acted until now to freeze electricity prices and increase supply.
The Liberal Leader said his real concern is what Ontarians will have to pay over the long term.
Fast forward to September 14, 2005 when Dalton McGuinty was Ontario’s Premier. In a keynote speech to the Ontario Energy Association, he bragged about what the OLP had accomplished and their plans for the future. Let’s examine the promises made in that speech.
McGuinty: “We won’t gamble away Ontario’s future prosperity because of what the next poll might or might not say...”
A noble thought, but discarded by the OLP. When seeking re-election in 2011 McGuinty cancelled the Mississauga and Oakville gas plants and plans to contract for offshore wind developments. Polling in ridings affected by the foregoing showed several Liberal seats in jeopardy. More recently, shortly after a poll indicated Premier Wynne’s approval rating was at 20 %, she announced hydro rates would be cut by 25 %. Policy by polls…
McGuinty: … Or because of what new technology might or might not be developed.
The launch of the Green Energy and Green Economy Act (GEA) in 2009 focused on wind and solar generation at above market prices, without a cost/benefit study as pointed out by the Ontario Auditor General in his December 5, 2011 report. Both wind and solar were old technologies promoted by ENGO and wind and solar associations and known to be intermittent and unreliable sources of generation.
McGuinty: That’s why we asked the OPA to report on a long-term plan.
The Ontario Power Authority (OPA) produced a viable plan with limited wind and solar capacity to be contracted for in a competitive environment, but the plan was suspended by Energy and Infrastructure Minister George Smitherman before approval via his directive to the OPA dated September 17, 2008.
McGuinty: That’s why we acted to take the politics out of pricing.
The recent Fair Hydro Act and the gas plant moves dispel the notion that politics has been removed from pricing, as do the FIT and MicroFIT programs that past Minister Smitherman enabled via a directive issued September 24, 2009 to the OPA which included a domestic content requirement. The latter resulted in a challenge before the World Trade Organization which Canada lost and taxpayers picked up the costs.
McGuinty: This spring, the Ontario Energy Board, a truly arms-length public agency will set the price of power for small consumers. The OEB sets the price based on what electricity costs, not on what politicians think it should cost, or wish it would cost.
While those homilies are correct, the prices are set based on input costs which the OEB has no control over. In simple terms, they divide the input costs accumulated (Global Adjustment + Hourly Ontario Electricity Price + transmission) and divide it by kilowatt hours consumed. The impact of above market (highlighted by the Auditor General reports) contracts with wind, solar, and other generators and the plethora of other spending (e.g., conservation $400 million per year, etc.) dictated by the Energy Minister, plus above market salaries and benefits for OPG and Hydro One employees etc., are all part of those costs.
McGuinty: We could require our businesses and families to subsidize the price of electricity through their taxes.
Premier McGuinty did just that when he moved the gas plants and part of the cost was paid by taxpayers. The Liberal government also drove up the price of hydro and put 600,000 household into energy poverty. It fell on charities, supported by Ontario taxpayers, to help those households. Tax dollars from those households also supplied grants to buyers of expensive Tesla automobiles and those grants continue today!
McGuinty: But, having finally put our province on a sound financial footing, we choose to ensure the price of electricity reflects the true cost of electricity.
The “sound financial footing” didn’t last long, and during the Liberals’ reign Ontario’s debt has increased from $132 billion to over $300 billion. Ontario has seen only one budget in the last decade that will seemingly balance and that was the most recent one.
McGuinty: We can’t guarantee price certainty –; that just isn’t realistic, given the nature of the challenges before us.
The Fair Hydro Act just passed by the Wynne government guarantees price certainty for four years for certain classes of ratepayers. This isn’t realistic: refinancing those assets may conflict with their ability to continue to generate electricity for an additional ten years. Amortization of fixed assets is based on the longevity of those assets, but the Wynne government has decreed that they can extend their life so that our children will be stuck with the replacement costs.
McGuinty: But I can assure you that we will do everything we can to ensure safe, clean, affordable electricity is always in full supply in the Province of Ontario.
When the OLP became the government, the average price of a kilowatt hour was 4.3 cents. By 2016 it averaged 11.2 cents — a 160% increase. The 25% reduction touted by Premier Wynne as the largest in Ontario’s history followed. The subsidy to cover that 25% will accumulate within the confines of OPG and at the end of increases held to “the rate of inflation for the next four years,” that subsidy will rise well above that benchmark in the years following that moratorium.
McGuinty: We won’t subsidize prices or cap prices –; that would mean more debt or higher deficits. Both of which would lead ultimately to higher taxes.
By deferring debt to subsidize hydro prices for four years within OPG’s balance sheet (guaranteed by the Province), the plan is to hide (temporarily) the impact from ratepayers while supposedly balancing the budget.
So, what happened to all those lofty promises of “affordable” electricity costs for consumers and business, that is immune to politics?
Was this what all those promises really meant?
“The true cost of the Liberal government’s hydro bungling will add tens of billions of dollars to the debt.”
The “Fair Hydro” plan ushered in by the Wynne government is setting up ratepayers for higher bills as soon as 2021 arrives. When the hiatus ends, limiting increases to ratepayer bills to no more than the “cost of living” (COL) over the next four years, the cumulative debt acquired by OPG to “refinance” the reported $50 billion of electricity assets will have to be repaid.
Early indications suggest the costs will be higher than the $2.5 billion being set aside for the next three years by Premier Wynne and Energy Minister, Glenn Thibeault.
Evidence? A look at May 2017 compared to May 2016 indicates the increase in the Global Adjustment (GA) costs for Class B ratepayers was 7.9% higher than 2016 and well above the May COL index of 1.4%. Any increase in costs above the inflation rate will be added to the $2.5 billion being refinanced and become the responsibility of ratepayers to pay when the hiatus ends.
Demand drops but the cost goes UP
The IESO May 2017 Monthly Market Report indicates Ontario Class B ratepayers consumed 344,000 megawatt hours (MWh) less than they did in May 2016, which represents a 4% drop. That’s about the same as 460,000 average households would consume for the month. The Global Adjustment (GA) costs on the reduced amount of electricity consumed, however, increased by $82.7 million from $931.2 million in 2016 to $1,013.9 million in 2017. Many will recall in May 2016, lower consumption during the prior six months caused the OEB to raise rates!
So, what caused the 7.9% spike ($82.7 million) in GA costs? It appears there were two principal causes with one of them related to Ontario’s “Net Exports”.*
In 2017, net exports averaged 600 MW per hour higher than 2016, meaning they increased by 446,400 MWh (600MWh X 24 hours X 31 days) in May 2017 (enough to power almost 600,000 average households for the month). The buyers in New York, Michigan, Quebec, etc., paid only the Hourly Ontario Electricity Price (HOEP) of $3.17/MWh, while Ontario’s ratepayers were required to pay the GA costs of $54.8 million or $122.89/MWh.
The other major cause of the GA spike appears related to power generation from wind and its record curtailment in May 2017. My friend Scott Luft posts both the generation from TX (transmission connected) and DX (distributor connected) industrial wind turbines (IWT), and also conservatively estimates “curtailment”. In May 2016 TX and DX connected IWT generated 699,371 MWh, not including 130,000 MWh of curtailed generation.
Combined: wind power in May 2016 cost ratepayers about $113 million or $162/MWh. May 2017 saw 669,011 MWh of wind power delivered either to the grid (TX) or to local distribution companies (DX). Curtailed wind in May 2017 was a record as Scott estimated almost 524,000 MWh (enough to power almost 700,000 average households for the month) were curtailed. The cost for generated and curtailed wind increased to slightly more than $158 million for the month, which raised the cost of accepted wind generation to $236/MWh.
$100 million added … for just one month
What this means is, wind-generated and curtailed costs in May 2017 were $45 million higher. Coupled with the increase in net exports of surplus generation and related costs, $100 million was added to the GA … for just one month. If May 2017 is in any way representative of the four years of the rate freeze (tied to the COL index), the costs of refinancing those assets will be much more than the March 2, 2017 press release suggested it would be: “These new measures will cost the government up to $2.5 billion over the next three years.”
Based on past forecasts by the Ontario’s Liberal government, keeping the costs at $2.5 billion over the next three years may be a “stretch goal”!
*“Net Exports” are total exports less total imports.
With a forecast of more increases on the way …
Ontario news in May focused on record rainfalls in many areas of the province, records were being set elsewhere, too: in Ontario’s our electricity sector.
While one of those records occurred on May 27 when the 4,500 MW capacity of industrial wind turbines generated a record low of one (1) megawatt hour, there were others. They won’t make you proud.
Highest “B” Class GA per MWh ever @ $123.07/MWH – What the $123.07 represents is a Global Adjustment cost to all Class B ratepayers of 12.3 cents /kWh without including the HOEP (Hourly Ontario Electricity Price) at a time when Premier Wynne has told us her government is reducing our electricity bills by 25%* so the difference between what the cost of electricity was in May and other months and the TOU rates (to be announced) will be “kicked down the road” to be paid at a future date.
Highest “B” Class total dollar GA cost ever @ $1,013.9 million – The Class “B” ratepayers got stung badly in May 2017 as their portion of the GA reached record levels.
Highest OPA contracted GA monthly cost ever @ $838.3 million – The Ontario Power Authority (since merged with IESO) was created by Dwight Duncan when Minister of Energy and contracted for all new power contracts, including those above market ones for renewable energy (wind, solar and biomass). Those contracted generation sources set a new record for contribution to the GA representing 73.2% of the total amount as noted under # 5. below.
Lowest “B” Class consumption for May (in evidence) @ 8.310 TWh – It would appear that Class “B” ratepayers did their best to reduce consumption and based on data on the IESO website consumption levels set a record low in May 2017.
Highest overall total GA costs ever @ $1,144.5 million – The total GA costs for May 2017 for the combination of Class B and A ratepayers achieved this record level since the GA was first created.
Based on what happened in May, it would appear that holding future rate increases in the next four years to the inflation index will result in huge increases when the hold-back (financed by taxpayers via the OPG) is slated for recovery.
That could make the Debt Retirement Charge look like chump change!
* The OEB has not yet announced the TOU rates that will apply effective July 1, 2017 as a result of the passing of the “Fair Hydro Plan” Act in the Ontario Legislature.
To: The Honourable Glenn Thibeault, Minister of Energy, Ontario
EB-2017-0049 Hydro One Rate Increase application
My views/thoughts and “What the OEB needs to consider”
- The OEB must consider the fact Hydro One has publicly declared1(a) their intent to pay 70% to 80% of their net income after taxes as dividends to shareholders. No other publicly owned LDC pays out at that level. Toronto Hydro has recently informed the City of Toronto they will reduce their dividend.(b) It should be a point of the review by the OEB to limit the payout dividend rate by Hydro One to no more than the average of all of the other LDC dividend payout rates as the higher payout rate increases borrowing needs and resulting interest payments thereby increasing the need for the raising of distribution rates!
- The OEB is currently in the process of endeavouring to have the distribution rates become more of a “fixed” cost moving away from variable rates currently embedded within the rate application system. Hydro One’s application ventures away from that path even though they cite the move to fixed rates on their website!(a) The OEB needs to re-establish their regulatory purpose.
- A review of the Yearbook of Distributors(a) filings on the OEB website comparing Hydro One’s filings for 2014 with 2015 (2016 filings not posted yet) indicates OMA costs fell by $103 million from 2014 to 2015 while depreciation increased by $14 million. One would suspect the reported drop in OMA costs would have caused a drop in Hydro One’s distribution costs but no reduction was forthcoming. One must assume the increased depreciation was due to the OEB approving the completion of capital spending moving previously approved spending within a variance account to current rate recovery status. Presumably due to the drop in OMA costs; Hydro One reported an after-tax profit in their distribution business of $257.3 million an increase of $68,1 million in fiscal 2015.
- We would note either Hydro One has been effective at getting ratepayers to conserve OR their out of line distribution rates have driven ratepaying households into “energy poverty”. The foregoing is evident in comparing the year ended December 31, 2015 with the comparable year ended December 31, 2016. Distribution volumes fell 8.6% whereas Transmission volumes increased 1.7% signaling distribution rates are out of line with other LDC! A further 1.1% reduction in distributed electricity is evident in reviewing the 1st Quarter of 2017 as compared to the 1st Quarter of 2016! NB:
- We would note that asset classifications of: “Goodwill” and “Intangible Assets” now cumulatively represent $676 million having increased from $400 million in 2012. Those assets now represent 6.7% of Hydro One’s equity base and in line with the OEB’s annual setting of the ROE allowed by the LDC has the effect of inflation of Hydro One’s rate increases. It is time to discount the $676 million when considering the current application. Hydro One has inflated the goodwill (in particular) by enticing local councils to sell their LDC to Hydro One at prices that exceed normal acquisition activities in the private market. That in turn impacts not only the ratepayers of the acquired LDC but also (via the inclusion of the goodwill) impact all other Hydro One ratepayers.
- Of note in respect to the OEB’s responsibility is the January 14, 2016 “Review of the Cost of Capital for Ontario’s Regulated Utilities”(a) wherein we find the following under the heading “Electricity Distributors” and labeled # 4) under “The differences between the OEB approved and the actual results can be attributed to the following:”: is the following: “4) The utility’s ability to manage its costs leading to under or over spending, and demand pressures”! Ontario’s ratepayers should rightly expect the OEB to not only “attribute” differences between “approved and the actual results” for the foregoing reason but to also bear that in mind on a comparative basis with all LDC ensuring that “over spending” is not granted the freedom given to Hydro One in the past and in the future! Costs for the same relative activities should be similar for all LDC!
NB: What that suggests is having the highest distribution rates during a time when the grid has a large surplus of electricity has two negative effects on ratepayers. The first is that reducing consumption will have a detrimental impact on the HOEP driving it down further particularly during the shoulder seasons when demand is low and secondly the reduced revenue to Hydro One will cause them to apply for rate increases associated with the revenue drop thereby increasing distribution rates. It is a downward spiral for ratepayers! We would also point out that while Hydro One experienced an 8.6% drop in consumption the IESO report that consumption from 2015 to 2016 remained flat at 137 TWh.
On one day recently, for one hour, Ontario’s thousands of towering wind turbines delivered just one megawatt of power. And still, Ontario had a surplus that was sold off cheap.
May 27 was a Saturday which is usually a “low demand” day for electricity in Ontario, compared to weekday power demand and assuming weather patterns are close to average. The temperature on the recent May 27 was slightly below historic averages in Toronto; as people woke up and set about their activities that day, the demand for electricity built slowly.
According to the IESO’s (Independent Electricity System Operator) Daily Market Summary, Ontario demand peaked at 14,069 MW and averaged 12,751 MW (total Ontario demand was 306,024 MWh for the whole day). If anyone checked IESO’s “Power Data” page at, say, just after 11 AM, they would have noted demand was 13,208 MW at 10 AM and the HOEP (Hourly Ontario Energy Price) was indicating a negative price of -$4.00 /MWh. If one had also looked at the “Generator Output and Capability” and scrolled down to “Wind Total” they would have seen that under the heading “Output” the number appearing on the screen was “1”!
As in, one single megawatt of power.
About half the capacity of one ordinary wind turbine.
So, at 10 AM on May 27, 2017 the approximately 4,500 MW capacity of the more than 2,000 wind turbines installed throughout the province by the McGuinty/Wynne governments with lucrative, 20-year contracts, were delivering one megawatt of power.
And yet, to the best of my knowledge, Ontario didn’t experience a blackout or brownout because intermittent wind power generation was almost completely absent, nor did our emissions increase, as we got all the power needed from nuclear and hydro resources. In addition, the almost 9,000 MW of gas generation was idling, operating at an average of about 2% of capacity almost all day.
Despite wind only producing an average hourly output of 75 MW for the day and just the “1” for hour 10, Ontario still exported 43,584 MW of power at a cost to ratepayers of $5.6 million*.
Despite the lackluster performance of industrial wind turbines May 27 and on many other occasions, a visit to the home page of CanWEA still claims: “Wind is delivering clean, reliable and low-cost electricity”!
Perhaps with another 4,500 MW of capacity in Ontario, the industrial wind turbines may have delivered TWO MW of power at 10 AM on May 27?
*Cost estimate assumes the second IESO estimate of May’s Global Adjustment of $127.76 holds up.
April brought high winds, record curtailment of wind power, and record low consumer demand. Wasted and exported power could have supplied half the homes in Ontario for a month.
The Independent Electricity System Operator (IESO) recently released their April 2017 Monthly Market Report with information on power consumption, market pricing, exports and a host of other data. What the April report revealed was Ontario’s average demand was low — so low that when energy analyst Scott Luft searched IESO’s records, he found the total demand for the month was a record low. He searched back to 1994, which is as far back as available.
The total demand reported by IESO for April 2017 was 9,788,614 megawatt hours (MWh): Ontario ratepayers are conserving, or we have lost many industrial clients, or both!
Another significant fact appearing on IESO’s website is that April was a pretty good month for Class A ratepayers. They consumed 21.9% of Ontario’s demand, but were only charged 11.4% of the Global Adjustment (GA), $965.7 million. Class B ratepayers (that’s you and me, and small businesses) were charged with paying 88.6% of the GA, but represented only 78.1% of Ontario’s demand.
Cost: $160 million for revenue of $14 million
The other disturbing fact about April was our net export sales of power. That totaled 1,311,120 MWh sold at an average price of $11.14/MWh for a revenue of just $14.6 million for power that cost ratepayers $160 million. The loss of $145.4 million for the month contributed to the GA total of $965.7 million.
That 1.3 million MWh of exported power — which you paid for — could have provided power for more than 1.7 million average Ontario households at a cost of 1.11cents/kWh or just $8.35 for the month! (Assuming average use of 750 kilowatt hours/kWh of electricity for the month.)
Reviewing the IESO stats provides relatively current information but it doesn’t disclose the source of the generation, or what caused the hourly Ontario electricity price (HOEP) to be so low. Did we, for example, have to curtail wind?
Wind power: wasted. Again.
For that information I depend on my friend Scott Luft, who keeps a monthly data file which includes not only actual industrial wind generation, but also an estimate (always conservative) of curtailed wind power which we pay for but isn’t delivered to the electricity grid. For the month of April 2017, wind power generated and curtailed (521,056 MWh) was 1,374,873 MWh, for a cost of approximately $182 million.
Curtailed wind in April was the highest on record since we began paying for it back in September 2013!
Here’s the fatal math:
net exports of 1.3 million MWh +
the 521,000 of curtailed wind = 18.7% of total Ontario demand.
Combined, the 1,832,176 MWh at the HOEP price of $11.14/MWh and 1.11 cents/kWh and what do you get? Enough power for more than 2.4 million average households (over 50% of all households in the province) with their average need for power at a cost of only $8.35 — for the whole month.
Why doesn’t Premier Wynne simply cancel the Green Energy Act and the contracts for projects not yet built?
Either math is a problem for the Premier or she doesn’t want to admit to another “mistake”!
May 28, 2017
*Please note the GA is the can Premier Wynne is “kicking down the road” under her “Fair Hydro Plan” where she will refinance assets the Province doesn’t own by getting Ontario Power Generation to accumulate the debt for the uncoming 25% reduction in our monthly bills for the next four years. Look forward to a reappearance of the DRC (Debt Retirement Charge) but on a bigger scale in 2021!