Pan-Canadian Perspectives: The Cost of Electricity in Ontario

Editor’s Note: This week, the PPGR is publishing commentary articles from public policy and public administration students at universities across Canada. This Pan-Canadian Perspectives series is meant to highlight voices from coast to coast, addressing diverse issues of local and national importance. Our fifth article in this series is from Sarah Edmunds at Ryerson University, who explores the policies that have caused electricity rates in Ontario to spike–an issue that many other provinces may learn from as they consider green energy sources.

by Sarah Edmunds

Since 2005, electricity rates for consumers and businesses alike have skyrocketed in Ontario, increasing 149% for off-peak power prices, and about half of that for mid- and on-peak from 2006 to their highest point in 2016. Comparatively, inflation in Ontario in this same period was only around 18%. There are a multitude of reasons for this increase, but it boils down to two major causes: the desperate need for electricity infrastructure upgrades, and provincial policy decisions. Roughly 60% of electricity generated in Ontario is from nuclear sources, namely, an aging set of nuclear generators that are nearing the end of their useful lives, and thus in need of continued costly upgrades. Ontario’s recent energy policies, like phasing out coal in favour of more sustainable sources of power, undertaking large-scale electricity generation projects, heavily subsidizing renewable energy projects, and increasing the installed capacity for natural gas-generated electricity to supplement nuclear generation, have all contributed to cost as well.

Electricity systems are composed of three stages: electricity generation, distribution, and transmission. Electricity generation itself accounts for ⅔ of Ontario’s electricity costs. Many of the new electricity generation projects (particularly the renewable energy contracts) have been financed with 20 year contracts between private companies and the provincial government. The lengthy nature of these contracts means there is little flexibility. Electricity rates have decreased from 2016, when they were at their highest, due to the introduction of the Ontario Fair Hydro Plan in 2017. The Ontario Fair Hydro Plan introduced an electricity rate reduction of an average of 31% off monthly bills for homeowners, farms and small to medium sized businesses.

The Ontario Fair Hydro Plan is made possible by spreading out some of the fixed costs of electricity into the future. Electricity costs have two parts: the short-term variable costs that change with how much electricity is used, and the long-term fixed costs, that captures  infrastructure and conservation costs, referred to as “Global Adjustment” on electricity bills. Under the Fair Hydro Plan, a portion of the Global Adjustment is being refinanced and will be recovered from ratepayers over a longer period of time, thus offering immediate rate relief but pushing some costs onto future generations. Costs of electricity generation should be born by both current generations and future generations, as it is unfair for current ratepayers to fund a disproportionate amount of the investments in electricity infrastructure that will provide benefits for many years. The refinancing of the Global Adjustment is a necessary step to ensure intergenerational equity.

Additionally, as part of the Ontario government’s Climate Change Action Plan, the Green Energy and Green Economy Act (GEGEA) was passed in 2009 to encourage investment and development in the green energy sector and to create thousands of green jobs. As noted by Peter Fraser in the book Energy Law and Policy, the implementation of the feed-in tariff (FIT) program portion of GEGEA was not a success. The FIT program allowed homeowners, businesses and developers to sell renewable energy at a guaranteed fixed rate for a fixed term. It caused energy bills to rise higher than projected, and three-fifths of the jobs created were only short-term contracts. The government also paid FIT producers not to generate electricity. The problem with the way Ontario used the GEGEA was that the market’s demand and supply conditions were ignored. There was little idea of what constituted sufficient green energy generation for electricity demand in Ontario, so the success of the program was measured not by efficiency but by monetary investment and the sheer number of jobs created by this sector. Not to mention, to encourage investment, the financial return on renewable power generation must be high, which can only be paid for by consumers paying higher electricity prices. Ultimately, the GEGEA did not “create a culture of conservation,” as intended, but rather it created an incentive for private companies to capitalize on government subsidization.

If the Ontario government had a clearer picture of each project’s capacity to supply electricity and the demand for electricity in Ontario, they could have avoided the over-production of electricity that occurred. Investment in renewable energy infrastructure is critical to developing the green economy, and although it also leads to higher electricity prices for consumers, it is necessary. Upgrading the electricity system so it runs more efficiently, effectively and sustainably should have been incorporated into the GEGEA.

Today, installed electricity generation capacity in Ontario is almost double of what is needed on an average day. This over capacity occurred as a result of both the FIT projects and an increased installed capacity for natural gas-generated electricity that supplement the nuclear reactors when they are not available.

The challenge that remains is balancing the needs of the present generation with those of the future. It is not fair for electricity ratepayers today to absorb all the costs of infrastructure upgrade when they are not the only ones that benefit from it. However, it is also not equitable to push upgrade costs onto future generations. Ontario also can’t afford not to upgrade electricity infrastructure that will be needed for a sustainable and healthy future. Between these competing pressures, the Ontario government faces the challenge of balancing affordability, intergenerational equity, and sustainability concerns.

Sarah Edmunds is a master’s student in the Public Policy and Administration program at Ryerson University. She graduated with a Bachelor of Environmental Studies and Diploma in Environmental Assessment from the University of Waterloo and has worked in environmental compliance in both the public and private sector. She is currently completing a major research paper on adapting Toronto’s Green Roof Bylaw to support urban agriculture and a sustainable local food system in Toronto. Her academic interests include energy and environmental policy, waste diversion, sustainable food systems and environmental assessment.