March 13, 2003
February appears to have racked up the highest electricity prices for any month since Ontario’s electricity market opened last May – prices that could trigger more subsidies to householders and small businesses.
As the high prices go on the books, the provincial government is faced with a decision: whether to give big businesses the benefit of the subsidized price freeze householders and small businesses enjoy.
But a consultant warns that extending price protection to big businesses could land the province with a subsidy bill of nearly $1 billion by the end of April.
Precise figures on the average February price haven’t been published yet, but weekly prices show February’s average has probably equalled or exceeded September’s record highs.
September’s prices were sky-high because weather was unusually hot, increasing the demand for air conditioning.
At the same time, some generators shut down for scheduled maintenance on what turned out to be a mistaken expectation that demand would slow.
In September, the weighted average price of electricity was 8.31 cents a kilowatt hour. The weighted average relates prices to demand.
If the price is 20 cents a kilowatt hour, say, during a period of high power use, it counts more heavily in the average than a period when the price was 5 cents a kilowatt hour but power use was low.
February’s weighted average hasn’t been published yet, but the Independent Electricity Market Operator, or IMO, which operates the market, has calculated weighted averages for the weeks ended Feb. 4, 11, 18 and 25.
The arithmetical average for those weeks – which doesn’t allow for weighting – is 8.54 cents a kilowatt hour, which puts February prices in the same range as September’s.
The arrival of the high electricity bills from August and September caused a consumer backlash that panicked the provincial Conservatives.
The government had opened the market to competition on the premise that the open market would reduce prices.
As a result, Premier Ernie Eves froze the price of power at 4.3 cents a kilowatt hour for householders and small businesses, who make up roughly 47 per cent of Ontario’s electricity market.
Ontario’s ministry of energy is now considering whether large businesses should also enjoy a price freeze.
Canadian Manufacturers and Exporters have asked the province to extend the price freeze to large businesses in the short term.
New sources of generation are badly needed, the CME told the province, but until they come on line “CME asks the government to provide the same rate freeze option” enjoyed by residential customers. Other business groups are said to have delivered mixed messages in private consultations with the ministry.
Extending the price freeze to large businesses would be an expensive proposition, according to an analysis by Bruce Sharp of Aegent Energy Advisors.
Sharp calculates it will cost the government $450 million to freeze the electricity price at 4.3 cents a kilowatt hour for consumers and small business to the end of April. That’s the cost of the making up the difference between the market price of power – currently averaging about 6 cents a kilowatt hour – and the frozen price of 4.3 cents.
Part of the gap is covered by a rebate from Ontario Power Generation, but Sharp figures the rebate comes up $450 million short under the freeze.
Extending the freeze to big industrial customers, Sharp figures, will cost an additional $530 million, for a total of $980 million in subsidies for the full year since the electricity market opened last May 1.
Tom Adams of Energy Probe calls Sharp’s analysis “very credible.” He notes that industrial customers have a case for arguing their prices are being pushed higher by the consumer price freeze. That’s because electricity demand has blossomed with the freeze in place.
Eves blames the high consumption on cold weather, but Adams says consumers have no incentive to conserve since they’re paying a low price. As a result, Ontario’s generating capacity can’t keep up with demand – and when supplies grow tight the prices paid by the industrial sector soar.
So why not freeze prices for industry? Adams notes that the cost of such a subsidy is considerable, for one thing: “The taxpayer has a leaking tire here, and it’s losing pressure quickly.”
Adams also wonders whether energy retailers, whose residential business has been wiped out by the price freeze, may still have a case for seeking compensation from the province.
Sharp said freezing prices for industrial as well as residential customers effectively kills Ontario’s electricity market.
What’s wrong with that?
Sharp says it will discourage private generating companies from building new facilities in the province, which Ontario badly needs. The IMO says Ontario must build or replace 15,000 kilowatts of generating capacity over the next 15 years. That’s about half the province’s current generating capacity.