Ontario’s conservation program another corporate welfare handout

(August 3, 2017) Ontario ratepayers will pay $100 million for a conservation program that experts admit is unnecessary.

While many businesses in Ontario admit that soaring electricity prices have forced them to cut jobs or hold back investment, a small number of companies are using the province’s conservation-at-any-cost policies to pocket $100 million while never actually reducing their power consumption.

The money relates to a two-year program that the province’s electricity system operator, the Independent Electricity System Operator (IESO), has overseen and – at the bequest of conservation mandates coming from Queen’s Park – intends to expand in the coming years. The program is known as Demand Response and allows companies to auction off chunks of time, during periods of high demand, when they would be willing to cut back on their power consumption. These companies “bid” this capacity into the Demand Response auction to determine how much they would have to be paid to offer this service and, in theory, replace the need to build new power plants.

Fortunately for these companies – and unfortunately for electricity consumers across the province – Ontario’s massive surplus of power, means that, in reality, there’s little-to-no chance that the province will find itself in a situation where it’s so starved for power that companies would have to temporarily shut up shop, turn down the lights or cut their air conditioners. The companies that have been encouraged to participate in the auction get paid a fee for a service that the province’s energy experts know they’ll never have to provide.

A group of experts at the Ontario Energy Board (OEB) that investigates and reports on activities in the province’s electricity market – and provides a series of recommendations to experts and elected officials running the grid – recently noted that payments made to companies as part of the Demand Response auctions were “unnecessary and inefficient.” The experts pointed out that Ontario is “flush with supply” and, even with a major uptick in electricity demand, has no need to build new capacity. They concluded that any capacity procured through the Demand Response auctions simply “is not needed” and will cost ratepayers as much as $100 million.

Even IESO, the agency responsible for the Demand Response auctions, admits that the last two years of auctions – and the increase in the program that bureaucrats have promised over the next three years – are little more than a “learning opportunity.” Experts at the OEB note that this learning opportunity “comes at a cost” for ratepayers, yet will provide “little benefit” to the overall electricity grid and won’t reduce hydro bills, as most conservation programs promise.

IESO’s own forecasts show that the need for new capacity – or any aggressive conservation programs – is non-existent well into the next decade. Even under the most aggressive demand outlooks laid out in its most recent planning forecast – involving a massive and unlikely move towards electric vehicles and a big switch from natural gas to electric heating, among other predictions – the province’s current generation capacity can meet summer peak demand forecasts out to 2025 and winter peak demand forecasts out to 2023.

Under a more realistic scenario – and one that IESO notes is its “status quo” forecast – the province’s generation capacity can meet peak demand requirements out to 2035 in both the winter and summer, with just a very minor shortfall in one year (2025). Ultimately, the agency concluded that Ontario has “sufficient resources to meet demand requirements generally over the next decade across all outlooks.”

Nonetheless, IESO is planning to actually increase the size of its Demand Response auctions in the coming years, even though the current level of “conservation capacity” that ratepayers are paying for is unnecessary and will never be realized. Next year, IESO is planning to nearly double the size of the Demand Response auction. It’s doing so, as highlighted by the experts at the OEB, simply to hit “administratively determined” targets, not ones based on a forecast for a “reasonable expectation” of “needs.”

Prior to the last two years of Demand Response auctions, the IESO – following direction from the province – signed numerous contracts with a variety of large power consumers where it would pay a fee if they promised to reduce consumption during peak periods (similar to the Demand Response auctions, except these were bilateral contracts). Many of those contracts are now expiring. Rather than admit that the province’s decade-long policy of procuring new generation capacity – even when it was clear it wasn’t needed – has created a surplus and put its Demand Response programs on hold, IESO is simply rolling the amounts embedded into those contracts into its upcoming auctions, thereby expanding it, knowing that it’s not needed based on its own forecasts.

Worse still for the province’s residential customers and small business owners is that the cost of conservation programs are paid for through the Global Adjustment, which is a charge applied each month to the generation portion of hydro bills. Due to a provincial policy introduced in 2011, small customers now pay a greater share of Global Adjustment costs than large consumers, meaning the cost of the Demand Response auctions, among other conservations programs, are paid disproportionately by small customers, while large customers remain their biggest beneficiary.

Brady Yauch is an economist and Executive Director of the Consumer Policy Institute (CPI). You can reach Brady by email at: bradyyauch (at) consumerpolicyinstitute.org or by phone at (416) 964-9223 ext 236

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