(October 6, 2019) How was Michigan able to maintain rate increases below inflation while Ontario’s increases were well above? As it turns out, Michigan is a large purchaser of Ontario’s surplus electricity generation.

By Parker Gallant (a former banker who didn’t like what he was seeing in his Ontario electricity bills).

For the original version of this posting, see here.

For more analysis by Parker Gallant, check out his blog here:
https://parkergallantenergyperspectivesblog.wordpress.com/

A recent article in the Toronto Sun newspaper by Ben Eisen, a senior fellow with the Fraser Institute’s Ontario Prosperity Initiative, compared Michigan State’s GDP growth and private-sector employment averages with Ontario since 2011.  Mr. Eisen also looked closer at the latter and zeroed in on the manufacturing sector.

What he found was Michigan’s “real GDP growth (per person)” was “1.7% compared to Ontario’s 1.2%.” and their “private-sector employment has averaged 1.9% annual growth, significantly higher than Ontario’s 1.4%.”

In respect to the manufacturing sector he noted; “In 2017, there were 47,000 more manufacturing jobs in Michigan than in 2007, before the recession hit. In Ontario, we shed 170,000 manufacturing jobs during the same period.”  The latter is somewhat shocking and disappointing but during that time, one of the major issues why the manufacturing sector in Ontario shed jobs was due to the cost of electricity skyrocketing, mainly due to the implementation of the Green Energy and Green Economy Act (GEA).

With that in mind investigating the “all-in” cost of electricity to Michigan in May 2011 disclosed their average price to “commercial” clients was 10.61 cents/kWh (kilowatt hour) and in May 2017 it had increased to 11.1 cents/kWh for an increase of 4.6% over 6 years.  Ontario’s rates (electricity only-exclusive of delivery costs) over the same period increased by an average of 4.7 cents/kWh or 64% jumping from an average of 7.35 cents/kWh to 12.05 cents/kWh in those same 6 years!

The question becomes how was Michigan able to maintain rate increases below inflation while Ontario’s increases were well above.  As it turns out Michigan is a large purchaser of Ontario’s surplus generation and we practically gave it away and continue to do so.

Due to the design of the GEA it distorted the pricing mechanism within the electricity system in the province. The bureaucrats at the OEB (Ontario Energy Board) and IESO (Independent Electricity System Operator) wound up creating a hybrid pricing system with two parts.  Those parts are the GA (global adjustment) and the HOEP (hourly Ontario electricity price). The latter is a market driven price and the former a means to pay private and publicly contracted generators their contract per/kWh (kilowatt hour) price.  To clarify:  It the contracted amount is 13.5 cents/kWh for wind but the HOEP sells off power for say 2.5 cents/kWh the difference of 11 cents/kWh goes into the GA pot.  The latter is the full responsibility of Ontario’s ratepayers.

Michigan has been an aggressive buyer of our surplus generation at very cheap HOEP prices.  If we examine the six years starting in 2012 through to 2017 we note they purchased 50.908 TWh (terawatt hours) based on IESO reports.  In total Michigan paid approximately $1,250 million using the average HOEP price reported by IESO.  If one calculates the cost per kilowatt hour Michigan paid for those almost; 51 TWh, it comes to 2.465 cents/kWh.

Looking at the other side of the equation those 50.908 TWh using the average GA at the end of each of the six years reported by IESO, created a GA total of over $3.8 billion dollars.   The $3.8 billion was all paid for by Ontario ratepayers.  If we add in the costs for the 2018 sales of 9.07 TWh to Michigan of $760 million we find Ontario ratepayers have subsidized the sale of surplus generation (just to Michigan) by over $4.5 billion in the past seven years!

Premier Ford will hopefully receive a thank you letter from Governor Gretchen Whitmer thanking us for our generosity.

Parker Gallant is a retired banker. Retirement allows Parker to spend time researching the energy sector, applying his banker’s common sense to analyzing the sector’s approach to the production, transmission and distribution of electricity to Ontario’s consumers. Parker is a regular contributor to the Financial Post on matters related to the energy sector. He is a former director of the umbrella organization Energy Probe belongs to (see Energy Probe Research Foundation).

For previous blogs by Parker Gallant, published by Energy Probe: see here.