TVO’s Dim Power Rate Analysis

TVO’s Daniel Kitts has presented a recent bromide claiming public concern with Ontario power rates is unjustified. His arguments range from excusably ignorant to inexcusable.

Kitts concludes that Ontario power rates are moderate by comparison with other jurisdictions, that general inflation is a key driver for rates, that nuclear power is the major driver of the rest of the increases over the last many years, and that dealing with aging assets covers most of the remainder. He presents the cost of renewable energy as a minor item.

The rate comparison Kitts relies upon, produced annually by Hydro Quebec, has the appearance of solidity and is commonly used for the purpose he puts it to. To my knowledge thorough analysis of the Hydro Quebec study’s limitations are not publicly available. While Hydro Quebec’s rate survey is a reliable source of information for average prices in most provinces, it does not provide a reliable guide to the average rates in either Ontario or Alberta. For Ontario, the Hydro Quebec study ignores the impact of the Ontario Clean Energy Benefit which transfers 10% of residential bills to the provincial deficit. The only industrial rates Hydro Quebec considers are distribution-connected consumers, which are not typical for the largest industrials in Ontario or Alberta. Notice also that Hydro Quebec’s survey collects no data on the rates paid by rural and northern consumers in Ontario. This Manitoba Hydro is a little better, but still ignores the miserable experience of Hydro One consumers who pay much higher rates than urban consumers and constitute almost one quarter of residential consumption.

A major weakness of the Hydro Quebec study is that it presents U.S. rates very poorly. Unfortunately, this the main context for its inclusion in the Kitts report. Hydro Quebec cherry picks a handful of U.S. cities with the highest rates. Apparently, the purpose of the survey is to make Hydro Quebec look good. Much better data is available. Unlike in Canada, accurate state-by-state average rate data by customer class is readily available from the US EIA. That analysis shows U.S. rates far lower than Hydro Quebec reports.

Kitts relies on U of T professor Don Dewees to compare the cost of power with inflation. Dewees reports that from 2000-2010 Ontario power rates rose at twice the rate of inflation. Kitts, who has been a journalist with TVO since 1999, might have noticed that this period included two extended periods of rate freezes — first from from 2000 until May of 2002 and then a government-imposed rate freeze from November 2002 until 2004. It is particularly noninformative to be measuring the rate of change of power rates during rate freeze periods and prior to the rate impacts of the great green crusade that has driven official policy since 2003 but didn’t start hitting rates until 2005.

The main elements of the Kitts review are pure junk, peddled by green charlatans Mark Winfield and Jack Gibbons. Both Winfield and Gibbons know their pseudoeconomics about the factors driving Ontario rates are untruthful. They are both taking advantage of the fog of confusion the government has created around rates to spin their green-is-cheaper tall tales. Their nonsense is refuted by so many readily available sources that it raises a question as to why Kitts reported them without checking their claims or seeking qualified alternative analysis.

Winfield is an Associate Professor at York University’s Faculty of Environmental Studies specializing in energy and environment. Gibbons represents the Ontario Clean Air Alliance (OCAA). OCAA is backed by among others government agencies, gas utilities, electric utilities, and renewable energy developers feeding off the FIT program. Winfield and Gibbons both knowingly rely on misinformation.

Kitts provides Gibbons with a platform to spew his usual line that nuclear is causing Ontario’s rate increases. (Here is another example of Gibbons making similar arguments.) While true that of the various fuel types supplying Ontario, nuclear was the largest contributor to the November 2015 increase, that increase was really driven by rising labour costs and its clear from the context of Gibbons remarks that he is not speaking only of the November 2015 increase but of the general trend of rates in recent years. The trick that Gibbons relies on (Greenpeace does it too) is to consider only a slice of the power bill — Global Adjustment — out of context from both the portion of overall supply provided by nuclear and the rest of the commodity portion of the bill. Gibbons knows, but doesn’t tell you, that when the market price drops, as it has in recent years, recovery of an increasing portion of nuclear’s relatively low overall cost shifts from the market price to Global Adjustment.

This chart included in the OEB’s most recent report explaining the November 2015 commodity cost increase demonstrates how Gibbons’ claim about nuclear’s rate impact is exactly backwards.

Chart from OEB Regulated Price Plan, Price Report, November 1, 2015 to October 31, 2016 (Issued October 15, 2015) p. 19

Chart from OEB Regulated Price Plan, Price Report, November 1, 2015 to October 31, 2016 (Issued October 15, 2015) p. 19

This chart accurately documents that nuclear is much bigger portion of Ontario’s supply than its portion of the Global Adjustment. The chart also documents that nuclear is the cheapest component of the different forms of power generation currently on your bill except for historic water power (which dominates the overall supply of water power in Ontario). The average cost of commodity power for household customers during this period will be 10.73 cents/kWh — more than 60% above the cost of nuclear. The future might turn out to be different than the current cost picture but right now, nuclear costs drive down average consumer cost — the opposite of what Gibbons and Kitts would have you believe.

Here and here are a couple of old posts from Scott Luft that Kitts might have used to check the junk claim that nuclear is driving up your rates.

Kitts presents Gibbons acknowledging that wind and solar driving up rates but ”but not as much as many people seem to think”. In reality, the cost of new renewable power is much worse than it first appears. The direct payments to various types of generation, reported in the chart from the OEB above, show that the wind and solar generators get paid about 2 and 6 times respectively more than their proportion of the supply. However, notice also that the OEB chart suggests that wind power is cheaper than gas-fired power. What the chart doesn’t show are the financial interactions between types of generators — particularly the increase in the unit cost of gas power caused by having to back up fickle wind and solar (the apparently poor showing of gas is also influenced by the role gas plays in balancing fluctuating demand). This analysis conducted with my coauthor Ross McKitrick, quantified the cost impacts of various types of new generation added to the Ontario grid by examining the impact on consumers rather than payments to the generators. We found that cost impacts of wind power on consumers are more than 3 times the payments to wind producers. We also found that new additions of hydro-electric power have been almost as frightful a deal as wind for consumers.

Central to Winfield’s rate analysis is his claim that “Places whose systems are essentially 100 per cent hydroelectric, it’s fortunate for them.” Winfield’s implication is that all water power is cheap, which is consistent with his junk propaganda that Ontario can have a successful economy based almost exclusively on renewable electricity. On the contrary, the cost of all major new water power projects added to grid supply in Canada in the last decade — not just the Ontario experience documented by McKitrick and I — has been a raw deal for consumers. For example, in Newfoundland & Labrador the addition of new hydro power, which is replacing oil-fired power and will take the province to the green dream of being nearly fossil fuel free, is going to increase rates more than 50% overnight, assuming no further calamities befall the project, as documented in this excellent reporting from Ed Hollett. (Newfoundlanders will then be almost as badly off as Hydro One customers.) Fortunately for Ontario consumers, the amount of new hydro capacity in recent years has been relatively minor. Across Canada, all of the good hydro locations were exploited long ago.

Another of Winfield’s excuses for rising rates, which closely matches the PR line the Ontario government and its industry allies have pumped for years, relies on what is at best a half truth. He repeats the official “aging assets” claim, saying that “we reached a point where those assets began to reach end-of-life and had to be replaced.” What he leaves out is the vast carelessness of the asset replacement program in the last 12 years. Examples abound. As the Auditor General found in 2014, the replacement of analog meter with smart meters, which began with a $1 billion budget but no business plan or monitoring, ended up costing $2 billion. The Feed-In Tariff (FIT) program paid government-preferred generators up to 80 cents/kWh for power with a market value of about 2 cents/kWh. The government has done extra wasteful sole source deals with the likes of Samsung. By buying too much of the wrong kind of generation at the wrong times, the Ontario government saddled Ontario consumers funding billions of dollars of losses giving away power to neighbouring utilities. Vast amounts of costly but underutilized transmission infrastructure has been built to bring low productivity wind and solar onto the grid. Some of the “aging infrastructure” replacement programs driving up your rates have been vandalism.

Gibbons has spent his career of almost 40 years advocating one brand of green snake oil after another. He has been a champion of conservation subsidies as a free lunch, tried for years to skew gas and electricity rates away from marginal cost pricing, lead the campaign to kill low cost coal generation, expounded the claim that switching to 100% renewables is doable, and demanded wasteful hydro-electric projects like the nearly useless $1.5 billion Beck third tunnel at Niagara. He has earned a standing ovation from Al Gore, but he is no defender of ratepayers. The common thread connecting all of these causes is that every one is increasing, or would if implemented increase, overall energy rates.

Notwithstanding all of this, Kitts presents Gibbons as the the ratepayer’s defender. The latest brand of green snake oil Gibbons is flogging is his theory that Hydro Quebec will save Ontario from itself.

Gibbons and Winfield have been leading players in the transition of Ontario’s power system toward parasitism. Kitts might check their record.

14 Comments

  1. Tom, You have correctly identified the lazy journalism (with only a few exceptions) that now seems to permeate articles related to the Ontario electricity debacle. Gibbons and Winfield will now wave this exceptionally poorly researched article around and claim it as gospel! Perhaps when you are beholden to taxpayers (TVO) for your well being you are reluctant to bite the hand that feeds you. In those cases you should maintain your silence.

  2. Nice (though maybe not so kind) article. You note the RPA of 10.728 from the RPP Price Report, and the need for better data. The EIA reports comparable data, as you probably know, by State (http://www.eia.gov/electricity/state/). Here are the numbers for Ontario’s neighbours:

    Average Retail Electricity Price (U.S. EIA, US c/kWh):
    Illinois – 8.40
    Indiana – 8.29
    Ohio – 9.12
    Michigan – 10.98
    Pennsylvania – 9.91
    Wisconsin – 10.30

    I did not include New York (15.2 c/kWh) because rates are locationally-based within the state and the average is skewed upwards by NYC. It is difficult to know whether the determination of these rates is identical to that of the RPA, but they do seem to be very similar. If you know something I don’t, do tell. Given current currency exchange rates, it does not appear that our electricity rates differ much from our neighbours’ rates.

    The future may change this situation as we seem to have a penchant in Ontario for contracting new supply of all sorts while our demand continues to decline and while achievable DSM remains cheaper than new supply.

    • Rick, you are linking to summary totals for 2013 that include all customer classes. The TVO article is discussing residential pricing.
      The EIA data is all charges in, divided by metered usage – I see Toronto Hydro’s sample bill stills shows a gross-up of usage on their billing (long, long after Measurement Canada directed billing by the meter reading).
      You can use filtering on the EIA electricity data browser for comparison to residential consumers (http://www.eia.gov/electricity/data/browser/). For April 2015 (HQ study says as of April 1):
      Illinois 13.38
      Indiana – 11.89
      Ohio – 12.57
      Michigan – 14.07
      Pennsylvania – 13.53
      Wisconsin – 14.51
      Those swing from month to month, but the residential figure is the number that would match up to the HQ’s 16.4 cents/kWh for Toronto. The 11 percent bump on January 1st, when the OCEB is retired, will likely have Ontario number 1.

      • A year ago I calculated Ottawa all-in at just under 20 cents, and cottage-country Bracebridge (Hydro One as the utility) at just under 30.

        So we have urban prices (TO and Ottawa) trending to pretty high (enough to make us an easy Number One compared with neighbouring U.S. states), and rural (Muskoka) prices approaching obscenely high.

        Isn’t that sort of totally opposite to how power prices paid for rural electrification? At today’s price, Muskoka — poortown rural Ontario — would never get electrified.

        Don’t worry, they won’t freeze in the dark — they’ll use wood, collected and refined with their own labour, valued at less than minimum-wage.

      • Thanks, Scott.

        My attempt was to try to find the comparable prices to the Average RPP Price (i.e. the RPA) in the neighbouring states, but this does not seem to exist exactly. You are correct that I should not use the blended rates for all rate classes in those neighbouring states, but eligibility for RPP includes some small commercial customers and not only residential. However, if the comparable State rates included those RPP-eligible commercial customers, it appears that this would slightly lower the rates in these states, so I will ignore this. (though am open to suggestions).

        I am not sure about using April 2015 specifically as you propose since this is only a single month in time, unless that monthly price has been seasonally-adjusted (I assume it has not been). Better to use the most recent complete year, it seems to me.

        So, for 2014, for residential, we have in US c/kWh:
        Illinois 11.41
        Indiana – 11.25
        Ohio – 12.38
        Michigan – 14.50
        Pennsylvania – 13.34
        Wisconsin – 13.89

        To Tom’s point, I am not able to confirm on the EIA site the precise definition of “retail price”, but this definition is provided: “Retail sales (electric): Sales made directly to the customer that consumes the energy product.” This implies that the energy product is not the entirety of the cost, so I will add to the RPA, based on the rates here in Hamilton (https://www.horizonutilities.com/myHome/ElectricityRates/Pages/SmartMeter.aspx) and the RPP Manual, the following per kWh:

        DRC: 0.70
        RC: 0.57
        DC: 1.486
        TCC: 0.59
        TCN: 0.80

        Leading to a rate of 14.874 c/kWh in Canadian dollars. This number would be slightly lower in 2014, since the RPA was lower in 2014, so the temporal comparison is not precise. It is also not in US dollars. I could convert using the average exchange rate from last year (~1.1) or the current rate (~1.3). Using the former, gives an Ontario residential rate of 13.52 c/kWh and using the latter 11.44 c/kWh in US dollars.

        I did not account for fixed (administrative) charges in the Ontario rates, as it is not clear to me that these are included in the US rates. I also excluded the HST, since taxation is arbitrary between jurisdictions. The RPP does not include the OCEB, so this is irrelevant.

        So, to summarize, I still do not see a meaningful difference in residential rates between Ontario and neighbouring States. See my comment below to Parker regarding industrial rates.

    • Rick, Is there a reason why you left out the DRC, WMSC, DX, TX, and line loss adjustment from the Ontario rates? The equivalent categories to these cost items are included in the U.S. rates you quote.

      • Thanks Scott and Tom. I am going to stick with the Hamilton numbers. Toronto’s higher rates result from management (mismanagement?) at Toronto Hydro. With the clarification from Scott on the inclusion of all utility and government charges, fees, and taxes in the U.S. rates, I have done the for the Ontario rates, adding in FDC, loss adjustment (i.e. 1.0379%), HST and subtracting OCEB, so as to compare apples to apples.

        So, for 2014, for residential rates, we have as before in US c/kWh:
        Illinois – 11.41
        Indiana – 11.25
        Ohio – 12.38
        Pennsylvania – 13.34
        Wisconsin – 13.89
        Michigan – 14.50

        And for November 1, 2015 for Hamilton, Ontario we have in $C c/kWh:
        RPA = 10.728
        FDC – $17.32/month = 2.165 (based on 800 kWh/month)
        VDC (RPP) – 1.486*1.0379 = 1.542
        TCC – 0.59*1.0379 = 0.612
        TCN – 0.80*1.0379 = 0.830
        RC – 0.57*1.0379 = 0.592
        DRC = 0.70
        RC (admin) = $0.25/month = 0.031 (based on 800 kWh/month)
        Sub-total = 17.20
        HST = 2.236
        Pre-OCEB Total = 19.436 c/kWh in $C
        OCEB = (1.944)
        TOTAL ($C) = 17.49 c/kWh
        TOTAL ($US) = 14.22 (using 1.23 average exchange rate for 2015)

        So, we are still below Michigan 2014 (at least here in Hamilton) but above all of the other states on residential rates.

        In January 2016, we will lose the DRC and the OCEB, but gain the OESP. I have estimated $1/month increase due to OESP. I understand that the variable distribution charge will also begin a shift to a fully fixed distribution charge but that this is expected to be cost neutral, so I have not bothered to recalculate that.

        2015 Sub-total = 17.20
        DRC = (0.70)
        OESP = $1.00/month = 0.125 (based on 800 kWh/month)
        2016 Sub-total = 16.625
        HST = 2.161
        TOTAL ($C) = 18.79
        TOTAL ($US) = 15.27 (using 1.23 average exchange rate for 2015)

        We will have to wait for the final rates for 2015 for the US states, but it does appear that Ontario residential rates are on the way to being tops in the region.

  3. Nice work. “Winfield and Gibbons both knowingly rely on misinformation.” That’s a polite way to put it.

    It is always annoying to read these two charlatans cheering policies that have deliberately made our cleanest energy, electricity, by far the most expensive.

    But it is downright depressing that anybody outside of the Toronto Star would actually take them seriously.

  4. Rick, Its not just residential rates that are lower in neighbouring jurisdictions. This from this article you will see Buffalo offers cheap industrial rates in comparison to Ontario:
    http://www.technologyreview.com/review/540226/paying-for-solar-power/

    “As one of the cloudiest cities in the United States, Buffalo is not a particularly attractive area for solar power. Rather, SolarCity is making its manufacturing debut there because of the state’s generous incentives and the city’s industrial infrastructure and experience. Ironically, Buffalo offers another huge benefit: the electricity rate for manufacturers averages just 4.79 cents per kilowatt-hour, which is possible because of cheap hydroelectric power generated from Niagara Falls.”

    • Yes, I am aware of industrial rate differences. The problem is that each jurisdiction cross-subsidizes the rate classes in different ways. The HQ report attempts to get around this by providing findings for different rate classes, but this does not provide a global picture, and the parsing of rate classes differs between jurisdictions, so it is open to error. I was trying to find a blended average rate per kWh delivered, which is provided by the EIA for each State. The RPA is not that statistic for Ontario, I realize, but if you have such a statistic, do tell.

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