Caterpillar’s Decision to Move Production Out of Ontario: Notes on Relative Electricity Costs and Cost Trends

Analysis of reasons behind the announcement last week that heavy equipment maker Caterpillar Inc. would close its Electro-Motive plant in London, Ont., a month after it locked out about 450 workers, has focused on labour cost. Electricity costs might also be a factor influencing Caterpillar’s decision.

Indiana’s industrial rates appear to be at most 65% of Ontario’s.

The most recent price data for industrial rates in Indiana available from the U.S. Energy Information Administration (EIA) indicate that rates in 2010 were 5.87 cents/kWh. Interesting, Indiana’s 2010 industrial rates were almost identical to inflation-adjusted industrial power rates in 1990.

Check: http://www.eia.gov/electricity/state/indiana/ Then go to Table #8.
The EIA’s Annual Energy Outlook 2012 Early Release forecasts significant declines in inflation-adjusted industrial rates in Indiana’s neighbourhood over the next several years.
By contrast, Ontario’s industrial rates are much higher and rising. Figure 14 in the Ontario government’s Long Term Energy Plan (LTEP) indicates that 2010 rates were 9 cents/kWh and expected to rise at a rate of about 2% per year over the next several years before taking into account inflation. I commented here that the LTEP price forecasts did not reflect the new Global Adjustment cost shifting policies of the Ontario government that appear likely to have increased rates paid by Caterpillar. I also noted that the Ontario government in now developing much more high cost wind and solar generation than was forecast in the LTEP.

 

11 Comments

  1. I have written to the Premier a number of times about the plans for increased number of wind generators. The only feedback, I had ever recieved was that “…the province is on track to shutdown coal”. If we were to connect the dots, then 6300MW of coal to be replaced with wind turbines at approximately 25% capacity factor and 2.3MW typical machines, and I used the approximate land area for the Fairview (Stayner) project at the time; I estimated by extrapolation this would require approximately 10,000 wind turbines on a chunck of land approximately 150km by 150km in area, ie. almost all of southern Ontario. I then wrote several more letters challenging the premier and the energy minister on the viability of such a plan. They were did not respond to this point. Eric

  2. I am from vancouver and i wanted to say that it is no secret that Caterpillar has a deep hatred for unions. In Indiana the anti worker law called:(Right to Work)was passed.The workers there now are no better than slaves.Thats the kind of a place where Caterpillar likes to be located.They can pay their workers slave wages and get away with it.The workers in canada and the usa needs to be united so that these atrocities against the working class won’t happen.

    • Stan,
      I am not attempting to defend Caterpillar, only to understand some of the factors the firm might be considering in moving around production. Although it is a bit of a tangent from energy issues, there may also be much larger global competitiveness issues driving Caterpillar. Because of work I do outside of the energy sector, I am aware of some costs for some types of heavy industrial equipment. Chinese manufacturers of some types of heavy lifting equipment are now marketing their wares in North American at prices far, far below the historical prices of their North American competitors. Cat doesn’t compete directly in these markets but the signal is loud and clear.
      Tom

  3. Tom, I notice from the link you included that most of Indiana’s electricity is generated with coal, which puts out 385 thousand metric tons of sulphur dioxide per year. I wonder what would it cost for Indiana to replace that coal to generate electricity there?

    • David,
      Replacing coal in Indiana has already been an interesting question. The contribution of coal has declined as a portion of the fuel mix from 93% in 1990 to 69% in 2010. That would have been a tough choice, because for almost all of this period, the cost of coal power would have been a lot cheaper than the alternatives. Customers had to pay more than they would have to cut coal. The fact that electricity prices in 2010 were about equal to prices in 1990 while the use of coal as a fraction of supply dropped by 26% suggests massive efficiency gains. The price stability experience also suggests that they were careful to buy the better deals for coal-free power and turned up their noses are the pricier options.
      Tom

    • Scott is right, and Indiana is do it. Although Indiana’s coal usage for power increased by 17% from 1990 until 2010, SOX emissions dropped by 70% and NOX emissions by 77%.

  4. … and if Indiana did replace coal, it’d be with natural gas. Who knows, Ontario will have so much surplus power due to renewables, surplus baseload generation, etc. that Indiana could arrange to wheel a block of export power from Ontario.

    Dalton’s Ontario may lose money on exports but it’s gonna make it up on volume !

  5. What about the other pollutants created during the ENTIRE coal production and consumption process?
    Whilst reducing emissions from scrubbing is laudible, a wholistic approach is needed when looking at green v other energies.

    from eHow: Coal is a leading contributor to acid rain and global warming.

    Pollution from coal falls into two basic categories: pollutants released during the mining process, and pollutants resulting from the burning of coal. Mining releases sulfuric acid, methane, and other hazardous chemicals. The combustion of coal releases carbon dioxide, sulfur dioxide, nitrogen oxides, as well as other chemicals such as hydrogen cyanide. Coal waste products, such as boiler slag, fly ash and bottom ash, contain poisonous heavy metals and radioactive isotopes such as uranium.

    Sulfuric Acid

    Mine tailings, which are the leftover debris of the mining process, contain pyrite, also known as iron sulfide, or fool’s gold. When exposed to air and rainwater, sulfuric acid is formed, acidifying the soil and seriously damaging nearby aquatic ecosystems. Mine tailings can continue to produce acid years after a mine shuts down. Sulfuric acid is also produced indirectly by the burning of coal. Combustion releases sulfur dioxide, which reacts with oxygen in the air to form sulfur trioxide, which in turn reacts with water molecules in the air to form sulfuric acid, which becomes acid rain. Acid rain damages soil fertility, kills plants, lowers the pH of ponds and rivers to the point of killing fish, and can erode buildings and monuments. Scrubbing systems in coal plants can reduce the amount of sulfur dioxide released in combustion.

    Carbon Dioxide

    Coal is the single largest contributor to human carbon dioxide production. There is no practical way to prevent the release of carbon dioxide during coal burning. CO2 is not directly harmful to human health, but it is the most important greenhouse gas and the leading cause of global warming. Carbon dioxide released by coal plants also contributes to acid rain by reacting with atmospheric water to form carbonic acid.

    Nitrogen oxides

    Nitrogen oxides, including NO and NO2, are produced by coal burning. They also contribute to acid rain by reacting with water to form nitric acid. Nitrogen oxides are associated with emphysema, bronchitis, and heart disease. Nitrogen oxides are also a precursor to other hazardous pollutants. In the presence of sunlight, they combine with certain other pollutants to form ozone in the lower atmosphere, which causes smog and respiratory problems. Nitrogen oxides in the upper atmosphere actually destroy ozone and contribute to the destruction of the ozone layer. In other words, nitrogen oxides produce ozone where it is harmful and destroy ozone where it is beneficial.

    Mercury

    Coal burning also releases small amounts of mercury, a poisonous metal. Mercury concentrations in animals increase higher up the food chain, as top predators eat prey contaminated with mercury. Humans can be exposed to this mercury by eating contaminated fish.

    Other heavy metals

    Non-combustible waste products of coal, such as fly ash and bottom ash, contain numerous hazardous chemicals. These include arsenic, mercury, cadmium, radium, lead, and even small amounts of radioactive elements such as uranium and thorium. These materials are generally stored in hazardous waste facilities to avoid contaminating the environment, but several accidents and spills that released pollutants have occurred.

    Methane

    Methane is released during the process of coal mining. According to the EPA, methane has 21 times the global warming potential of carbon dioxide over a 100 year period, and an even greater effect in the short term. This is because methane traps infrared radiation and heat more efficiently than carbon dioxide, but it does not remain in the atmosphere for as long.

    Read more: Pollutants Associated With Coal | eHow.com http://www.ehow.com/list_7422243_pollutants-associated-coal.html#ixzz1ljLFMYUk

    and from others…

    The Paradox of Solar Adoption in the United States
    It’s messy. It’s inefficient. It’s working.

    The United States is forecast to be the second-largest global market for solar in 20121) despite the absence of a broad-based national climate change policy. Efforts in the U.S. to put a price on carbon and establish national mandates for renewable energy as a percentage of total energy produced have fallen victim to partisan politics and the 2010 election cycle, and it is highly unlikely that significant climate change legislation will pass this year. And yet, solar adoption continues to climb, with some estimating that the U.S. solar industry will grow at an average rate of 30% a year through 2014.2) This seeming paradox is explained by a patchwork of government actions that fill the void left by national inaction: led by state renewable portfolio standards and joined by regional and local solar initiatives including rebates and grants, federal tax incentives and stimulus-related programs, and U.S. Department of Energy loans and loan guarantees. The net impact of this patchwork quilt of policies has brought new signs of life to the financing of U.S. solar, a field that has been nearly moribund for the last two years. While the lack of action in the U.S. Congress may disappoint parts of the American body politic, a growing array of policymakers and industry participants are busy flexing their solar muscles. This momentum, in turn, is expanding into commercial solar finance.
    By Nancy E. Pfund, Sarah M. Ham

  6. Peter Gunn: Maybe the US will elect Rosseanne Barr as President and all your wishes will be granted eh?

    http://www.huffingtonpost.com/2012/02/07/roseanne-barr-for-president-california-ballot_n_1259590.html

    In case you haven’t noticed solar stocks have taken a beating so perhaps your interpertation of what is happening is not what the rest of the world anticipates will happen. http://www.infowars.com/solar-stocks-plunge-as-germany-quickens-subsidy-cuts/ Without huge subsidies wind and solar would never have been more then a passing fancy!

    Look to the future, not the past!

  7. The argument that electricity prices may have been a factor is this decision needs some numbers behind it. One thing you’d probably like to know is the proprotional cost of energy among the total costs of this factory, or compared to the value of the product produced. I don’t know, but I guess they are not large, but higher than in many industries.

    I think the high Canadian dollar and cheaper US labour, coupled with a high future risk of lack of demand would be the main financial considerations, and the differences in energy costs, proportional to differences in total costs, between Ontario and Indiana would be small.

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