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Ontario Election 2014: Electricity Promises

June 2014

  • Before the election was called, the Liberals announced ending the residential Debt Retirement Charge starting January 1, 2016. This would coincide with the planned end of the Ontario Clean Energy Benefit. If both changes happen together, the average household will see a net increase of $140 per year in its electricity bill.
  • The Progressive Conservatives have promised to put an end to wind and solar subsidies and estimate the associated savings at $1 billion per year. We estimate the savings would be $500 million per year and this represents a long-term savings of $43 per year on a typical residential bill - one that would not start to be realized until 2018 - 2019.
  • The New Democrats have committed to removing the provincial portion of the HST from electricity bills, starting in 2016. Based on projected residential costs in the Long Term Energy Plan, in 2016 this would save the average household $142 per year.

Ontario’s three major political parties have made energy policy promises part of their election platform. Let’s examine some of these promises through the lens of three electricity policy principles we think are important:

  1. Electricity consumers, not taxpayers, should pay for electricity
  2. Consumers should pay the true cost of the electricity they use
  3. A culture of conservation should be maintained

End residential Debt Retirement Charge starting January 1, 2016 (Liberals)

The Liberal government announced this proposal before the election was called.

The projected end date of the Debt Retirement Charge (DRC) varies from the end of 2017 to the end of 2018. The actual end will largely depend on the size of the dedicated revenue streams from Ontario Power Generation, Hydro One and local distribution companies (payments in lieu of taxes). These streams retire the non-residual stranded debt while the DRC retires the residual stranded debt. In the Ontario government’s latest Long Term Energy Plan (LTEP) issued in December 2013, it was assumed the DRC was in effect through 2018.

Ending the DRC early for residential consumers would coincide with the planned end of the Ontario Clean Energy Benefit (OCEB). The OCEB gives residential customers a rebate of up to 10% of their bill, a rebate essentially funded by taxpayers. According to the LTEP, in 2016 the OCEB would have provided an average residential consumer benefit of $200 per household. Removing the DRC will provide an average, tax-inclusive benefit of about $60 per year, for a period of about three years. Overall, the average household will see a net increase of $140 per year if both changes happen together.

These changes may simply involve exchanging one “bad” for another. By doing away with the OCEB, the government would be ending a subsidy of electricity consumers by taxpayers. Eliminating the DRC on residential consumers at the same time would reflect an attempt to offset the cost impact of the OCEB change. If we assume this residential DRC break is not paid by taxpayers then this would involve shifting DRC costs from residential consumers to the non-residential customers still left paying the DRC. Therefore, a violation of principle #1 ends and principle #2 is violated. Electricity costs would remain artificially lower than they would be otherwise, which would lead to higher consumption and violation of principle #3.

End renewable energy subsidies (Progressive Conservatives)

The Progressive Conservatives have promised to put an end to wind and solar subsidies and estimate the associated savings at $1 billion per year. This promise doesn’t violate any of the key principles. It’s simply a choice about the government’s role in procuring power, or at least about what mix of power it is procuring.

Cancelling or unilaterally altering terms of contracts that are approved or close to being approved could be both costly and damaging to the reputation and business investment climate in Ontario and so we assume this is not what’s intended. We therefore took a look at the current progress of renewable contracts in LTEP projections. We estimate minimums of about 500 MW of wind and 1,100 MW of solar contracts could be avoided if the tap was turned off right now. Using these quantities and making conservative assumptions, total provincial savings would be an estimated $500 million per year. This represents a long-term savings of $43 per year on a typical residential bill, and is one that would not start to be realized until 2018 - 2019.

Remove provincial portion of HST on electricity (New Democrats)

The New Democrats have committed to removing the provincial portion of the HST from electricity bills, starting in 2016. Based on projected residential costs in the LTEP, in 2016 this would save the average household $142 per year.

Some may view this promise as more a tax policy than an energy policy. Ontario faces a significant deficit, and presumably collecting less tax somewhere necessitates collecting more tax somewhere else.

The policy transfers costs from electricity ratepayers to taxpayers by reducing the cost of electricity and requiring greater taxation elsewhere. Principles #1 and #2 are therefore violated and as with the Liberal promise, principle #3 is also violated.

Politicization

The provincial government plays a role in electricity policy in Ontario that it does not play in the natural gas sector or the market for gasoline, for example. When natural gas or gasoline prices rise, politicians may express “concern”, but they don’t rush in to grab the cost levers, mainly because in those markets, they can’t. But they can do so in Ontario’s electricity market, and because they always have done, most Ontarians expect them to. The pressure to do so becomes an irresistible force.

Politicians and their policy advisors, and especially politicians on the hustings, have a very short planning horizon. The imperative is to propose policies that will have an immediate beneficial effect, and therefore curry favour with voters. However, as French philosopher Frederic Bastiat noted in 1850:

“The bad economist pursues a small present good that will be followed by a great evil to come, while the good economist pursues a great good to come, at the risk of a small present evil.”

Any observer of Ontario electricity policy over the last 20 years will see the truth in Bastiat’s observations. All the more reason for voters to consider critically the energy promises of all the parties in the current election.

To learn more about how artificially low electricity prices can hurt conservation, see our November 2010 newsletter article titled, Ontario Clean Energy Benefit: A Short-Term Conservation Killer?