Taxpayer subsidies of electricity in Ontario have risen to staggering levels, says a new report from the C.D. Howe Institute. In “Power Surge: The Causes of (and Solutions to) Ontario’s Electricity Price Rise Since 2006” authors Benjamin Dachis and Joel Balyk find that rate subsidies to offset high electricity prices are not sustainable and do not address the cause of Ontario’s high system costs.
The crux of the problem writes Dachis, is the cost of supply from high-cost energy contracts. With electricity consumption falling well below expected projections when the province signed those contracts, the cost to cover these contracts became the largest component of Ontario’s electricity system.
As system costs have continued to rise, both the present and past Ontario governments have increasingly turned towards taxpayer support to keep total bills down. The most recent Ontario budget estimates show the cost of rate subsidies rising to a staggering $6.5 billion—or nearly 3.5 percent of total government expenditures. “To put this number in context,” said Dachis, “that same budget proposed to spend $5.8 billion on long-term care.”
How can Ontario fix this? The paper recommends:
To help businesses, the current industrial electricity pricing system for large customers should be replaced with a market-based “interruptible rate” that rewards users for agreeing to interruptions of supply during extreme peak demand hours. For medium-sized customers, the full cost of energy prices should be set on an hourly basis.
For residential customers and small businesses who pay regulated energy rates, the paper recommends giving consumers the option of a lower price than otherwise, but with an incentive to reduce use at extreme peak demand hours.
The Ontario government should empower and resource the Ontario Energy Board to oversee decisions on procuring electricity and move electricity procurement decisions to local buying groups.
Since privatization, Hydro One has lowered its overall annual cost per customer by $90, mostly by reducing administrative costs. To help other local distribution companies emulate those savings, the province should implement tax changes that allow cities to find outside investors that can find savings while simultaneously unlocking value for municipal taxpayers.
Finally, the province should reduce rate subsidies, such as through means-testing or capping subsidies at a level of consumption.