Poor policy choices unnecessarily drive up electricity prices in Ontario

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Appeared in the National Post, November 3, 2015

Ontario’s approach to electricity policy has driven up prices for businesses and residents, undermining competitiveness. This is just one example of how misguided policy choices have contributed to Ontario’s economic weakness in recent years.

Once the engine of Canada’s economy, Ontario is now mired in a prolonged period of weak performance. In 2003, Ontario’s real GDP growth fell below the national average and consistently lagged behind the rest of Canada over the next decade. Consequently, real disposable household incomes in Ontario, which were fully 10 per cent higher than the national average in 2000, fell below the Canadian average for the first time on record in 2012 and 2013.

Investor confidence is understandably shaken, with the result being weak private-sector investment in the province. In fact, in 2013 (the last year for which we have data), private-sector investment still had not recovered to pre-recession levels.

The province’s relative decline cannot be entirely blamed, as some do, on external forces such as the resource boom elsewhere in Canada. Instead, a range of poor policy choices have undermined Ontario’s competitiveness. One of the clearest examples of this pattern can be found by examining the province’s policy on renewable electricity generation.

Ontario’s foray with renewables began in 2009 when the government launched its Green Energy Act (GEA), which aimed to “expand renewable energy generation, encourage energy conservation and promote the creation of clean energy jobs.” The plan subsidizes renewable electricity by providing producers with long-term price guarantees at above market rates through feed in tariffs.

The plan has expanded renewable energy generation but at a considerable cost. According to figures from one study, from 2009 to 2015, total annual power costs have risen by more than 30 per cent. And all the wind and solar installed by the province only accounts for four per cent of Ontario’s electricity, while amounting to 20 per cent of the average commodity cost. A high amount to pay for not much electricity.

These high costs put Ontario businesses and manufactures at a significant competitive disadvantage. This is best seen in a 2013 study which estimated the prices (in CA cents) that small industrial consumers would pay for a kilowatt-hour (kWh) of electricity in 119 Canadian and American cities. American rust belt cities like Chicago, Cleveland, Indianapolis, Cincinnati, and Pittsburg all had electricity prices under eight cents per kWh.

Small industrial customers in Toronto on the other hand experienced prices of almost 12 cents per kWh.  Considering that a small industrial customer will consume about 400,000 kWh a month, this price gap has a significant adverse impact on the competitiveness of Ontario’s businesses.

Ontario’s beleaguered manufacturing industry is clearly damaged by higher electricity prices. Indeed, one study estimated that a 50 per cent increase in Ontario’s electricity costs would result in a 29 per cent reduction in the rate of return to capital for the manufacturing industry.

All this pain for Ontario business has come with little environmental benefit. If Ontario had simply continued with ongoing retrofits to coal plants, all the environmental benefits of the GEA could have been achieved at one-tenth the cost.
And as for the “green jobs” the GEA was supposed to create, a 2011 Ontario Auditor General’s report noted that “studies in other jurisdictions have shown that for each job created through renewable energy programs, about two to four jobs are often lost in other sectors of the economy because of higher electricity prices.”

With few positives (if any) to show from the GEA, Ontario’s businesses are starting to feel the pressure. A recent survey of business owners found that 38 per cent expect to see their bottom lines shrink due to rising electricity prices, resulting in delays or cancellation of investment in the province.

External factors such as exchange rates and global economic growth will always influence Ontario’s economic performance. However, policy choices also play a major role in determining whether Ontario can thrive and prosper. On the electricity file, recent policy choices have weakened the provincial economy by unnecessarily driving up electricity prices. If the provincial government seeks to reverse Ontario’s trajectory of economic decline relative to the rest of Canada, one important step it can take is changing course on electricity.

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