Electricity consumers (you and me) pay for misguided policies that distort energy markets

As researchers at the Fraser Institute have shown, government “green” policies in Ontario lead to significantly higher power prices. Specifically, thanks to the Green Energy Act and poor energy governance, Ontario ratepayers got walloped:

Between 2010 and 2016, large industrial users in Toronto and Ottawa experienced cost spikes of 53 percent and 46 percent, respectively, while the average increase in electric costs for the rest of Canada was only 14 percent. In 2016, large industrial users paid almost three times more than consumers in Montreal and Calgary and almost twice the prices paid by large consumers in Vancouver.

An interesting article in the Calgary Herald by University of Calgary economics professor Aidan Hollis sheds some light on what carbon taxes are doing to your power bills—and who’s collecting the revenues.

Prof. Hollis points to a perverse element of the carbon tax on electricity that benefits producers over consumers. He observes that a coal-fired generator pays about 1.9 cents per kilowatt hour (a measure of electrical energy) of power produced, while standard gas-fired generators only pay 0.4 cents per kWh. Other forms of power may pay nothing, or even earn emission-reduction credits they can sell.

As a result, coal-fired generators have raised their prices by 1.9 cents/kWh. But here’s the rub—when coal power sets the market price in Alberta, which is some 80 per cent of the time according to the professor, other generators get that same increase in price.

So in effect, consumers face higher electricity costs due to the carbon tax because all electricity generators in the province will increase electricity prices.

However, the government only collects carbon tax revenue from carbon-intensive electricity generators, not all the generators. Therefore, the net effect is that cost to consumers of the carbon tax (in the form of higher electricity prices) is much higher than government revenues (which are supposed to be rebated to consumers).

Prof. Hollis also notes that it’s “well known that the carbon tax resulted in the return of unprofitable power-purchase agreements to the so-called balancing pool, costing Alberta ratepayers a cool $2 billion. The irony in all of this is palpable:

The $850 million in extra costs paid by consumers in 2018 would have been enough to convert the entire coal-fired fleet to natural gas… Instead, consumers are stuck paying high prices while coal-fired electricity plants continue to emit CO2.

Energy markets are complex, and governmental intervention into power markets comes with a high risk of unintended consequences. But one thing seems to be constant—consumers of electricity ultimately pay the price for the misguided policies that distort energy markets.