Latest LTEP Can't Stop Electricity Cost Freight Train

December 2013

• One key message in the provincial government’s new Long Term Energy Plan is that projected cost increases are much lower than in the 2010 plan.
• The essential fact about these cost increases is that they are driven mostly by the costs associated with new generation capacity coming into service that is the result of the government’s energy procurement priorities over the last several years. Virtually all of this capacity is contracted on terms that guarantee some level of above-market payments to the generator.
• The increased costs on our electricity bills are the result of these contract terms. So if you understand the terms of these contracts then future cost increases are largely foreseeable, and for the next several years there is little that can be done to mitigate the increases.

On December 2, 2013 the Ontario Ministry of Energy released the latest Long Term Energy Plan (LTEP), entitled Achieving Balance.  The new LTEP is the first follow-up to the previous plan that was released in November 2010.  Areas addressed in the new plan include conservation, nuclear and renewable energy.

Two prominent messages in the new LTEP are that much has and will be done to mitigate costs and that projected increases are significantly lower than those forecast in 2010.  Figure 7 from the report shows the typical residential electricity bill forecast based on monthly consumption of about 800 kWh.

Annual residential bill increases are projected at $168 for 2013-2014 and $120 for 2014-2015 (including HST and excluding the Ontario Clean Energy Benefit).    

The essential fact about these cost increases is that they are driven mostly by the costs associated with new generation capacity coming into service. This new capacity is the result of the government’s energy procurement priorities over the last several years. Virtually all of this capacity is contracted on terms that guarantee some level of above-market payments to the generator. Fixed-price and similar contracts have dominated Ontario’s supply picture for quite a few years – to the point where very little energy sold in the market is not covered by some contract. The increased costs on our electricity bills are the result of these contract terms. Future cost increases are largely foreseeable, for those who understand the terms of these contracts. 

Supply costs are a function of contract quantities and prices, and both continue to rise. The government and the Ontario Power Authority continue to add supply contracts.  Prices for existing contracts continue a steady march upward while the blended price for new contracts is quite high – as they are driven by additions of renewable energy. 

These costs are spread over energy consumption in the province. Total energy consumption in Ontario remains flat and so there’s no opportunity to spread rising costs across a broadening base. The only possible result is that unit costs must rise.

The most recent and largest supply cost addition involved the return to service of units 1 and 2 at Bruce Power’s Bruce ‘A’ Generating Station.  These 2 x 750 MW units add 12 TWh of annual energy to the Ontario grid - equal to 8.4% of annual Ontario consumption - and about $580 million per year in incremental supply costs.  This increases the average consumer rate by 0.44 cents (pre-tax) per kWh and the typical annual residential bill by $50 (after-tax). 

Looking ahead to 2014, the largest supply additions will come from wind and solar resources.  Quantity projections vary but Bruce Campbell, CEO of Ontario’s Independent Electricity System Operator, noted recently that over the next 18 months a total of 4,500 MW of variable generation will be added to Ontario’s grid.  Assuming 2,200 MW of wind and 800 MW of solar (for a total of 3,000 MW) are added in 2014 and making certain capacity factor assumptions, this will add 6.6 TWh of annual energy to the grid, equal to 4.7% of annual Ontario consumption.  Making other contract and spot price assumptions, the full-year cost impact of these additions will be $1.1 billion.  This will increase the average consumer rate by 0.84 cents (pre-tax) per kWh and the typical annual residential bill by $95 (after-tax). 

These additions and those coming in 2015 and 2016 are costs that already are destined to impact Ontario electricity costs.  One cost mitigation technique promoted in the new LTEP involves pushing out the last few percent of non-hydro renewables, with the envisioned total of 10,700 MW non-hydro renewable energy now coming fully into service by 2021 instead of 2018.  Another is the deferral of construction of new nuclear units at Darlington Generation Station.  These postponements – reflective of the reality that capacity has been growing faster than demand and so driving up costs – will unfortunately have little to no impact on the rate of cost increases in the next several years. On those costs, “the train has left the station”.

What's Happening with the Total Commodity Price for Electricity?  Read more »