Ontario Clean Energy Benefit: A Short-Term Conservation Killer?

November 2010

• The OCEB is to provide direct relief from rising electricity prices, by providing residential consumers, small businesses and farmers with a credit equal to 10% of their total electricity bill, including HST.
• Focusing on conservation, an economist would point out that electricity is like many goods - increase the price and consumption will drop and vice versa. This then raises the question, "How might the OCEB impact electricity consumption?"
• A closer look suggests that based on certain assumptions, residential consumption could increase by 3% and small business and farm consumption by 2%, for a total increase in annual consumption of 1.9 million MWh.
• In the context of the government's conservation targets for local distribution companies, an "unintended consequence" of the OCEB reduction in prices could be a consumption increase for LDC-served consumers that could offset as much as 32% of the total conservation and demand management targets these same LDCs are to meet over the next four years.

On November 18, as part of its fall Economic Outlook, the government announced the Ontario Clean Energy Benefit.

The OCEB is to provide direct relief from rising electricity prices, by providing residential consumers, small businesses and farmers with a credit equal to 10% of their total electricity bill, including HST. The OCEB takes effect January 1, 2011. The measure will be in place no later than May 1, 2011, will be retroactive to January 1, 2011 and is to remain in place for five years.

The OCEB is meant to lessen the impact of expected electricity price increases, estimated by the government to rise by a total of 46% for residential consumers over the next five years. While the measure will no doubt be popular with those who receive it, most of whom are voters, it is problematic as it flies in the face of four principles widely viewed as highly desirable:

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
4. Electricity policy should be depoliticized

Economists such as Stephen Gordon of Laval University point out (with credit to Kevin Milligan at UBC) that if electricity prices reflect the true cost of power, then unaffordability of electricity is an income problem and not a pricing problem. As a result, a completely different solution is warranted.

Estimating the impact of the OCEB on electricity consumption

Focusing on the conservation principle, an economist would point out that electricity is like many goods - increase the price and consumption will drop and vice versa. This then raises the question, "How might the OCEB impact electricity consumption?"

Many studies have examined the "price elasticity of demand" for electricity - the degree to which changes in price affect the amount of electricity consumed. One example is a study done by the Electric Power Research Institute (EPRI) in 2008, Price Elasticity of Demand for Electricity: A Primer and Synthesis.

From the EPRI study, we used own-price, short-run elasticity of electricity demand value estimates for residential of -0.3 and -0.2 for small business (choosing the lesser of -0.3 for commercial and -0.2 for industrial). The next step was to estimate total annual consumption for consumers receiving the OCEB.

Based on the estimated first, whole-year total OCEB cost of $ 1.1 billion, starting prices of $160/MWh for residential and $143/MWh for small businesses and farms, and average annual increases of about 8%, we estimate the total annual energy affected by the OCEB to be 68 TWh (68 million MWh). For residential, we assume current annual consumption of 54 TWh (54 million MWh) as contained in the Ontario Power Authority's 2007 Integrated Power System Plan. We therefore assume the annual consumption for small businesses and farms is the remainder, so 14 TWh (14 million MWh).

The OCEB will generate an effective step change or drop in price of 10%. Applying the price elasticity numbers noted above, we would then expect residential consumption to increase by 3% and small business and farm consumption to rise by 2%. The combined annual consumption increase would be:

Increase in annual consumption:
0.03 x 54 TWh + 0.02 x 14 TWh = 1.9 TWh

Putting the 1.9 TWh (1.9 million MWh) in context, total annual provincial consumption is about 142 million MWh, so the OCEB could cause the province's electricity consumption to rise by 1.3%.

Another useful measuring stick is to compare the potential electricity consumption increase to some conservation target.

In April 2010, the Minister of Energy issued a directive to the Ontario Power Authority on Conservation and Demand Management Initiatives under the Green Energy Act Conservation Framework. The directive alludes to the allocation to local distribution companies (LDCs) of a four-year, total conservation and demand management (CDM) target of 1,330 MW of peak demand and 6,000 GWh or 6 TWh of annual electricity consumption. It therefore appears that an "unintended consequence" of the OCEB reduction in prices could be a consumption increase for LDC-served consumers that could offset as much as 32% of the total CDM targets these same LDCs are to meet over the next four years.

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