We’re All Going to End up Paying More, Yet Again, for Electricity

Taken in splendid isolation key aspects of the new long-term deal between the Ontario government and Bruce Power for the long-awaited refurbishment of nuclear generating units at Bruce A and a fixed-price contract for the electricity they produce is good news for this area. Barring any unexpected calamities, and assuming the challenging job of rebuilding Units 1 and 2 is successful, the future prosperity of Kincardine, Saugeen Shores, and other communities near the Bruce Nuclear plant is assured for the next 30 years. 

Bruce Power will spend about $4.25 billion to immediately begin work to refurbish and restart Units 1 and 2, mothballed since 1997, then refurbish Unit 3 and replace the steam generators in Unit 4. In return, the company is guaranteed 6.3 cents per kilowatt-hour for the energy Bruce A generates.

The refurbishment project, which Duncan Hawthorne, president and CEO of Bruce Power called “perhaps the most complex engineering project ever taken on in North America,” is expected to mean 1,500 construction jobs at its peak and create 50,000 new person-years of long-term employment at Bruce Power.

The deal spells many billions of dollars worth of direct and spin-off benefits for the Bruce-area communities. Monday’s announcement was the day many people in the area have been waiting for ever since the grass-roots “Retube Bruce A” movement began soon after Ontario’s former Progressive Conservative government shut down all four Bruce A reactors in 1997.

But what does the deal mean for you and I and other electrical consumers throughout Ontario? It’s just one more new factor among many in the complex world of electrical energy wholesale and retail pricing in Ontario. However, one thing seems clear enough: the new Ontario-Bruce Power deal confirms we’re all going to end up paying more, yet again, for electricity.

For many years the people of Ontario were spoiled by cheap electricity rates that eventually, as the former Ontario Hydro’s nuclear debt soared, came nowhere near covering the overall cost of producing electricity. “Live better electrically,” we were told, and boy did we go overboard; it was cheap and it was plentiful.

But the party’s over. Those days are fast becoming a distant memory, faster than you might think.

It’s common knowledge by now, or it should be, that Ontario is facing an energy crisis. This past summer the crisis hit the proverbial fan as record demand coupled with various problems limiting supply and delivery of electricity resulted in 12 days of appeals to the public to reduce energy use, 23 emergency alerts and brown-outs for two days in August. Are people getting the electrical energy-crisis message? Apparently not.

Since May, 2002 the wholesale price generators like Ontario Power Generation and Bruce Power and others get for the electrical energy they produce has been allowed to go up and down in response to supply and demand pressures, and other factors; increasingly, those factors include fixed contract prices for new generation coming on line. While the wholesale market was set free, the retail price was capped by the former Tory government at 4.3 cents per kWh. But that never reflected real or wholesale costs, and as a result $5.6 billion was added to the provincial debt. When the Liberal government was elected in October 2003 it realized retail prices had to go up. But rather than force us to swallow the bitter pill of much higher electrical rates all at once, some of the sugar coating was kept in the form of a continued, but higher cap and a phased-in approach. Currently most electricity consumers in Ontario pay 5 cents per kWh for the first 750 kWh used, and 5.8 cents beyond that.

For the first five months of this year those rates were pretty close to the wholesale price set by the Independent Electricity System Operator (IESO), the non-profit entity that day-by-day, hour-by-hour, keeps tabs on the wholesale market and determines the price. But, suddenly this past summer, wholesale prices skyrocketed for several reasons, some of which may not be temporary.

In June the average wholesale price shot up to 7.12 cents per kWh, from 5.47 cents in May. It kept climbing, reaching a record average monthly price of 9.97 cents per kWh in September, “the highest weighted monthly average in Ontario since the market opened in May 2002,” IESO explains.

“These high prices can be attributed to at least three factors. The rising price of natural gas made it more expensive to run gas-powered generators across the province. Natural gas prices rose owing in part to the disruption of supplies following hurricane activity in the southern United States. In addition, many generators were on outage for routine seasonal maintenance, reducing overall supply to Ontario’s power grid. Lastly, low water levels resulted in reduced hydroelectric output,” IESO adds on its very detailed web site. For my money, it’s the best resource I’ve found to help understand the Ontario electricity market and I recommend every electricity consumer with access to a computer and the Internet read it.

The reference to “lower-water levels” caught my attention the most. The unseasonably hot weather and drought of this past summer was a double whammy for Ontario electricity: people cranked up their air conditioners and thus added greatly to demand, while the lack of rain cut into supply. Hot, drier summers are the trend in recent years, with global warming the most likely cause, so low water levels are going to be a long-term problem.

Meanwhile, the McGuinty government painted itself into the electrical generation corner during the 2003 provincial election campaign with a promise to shut down Ontario’s five remaining coal-fired generating plants. That means switching off 7,268 megawatts of electricity, about a quarter of the province’s generating capacity.

The coal-fired Lakeview Generating Station just west of Toronto was shut down in April. It had a capacity of 1,140 megawatts. To put that into perspective, Bruce A Units 1 and 2 will have a capacity of 1,500 megawatts after their successfully refurbished and put back on line. Two other coal-fired stations, Atikokan (215 megawatts) and Lambton (1,975 megawatts) are supposed to be shut down by the end of 2007, with Lambton replaced by two gas-fired stations in the Sarnia area. The biggest coal-fired plant, Nanticoke (3,938 megawatts) is to start shutting down units through 2008, with the last unit to close in 2009.

The McGuinty government has made a good case for the shut-down of coal-fired generation stations. A cost benefit analysis released in April “uncovered massive health and environmental costs from coal-fired generation. The study found emissions from all coal-fired stations were responsible for up to 668 premature deaths, 928 hospital admissions and 1,100 emergency room visits in Ontario per year. It also found that with an annual cost of $4.4 billion, coal-fired generation is significantly more expensive than other sources of electricity.”

“To support the replacement of coal-fired generation in Ontario, the McGuinty government has put the wheels in motion to produce well-over 7,500 megawatts of cleaner, more diversified power. Between 2004 and 2007, Ontario will secure more new generating capacity than any other jurisdiction in all of North America,” The Ministry of Energy said in June. It added, “the government is also currently reviewing a tentative deal with Bruce Power for the refurbishment of two laid- up nuclear reactors, which together represent more than 1,500 megawatts of additional capacity. If concluded, this agreement would raise the total of McGuinty government initiatives to 9,145 megawatts.

But new generating capacity comes at a price. Ministry spokesperson Ted Gruetzner said wholesale contract prices the government has negotiated for new renewable energy and gas-fired projects are in the 8 cents per kWh range. The ministry press releases announcing the deal with Bruce Power noted the 6.3-cent contract price was below the average wholesale price of 6.7 for the year. I note that price was arguably skewed by the sudden increases this past summer. Otherwise, the 2005 price would have averaged less than 6 cents.

But new energy investors whether they’re building wind turbines or refurbishing nuclear plants are enormous cost are entitled to a reasonable return on their investment. The McGuinty government said this week it had obtained an opinion from CIBC World Markets that considers the terms of the deal with Bruce Power “fair” as a commercially reasonable financial return on investment for Bruce Power, given the cost, complexity and risks associated with the Bruce A refurbishment project.

All things considered it may be a relatively good deal for everyone. But it is yet another sign of things to come, higher electrical rates. And no one should be surprised when that shoe is finally dropped.

Originally published in The Sun Times in 2005.

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