Fact Sheet on Industrial Electricity Pricing

Transcription

1 Fact Sheet on Industrial Electricity Pricing This document sets out the key issues in regards to Ontario industrial electricity pricing in This document is intended to be stand-alone in nature. It will serve as useful background information to third parties wishing to better understand the specific issues with Large Industrial Electricity Pricing in Ontario. 1. Industrial electricity pricing in the province of Ontario remains a serious concern. Ontario needs industry. It has been, and continues to be, a critical part of Ontario s economy. With it, comes investment and employment. And if industry is the beating heart of Ontario, then electricity is the lifeblood that powers industry and sustains Ontario s economic health. Specific prices in Ontario and other jurisdictions are shown in point #2 below There are at least three major concerns that have been voiced by large industry: o Competitiveness - see point #3 below o Capital Attraction see point #4 below o Cost of Carbon see point #5 below 2. Industrial electricity prices in Ontario are higher than they are in neighbouring jurisdictions. All prices below are in $ CAD The average price for Transmission-connected Ontario Class A Customers in 2016 was $89.50/MWh 1 The average price for Transmission-connected Ontario Class B Customers in 2016 was $133.60/MWh 2 1 Source: Independent Electricity System Operator (IESO) of Ontario Source: Independent Electricity System Operator (IESO) of Ontario -

2 The average price for Distribution-connected Ontario Class A Customers in 2016 was $102.40/MWh 3 The average price for Distribution-connected Ontario Class B Customers in 2016 was $146.50/MWh 4 3 Source: Independent Electricity System Operator (IESO) of Ontario Source: Independent Electricity System Operator (IESO) of Ontario - 2

3 Between 2012 and 2016, Ontario s cost of Class A industrial power increased by almost 30%. In the same time, Ontario s cost of Class B power increased by over 40%. 5 Directionally, it is expected that the Global Adjustment will continue to increase. OPG s recent rate case Application (EB ) is seeking significant increases on its nuclear portfolio due to Darlington Refurbishment. All of these numbers are publicly sourced. In many other jurisdictions, it is possible to strike private deals that result in prices lower than the values shown publicly. This does not happen in Ontario. 3. Ontario s industrial base is becoming less competitive. Many large Ontario industrials compete in a global marketplace. Accordingly, the output from these facilities has been commoditized meaning that large Ontario industrials are often price-takers. This creates a ceiling on their revenues they cannot charge more for a product than the market is willing to pay. Increasing costs (or costs that are higher than they are in other jurisdictions) reduce the margin between total revenues and total costs. This reduced margin translates directly to lower competitiveness. Large Ontario industrials have embraced world class health and safety standards. They have adopted advanced environmental standards. They abide by stringent labour laws. And Ontario is currently embarking on a journey into climate change regulation (that brings with it considerable uncertainty and potential expense). This superlative performance doesn t come at zero cost and this challenges Industry to maintain its competitive focus against others who may not embrace such high standards. Ontario industry is still paying for the Debt Retirement Charge ($7/MWh) and will be until April This represents yet another cost driving up electricity prices for industry. In the face of these competitive challenges, Ontario industry needs a more level playing field. While some programs do currently exist and are beneficial to some (such as Demand Response or the Industrial Conservation Initiative), many large industrials cannot take advantage of them due to the nature of their 5 Data underpinning graphs sourced from various ISO websites, and U.S. Energy Information Administration (EIA) data 3

4 operations, and even those who can take part can often only do so in a limited fashion. Some of the sectors that can t take advantage of such programs are very large. A portfolio approach needs to be taken, since one size never fits all. 4. Ontario s industrial base is struggling to attract much-needed capital investments. Canada is losing investment in expanding industries to the United States, and elsewhere. o Example #1 6 : Petrochemical o According to the Chemistry Industry Association of Canada, from 1980 to approximately 2010, Canada s level of investment was approximately 10% of that in the US. This is consistent with population. o Since 2010 that number has steadily decreased. o In 2016, the number was less than 3% o Example #2 7 : Automotive o According to the Centre for Automotive Research, from 2000 to approximately 2008, Canada s level of investment was approximately 30% of that in the US. o From 2009 to 2015 that average has dropped to 7% Large industry in the province needs stability to encourage investment in its operations. Volatility in pricing and in policy kills investment. Given its general position on international trade, it is unlikely that the current administration in the US will reverse this trend. A more protectionist government could possibly offer incentives to repatriate industry. While this trend is not solely the result of large industrial electricity pricing, the fact that Ontario electricity prices are generally higher than elsewhere will directionally make this trend worse. 6 Source - Chemistry Industry Association of Canada, Source - Centre for Automotive Research,

5 5. Ontario s cap and trade program was supposed to be cost-neutral to Ontario industry during the first compliance period. It was originally intended that the program would inflict no harm on Ontario industry on a facility by facility basis. Proceeds earned pursuant to emissions credit auctions were to be recycled back to Ontario industrial rate customers to protect them from cost increases associated with carbon pricing. In March 2017, instead of recycling cap and trade proceeds to ensure no harm, large industry was told that migration of the Rural or Remote Electricity Rate Protection program (RRRP) and the Ontario Electricity Support Program (OESP) from rate base to tax base will now serve as a proxy for this relief. Migration of RRRP and OESP is not an appropriate proxy for the relief that was intended. Notwithstanding that the quantum of RRRP and OESP effects combined are approximately the same as carbon costs today, there is no guarantee that they will be equal, going forward. Directionally, carbon costs can only increase if future targets are to be met and RRRP and OESP will not keep pace. This exposes large industry to increased business risk. 6. The Fair Hydro Plan does almost nothing to address industrial electricity pricing in the province. The only element of the Fair Hydro Plan (FHP) that applies to large industry is the migration of RRRP and OESP from rate base to tax base (see above). All ratepayers, not just large industry, received the benefits of migrating RRRP and OESP as part of the Fair Hydro Plan. However, as part of the FHP for residential customers, this change was identified as the correction of a funding source error, since those programs are essentially social programs that should have been paid out of Treasury all along, not from the electricity rate base. For industry, it was used as a proxy for carbon costs. The Global Adjustment refinancing does not apply to large industry. The expansion of the Industrial Conservation Initiative (ICI) does very little for large industry, as loads less than 1 MW do not even qualify as large industry. The FHP has only addressed part of the electricity pricing issue. Industry needs a fair plan too. AMPCO takes no position on the efficacy of the FHP s Global Adjustment refinancing approach and the increased costs that will flow from it. 5

6 7. While the IESO s Market Renewal Program is intended to remove costs from the electricity system, there will be no material cost reductions for many years. Market Renewal has been endorsed by the Minister of Energy numerous times as a cost reduction undertaking. AMPCO applauds any effort to remove costs from the electricity system. The IESO s consultant (Brattle Group) has published a Benefits Case that indicates the 10 year NPV associated with the MR Program is between $2.2B and $5.2B 8. That 10 year period does not start until Even if the Market Renewal Program plays out exactly as planned, it will be many years before there is any direct benefit. During that time, market participant costs will actually increase to implement the Market Renewal Program. Market Renewal is not a short-term solution to the issue of electricity pricing, and should not be marketed as such. 8 The Future of Ontario s Electricity Market: A Benefits Case Assessment of the Market Renewal Project (Executive Summary) 6