Ontario's electricity prices have become a hot-button issue recently.
But in spite of the increased focus on Ontario's electricity system, and in particular the Green Energy Act, there has been little information about how replacing the Act would affect electricity prices in the future.
The Pembina Institute set out to answer that question in our latest report, Behind the switch: pricing Ontario electricity options.
I sat down with Tim Weis, lead author of the report, to discuss the results of this research — and why Ontario prices are likely to continue rising sharply over the coming decade, regardless of whether the province keeps the Green Energy Act or builds something else in its place.
Q: How did you approach researching the impact that cancelling the Green Energy Act would have on electricity prices?
A: Electricity systems are very complicated; different technologies operate at different times, supply and demand fluctuate day to day and year to year, the system interacts with its neighbours and prices are contracted differently for different sources. It is difficult to model these interactions with a simple spreadsheet, so Pembina hired external analysts to develop a dynamic model of the complex inner-workings of Ontario's energy system.
We tested two main scenarios to see how maintaining support for renewable energy under Ontario's current Long-Term Energy Plan would affect electricity prices, compared to how prices would respond if the current commitment to future renewable energy development was cancelled and replaced with other sources. In the second scenario, we assumed that natural gas and some large hydro would replace the amount of electricity that is currently expected to be developed from renewable sources via the Green Energy Act's feed-in tariff. When we looked at the data, we felt that natural gas would be the most likely source that would be used to enable Ontario's supply mix to keep pace with demand.
This is a key factor that's been missing in the public debate about electricity prices — if you remove one source of electricity, in this case renewables, you need to replace it with something, and that something also has a price.
Q: What assumptions did you make about Ontario's energy system to ensure the model is accurate?
Predicting future energy prices is a real challenge, especially when there are so many unknowns about future nuclear energy prices and how natural gas markets might evolve. So we relied on publicly available, third-party data from sources such as the U.S. Department of Energy, the Ontario Energy Board and the Ontario Power Authority to make sure we were using conservative data.
We also assumed that projects of all types would be completed on time and on budget. The latter has not often been the case for Ontario's nuclear plants, so some of these assumptions may turn out to be underestimates — especially in light of the recent nuclear incident at Fukushima.
Finally, we assumed Ontario would honour any existing commitments to renewable energy providers under the Green Energy Act, that coal power would be phased out permanently as currently scheduled, and that Ontario would meet its existing climate change commitments.
Q: So what does the model predict?
What the data found shouldn't be a surprise to anyone — that electricity prices will continue climbing in Ontario, just as they are across the country. In fact, the scenarios we looked at showed that cancelling the Green Energy Act would have very little impact on electricity prices in Ontario, as there are so many other factors and necessary investments in the overall system that are also affecting prices.
But there would likely be some difference in prices over time. Although there would be virtually no change in overall system costs over the couple of years, looking at price increases five to 10 years from now suggests that ratepayers would likely start see a very slight difference (less than two per cent) if Ontario scaled back its supply of power from renewable sources. At its peak, about 10 years from now, the difference works out to a potential savings of just $4 a month on the average household energy bill.
But it's important to keep in mind that using less renewable energy would likely mean burning significantly more natural gas in Southern Ontario in the next five to 10 years, and that means more greenhouse gas emissions and air pollution, more price uncertainty, and the likelihood of requiring additional gas power plants in southern Ontario.
And since natural gas prices are forecast to steadily increase in that same time period, any initial savings in the short term turns into a longer-term cost for ratepayers, as current investments in renewable energy start to act as a hedge against the rising price of gas.
Q: How does the model suggest electricity prices will change in the long term?
As I mentioned, the price of natural gas is forecast to rise steadily in the years ahead. Meantime, renewable energy projects that are built today have long-term contracts at steady prices, and future renewables will likely be built at lower prices. That's because the feed-in tariff is designed to be reviewed and adjusted regularly — just as similar policies have operated in Europe for decades.
Two factors that have a much more significant impact on future prices are: a) what the true costs of new and refurbished nuclear reactors will be, and b) how issues such as shale gas fracking will affect long-term imported natural gas prices.
Q: What do you think is the most important finding in this new research?
Whether Ontarians choose to keep or kill the Green Energy Act, electricity prices will continue to rise in this province because of the serious — and costly — refurbishments, repairs and replacements required to fix Ontario's energy system. The majority of Ontario's electricity generation needs to be replaced within the next 10 to 20 years. You simply cannot replace assets that were bought and paid for in the 1970s with new facilities today, and expect to pay prices on par with those four decades ago.
The modelling shows that cancelling the Green Energy Act would make very little no difference to Ontario ratepayers, because to meet electricity demand, the amount of energy that's currently planned from renewable sources would have to be replaced with other options — which would likely work out to be more polluting, and less sustainable, and in the long-run more expensive.
Ultimately, this research shows that Ontario's ratepayers stand to lose more than they would gain in the short term by cancelling the Green Energy Act, because doing so would lead to higher costs and more risk in the long run.
Julia oversees the Pembina Institute's communications department, including planning and strategy, media relations, audience engagement, and the development and delivery of the Institute’s many research publications and online resources.