The ‘why’ of electricity choices

Electricity prices are rising quickly everywhere in the world? Four principal costs drive prices: electricity generation and transmission: interest rates and inflation; fuel; the cost of people; and capital expenses.

  • Interest rates and inflation everywhere are close to zero;
  • Renewable energy fuel: wind, sunshine and falling water costs nothing. Uranium in Ontario’s Candu reactors is, per unit of power generated, nearly zero. Natural gas during peak power periods also costs very little, as gas plants run less than ten percent of the time;
  • People costs per unit of power to operate the electricity generation and transmission systems are similar in all jurisdictions in North America, and are very low per unit of power generated;
  • That leaves capital expenses.

 

You are either building and renewing your system, or you are not. If a region is building, rebuilding or maintaining a power generation and transmission system, it incurs costs in the tens of billions of dollars, and passes them through to users’ power bills. If you are not building or renewing generation and transmission, you are postponing tens of billions in costs now, to make users pay much more later.

During the past 12 years, Ontario built tomorrow’s power generation and transmission infrastructure, paid for it with yesterday’s money, and financed it over its useful lifetime at interest rates of nearly zero. Ontario’s neighbours put off this renewal. They must now buy today’s power generation and transmission infrastructure; pay for it with tomorrow’s money; and finance it at interest rates that have nowhere to go but up.

Ontario’s improvements to the electricity system in the past dozen years represent a $35 billion investment. Like a mortgage, this principal is amortized over its anticipated service life, and divided among electricity users, based on how much you use. All Ontario’s capital investments were properly, cleanly and openly procured.

‘Urban myths’ aside, Ontario does not have the most expensive electricity in North America. The U.S. New England states do. Quebec now buys electricity from Ontario in the winter, as Quebec does not generate enough electricity for its own use during the winter months. The quarter- to third-of-a-billion dollars in surplus (profit) that Ontario makes on net sales of electricity help keep our own costs in Ontario under control.

Ontario’s modern, diversified generation and transmission capacity is on the ‘rate base’ of residences and businesses. Other regions, especially in the United States, are about to see electricity rates go up even more sharply than Ontario’s have, to catch-up with our power generation and transmission infrastructure. Most places in the Great Lakes states already pay electricity prices higher than Ontario does.

Electricity prices can be whatever you want them to be. And the Government of Ontario does not set those prices. However, the cost of electricity is a different matter. What trade-offs are we willing to make to mitigate the price of electricity, whose cost is fixed through past capital expenditures, and will be paid throughout the lifetime of the power generation and transmission stations and wires?

Do we wish some of the price of electricity to move from your rate bill to your tax bill? Many Ontarians do. Do we wish to have projects in health care and transportation delayed, or services to be curbed, to subsidize electricity? Few Ontarians do. Should we pay additional taxes? Opinion is mixed.

The choices facing every jurisdiction and utility that provides electricity to its customers are not between cheap or expensive power; or even between green and polluting power. They are between having electricity and not having it! At the turn of the 21st century, power brownouts and bad air from coal-burning were common in the Greater Toronto Area. Today, the GTA has not had a bad air advisory in more than four years. Coal is no longer burned to produce electricity anywhere in Ontario. All the expensive trafeoffs the rest of the world must come to terms with so that it meets climate change objectives are already done here in Ontario. Brownouts and power shortages are things of the past. Ontario paid for all this through our investment in the electricity system.

Canada continues to have some of the world’s least expensive electricity. Ontario’s continuing investment in its own electricity system means its own costs will be stable for the long term.

Common Questions

Why are electricity prices rising all over the world?
Between the end of World War II and the late 1970s, much of the electricity generation and transmission systems worldwide was built. The world over, nations, regions and utilities simply stopped building and renewing their electricity infrastructure. Just like a home that’s been neglected, when the repairs catch up to you, a homeowner faces some big bills. Ontario began the rebuild of its electricity system more than a decade before nearly all other jurisdictions worldwide.
How can we say people cost are very low when it seems that everybody in the electricity sector makes a higher-than-average salary?
Because it does not take that many people to run the electricity system. As such, compared with the huge amounts of electricity generated, the wage bill for the electricity sector is a small fraction of the largest cost, which is capital expenses (i.e. building and renewing the sector).