From The Financial Post
Ontario’s Power Trip: Power dumping
Billions are wasted buying subsidized wind and solar power that ends up being exported at fire-sale prices
By Parker Gallant and Scott Luft, Financial Post
During the spring months in Ontario, the winds blow a lot. For companies in the wind-power business, that’s good news. For the province’s electricity consumers, though, it’s another financial disaster that, on an annual basis, drains up to $400-million out of consumers’ pockets. But that money doesn’t directly fund green electricity for Ontarians who pay for it. Instead, the bulk of wind power is essentially surplus power that is exported to the United States and out of province at rock-bottom prices. Ontarians are paying $135 for units of power that are dumped on the export market at prices as low as $20. Sometimes, Ontario has to pay other jurisdictions to take the surplus off its hands.
This past May, Ontario’s wind producers generated 284,000 megawatt hours (MWh) of electricity. For each MWh, the producers collected $135, for a total of $38-million. That money is paid out of the churning slush fund that is now the Ontario electric power system. The system, through its byzantine structures, sold that same power into the electricity market at market prices. The average market price for electricity in May was about $25 a MWh. Wind power, however, rarely gets even the average price.
Because wind often blows when power is not needed, and the Ontario government has mandated wind, the Ontario power system is stuck with surplus power that has to be unloaded, at whatever the market will bear, which is usually below average market prices.
Wind power appears out of the blue, usually at night and during low-demand spring and fall seasons. The province’s grid operator — the Independent Electricity System Operator (IESO) — is obligated to take wind power and offer it in the market, driving the average market price down when demand is already low and power is surplus to Ontario’s needs. The buyers are Michigan, Minnesota, New York and Quebec. By our calculations, in the last five and a half years, electricity produced from wind has exceeded exports less than two out of every 100 hours. So a strong case can be made that Ontario ratepayers export 98% of wind’s production.
Based on our reconstruction of official data from the IESO, the average price paid for wind in May was $21.62, about 16% below the average market price of $25.89 for all electricity — and about 85% below the mandated wind price of $135. In the end, the $38-million paid to wind power producers in May generated only $6.2-million on the market, creating a $32-million subsidy overpayment for wind power the province doesn’t need.
That, however, is just the start. During the month of May, the $32-million wind subsidy was joined by other subsidies — solar generation, conservation-related advertising, fixed price non-utility generator (NUG) contracts, grants to community power groups and schemes that pay consumers not to use electricity. All these giveaways add up. We call them subsidies because this is money paid for electric power at rates below market rates. The total subsidy for May was $498.2-million, a record. Over the 12-month period ending in May, the total was $4.3-billion. The annual subsidy for the current fiscal year is certain to exceed $5-billion, a number that will continue to rise in years to come as Ontario bears the burden of the Liberal government’s green energy program.
What really matters in this is that these subsidies will continue to grow to pay for new green energy that is not needed. The province is adding new renewable energy supplies — wind and solar — contributing to a large and growing electricity surplus.
The scale of this expensive Ontario surplus can be seen in the graph above. It is big today and is set to get much bigger. According to a projection by Clearsky Advisors, in a paper for the wind industry, Ontario’s net exports of electricity will soar to 20 terawatt hours by 2013, up from 12.7 TWh this year. The increase, 7.3 TWh, is almost the combined increase in wind (3.7 TWh) and solar (2.3 Twh) over the period. Because this expensive electricity is surplus to Ontario demand, it will be exported at cheap prices.
Looking forward, the graph suggests that Ontario will have a massive surplus, exporting power until 2015 at an increasing cost to consumers. Then, with the apparent closure of some nuclear plants, the balance will plunge back into a sudden shortage in 2018. The realism in these longer-term projections is suspect, but there is no doubt that Ontario now faces a massive oversupply of electricity over the next few years, electricity that will have to be exported at mounting cost to consumers.
Ontario Energy Minister Brad Duguid likes to portray this exported power as an economic bonus. “Electricity Exports Continue to Benefit Ontarians,” his department said in a news release last week. So far this year, Mr. Duguid’s officials claimed, Ontario had net exported power revenues of $161.5-million. Since 2006, it claimed, Ontario has received $1.6-billion in revenue from net power exports that “keeps costs down for families.”
But is that true? How much does that export power cost Ontario power consumers? Based on our analysis of IESO data, the total cost of the exported power since 2006 exceeded $2.5-billion (see table below). That means that Ontario power consumers, who must pick up the difference, suffered a loss of more than $900-million on the exports. As the table shows, moreover, those losses are mounting as more and more surplus wind and solar energy is added to the system.
The cause of this now well-known financial foolery is a sharp drop in demand due to the economic slowdown and Ontario’s 2009 Green Energy Act (GEA). The GEA established a feed-in-tariff (FIT) program for wind, solar and other renewable power sources.
As the act kicks in, the buried numbers are growing fast and are destined to rise as much as 50% over the next years. The subsidies for wind alone have increased from less than $50-million per annum in early 2007 to $352-million today. If the current year’s pattern continues through December, the subsidies for wind alone will amount to $448-million in 2011.
For all power, the hidden cost of Ontario’s power surplus will likely exceed $5-billion this fiscal year. If exports almost triple, as forecast, the costs could hit $8-billion or even $10-billion over the next few years.
That’s a lot of money to dump for a province that can’t afford it.
Parker Gallant is a former Canadian banker who looked at his Ontario electricity bills and didn’t like what he was seeing. Scott Luft is a former retailer and small businessman with a statistical interest in Ontario electricity data and the effectiveness of Ontario’s renewable energy policies.