The Hydro Mess Will Continue


by Peter Wagner. Peter is a self-professed energy geek that is a close observer of regional energy markets – especially electricity and natural gas.

Read with interest the National Post article on the provincial Liberal’s spending on hydro. http://business.financialpost.com/fp-comment/kathleen-wynnes-50-billion-power-spend-adds-up-to-little-for-ontario-ratepayers

I will try to abstain from making judgements on competence or appropriateness but what we need to understand as taxpayers (and voters) is that while the situation is bad, it is likely to continue for almost a generation. I may not share the author’s perspective on how to categorize the spending (and feel frankly that it weakens his argument) but the important part is the magnitude. What it is likely to mean (whether it is reflected in rates or not) that the cost of electricity will remain at current levels for a 10 – 15 year period at least. Voters can determine whether they view some of these investments as appropriate at the ballot box, but a change of government is unlikely to affect the real cost of electricity.

Rather than look at them from the current categories, it might be useful to look at them as sunken costs or continuing costs.

Sunken Costs

  • Smart Meters and Smart Grid $3.2 billion
  • Closing Coal Plants $.6 billion
  • Gas Plant Moves $1.1 billion
  • Big Becky $1.5 billion
  • Mattagami $2.6 billion
  • Bruce refurbishment $3.4 billion

TOTAL $12.4 billion

On-Going Costs

  • Wind generation $10.2 billion
  • Solar generation $6.2 billion
  • Wind and solar connection $5 billion

TOTAL $11.2 billion

What we see is that the on-going costs (where hydro users will continue to pay for hydro purchased at prices set by the government at well above market rates) are within 10% of the sunken costs (where rightly or wrongly, the government chose to make investments in the grid). If you remove the cost of moving the gas plants (where much of the cost is opportunity cost based) we are basically at the same level.  It is interesting to me that all of the on-going costs (labelled intermittent and unreliable in the article) were made for largely environmental reasons. Because of the associated agreements with the owners of these generation facilities we will continue to endure these costs for the next 15 years (give or take). No change of government, or improvement in the operating efficiencies, or better management will cause these costs to go away.

While few people outside the government and passionate environmentalists will characterize the Liberal’s management of the energy portfolio as sterling, the reality is that even the best management (which is unlikely to ever happen in the public sector) will continue to be stuck with these costs. The opposition to the recent hydro cuts (represented as 25% but in reality just a deferment) has been surprisingly muted. What the government has cleverly done is defer the costs of providing electricity to the grid further down the road. While I can appreciate this is welcome relief for those who are having to choose between food and heat, we are in reality just saddling our future years with the costs created by a philosophical decision to go away from fossil fuels. At no point in time was it contemplated that these renewable investments would result in electricity at (or close to) market rates.

What is lost in both the article and this commentary is how these investments compare to the expected on-going costs of running a utility of this size. While there is no doubt that the sunken costs are both real and significant, are they consistent (in size) with capital refurbishments that we ought to be making to keep our power supply reliable, safe (in the broadest concept), and cost effective?  It might be helpful to look at a cross section of quasi private energy suppliers to understand where (and how much) we should be spending.

In my view, simply painting this as incompetence of the government does not get us to the point where we are making informed decisions. The Wynne government would have us think that an investment of this magnitude demonstrates commitment to ‘improvement’ in the energy portfolio. While I fear that most will come to another conclusion, let us get to whatever judgement we come to on the basis of facts in the proper perspective.

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