Rising rates not helping economic brownouts

November 4, 2013 by  
Filed under Wind Energy Tips

Ottawa West News

News -Five years after the onset of the economic downturn, Ontario’s economy is struggling to retain the status – and job numbers – it once boasted as Canada’s economic powerhouse.

Since 2008, Ontario’s economy has been battered, with an unemployment rate of 7.5 per cent in the third quarter of 2013 and annual gross domestic product increases of 1.8 and 1.4 per cent in 2011 and 2012 respectively, according to Statistics Canada.

By comparison, Alberta’s GDP rose 5.4 per cent in 2011 and 3.9 per cent in 2012, while Saskatchewan’s rose 5.5 and 2.2 per cent in the corresponding two years.

With an economic growth rate lower than the national average and an unemployment rate higher than the national average – coupled with a still-increasing debt of $260 billion – Ontario’s economic situation is far from rosy. Turning this situation around will require a combination of increased investment and maintenance of existing employment levels. One factor that can have a sizeable effect on a company’s financial viability or decision to set up shop in Ontario is energy rates. With another rate hike planned for Nov. 1, Ontario’s electricity rates have risen dramatically over the last five years. Renewal of grid components, the addition of heavily subsidized renewable energy such as wind and solar power, backed up by new gas generators to provide grid stability have all

played a role in driving hydro rates up for not just consumers, but businesses as well.

Ontario Energy Minister Bob Chiarelli has stated the province made some strategic alterations on the energy file and related contracts to mitigate those increases, adding the province was “starting to turn the corner” on rising rates.

Chiarelli would not, however, discuss when rates might stop their upward climb, preferring to wait until the province’s long-term energy plan is released later this year.

Keeping existing jobs, especially the manufacturing jobs that long served as the backbone of Ontario’s economy, has been a challenge, with companies drawn to lower labour costs in the United States. Taxation and energy rates are the other big

considerations for industry.

In Canada, Quebec and Manitoba boast significantly lower energy rates than Ontario, with rate decreases actually reported in Quebec in 2011 and 2012 due to surplus power. Ontario also has periodic power surpluses, which the Independent Electrical System Operator – the crown corporation that runs Ontario’s power grid – sometimes sells to neighbouring jurisdictions below cost, a situation that has a negative impact on ratepayers.

RING OF FIRE FIZZLING

Like the manufacturing industry, the northern Ontario mining industry has traditionally played a large role in the province’s economic fortunes, putting places like Sudbury and its iconic big nickel on the map.

Earlier in October, a North Bay newspaper published an article on the increase of heavy truck traffic on Highway 11 north of the city. The trucks are carrying mine concentrates from the Sudbury area to Noranda, Que., for refining.

Mining is an industry prone to boom and bust cycles that create uncertainty for individuals and whole regions. But, it can be very profitable over a sustained period, and the province – tasked with wrestling down a deficit first and a debt later – would like to see mining thrive.

The much-talked about Ring of Fire deposit in the James Bay Lowlands of northern Ontario has the potential for mass extraction of a number of valuable metals, the most lucrative being chromite – a key ingredient in stainless steel.

Currently the project is still in its infancy, with a lack of either rail or road access to the remote area and two key land holders locked in a legal battle over the one access route. If extracted, the chromite contained within the Ring of Fire would be transported to a smelter in Sudbury for processing under a plan mapped out by the Liberal government.

The largest land-holder in the Ring of Fire – U.S.-based Cliffs Natural Resources – is now threatening to pull the plug on the project if it can’t get the all-weather road it wants, which would threaten the Sudbury smelter and the economic benefit such an operation would bring.

Energy comes into the equation when one factors in the huge amount of electricity needed to run a smelter. With Ontario’s rates already higher than Quebec’s and rising, the worry is that some of the economic benefit from the Ring of Fire could bypass Ontario for refining in another jurisdiction, such as the province next door.

One bill-reducing energy incentive listed by Chiarelli is the Northern Industrial Rate Program, which provides a rebate approximately equal to a 25 per cent reduction in bills for the largest consumers, such as smelters. Depending on how much Ontario’s hydro rates rise, that could soon be not enough to entice business of that size to set up shop in Ontario.

Questions also remain in the northern business community about the power needed to serve the Ring of Fire area, and whether there will be enough when and if the area comes alive. The Thunder Bay Generating Station, which traditionally provided excess power to the region, is currently idled after its conversion from coal to natural gas was stopped, with no official word yet on its eventual fate.

Chiarelli stated that despite the status of the Thunder Bay plant, “we’ve given (the region) complete assurance in principle that they will have power when they need it.”

A number of solutions being worked on in northwestern Ontario, said Chiarelli, including new transmission lines from Wawa, new generation planned for the Dryden area, and the restarting of the converted Atikokan Generating Station, located about 200 kilometres west of Thunder Bay.

SMALL BUSINESSES FEELING SQUEEZE

Mining and manufacturing are but one part of the economic story in Ontario.

Serving smaller areas and moving smaller amounts of product, small and medium-sized businesses are numerous and employ many. Businesses that use less than 250,000 kilowatt hours of power a year are billed for their energy consumption no different than residents.

Ottawa businessman Jim Sourges finds himself in a difficult situation, as his stock-and-trade is the very appliances and fixtures that consume that pricey electricity.

As owner of The Electrical Plumbing Store’s two Ottawa locations, Sourges knows all too well the impact of rising hydro rates and has little recourse in stemming the rising tide of energy bills. He’s replaced all of the bulbs in his showrooms with compact fluorescent lightbulbs and has darkened the chandelier showcase as much as possible, but a storefront business that has to be open during peak hours can’t do much to mitigate costs before staff or the customers become affected.

“Hydro rates have continued to climb over time, especially with time-of-use billing,” said Sourges, whose father founded the store’s original Ogilvie Road location 32 years ago.

“With us, given that we can’t control time-of-use or our hours of operation we can’t do all of the (conservation tips) the government proposes. We signed a fixed-rate contract, but we’re probably paying the same as if it were time-of-use.”

Signing a contract with a third-party energy retailer is the single, only option for small business owners in areas where time-of-use rates are in effect, and the savings are minimal.

Being in the business for so long, Sourges knows that eventually his business and others like it will be forced to pass the cost of the power bill on to customers. Some current business owners in his line of work could easily be swayed into storing merchandise in a darkened warehouse and handling sales through a website, thus eliminating staff members.

“There are ramifications to rising hydro rates that aren’t as obvious as saying ‘I’m going to have to pay a few hundred a month more,’” said Sourges.

“If you’re a manufacturer and your location isn’t important, if you find a place that costs 20 per cent less, you go

there. If you’re serving a local market you might have to change your type of operation, fire a few staff or increase the cost to the buyer. Ultimately, the customer pays in the end – it doesn’t matter what type of business. No one likes to hear that, but that’s the reality.”

For his Northside Road location in Bells Corners, Sourges estimates his electricity costs have risen by $1,500 a month in the past five years.

Sourges, who serves as chair of the board of the Bells Corners Business Improvement Area, said the small-and medium-sized business that make up a community could use some form of relief. He stressed that he understood the need for regular grid improvements and maintenance, and knows such work isn’t cost neutral, but did say that businesses need to be able to stay competitive in the marketplace. Without this, businesses both large and small will suffer, harming both the economy and the province’s future.

Despite continued sluggish, marginal growth in the province’s economy, there has been little word from Premier Kathleen Wynne on how the provincial government plans to turn the situation around. That could change after Finance Minister Charles Sousa delivers his fall economic statement, scheduled for Nov. 7. In his previous statement from May of this year, Sousa said the province is on track to eliminate the budget defi-cit – pegged at $11.7 billion for 2013-14 – by the 2017-18 fiscal year. During that time, however, the province’s debt is expected to rise, hitting $303.9 billion in 2015-16, according to the 2013 Ontario budget.

It remains to be seen what changes will be found in the province’s long-term energy plan. The recent announcement that Ontario would not be moving forward with a

planned build of new nuclear generators – instead relying on a refurbishment of existing reactors – is an indication the Liberal government might be recognizing the potential economic impact of rising rates. Changes made earlier this year to the FIT program (under which wind and solar generation are managed and paid for)

and the contract with Green Energy Act partner Samsung reinforce this notion.

The early estimates of longterm rate increases needed to accommodate grid improvements and the rollout of the act were seriously underestimated. As well, the projected power needs for the province in the near future were overestimated. The Independent Electrical System Operator projects a 0.5 per cent decline in energy demand in 2013, and a 0.1 per cent decline in 2014, a situation that was not envisioned at the end of the last decade.

The opposition Progressive Conservatives and New Democratic Party, as well as the Green party of Ontario, have all criticized elements of the Green Energy Act, while the province’s auditor general slammed the Liberals in the wake of the 2011 election for not performing a cost analysis of the act before moving forward with it.

A report published in June of this year, however, sheds some light on where rates could go in the near future.

“Ontario Electricity Options Comparison: Illustrating the Economics of Ontario Energy Supply Options” is a report by Strategic Policy Economics commissioned by the Power Worker’s Union, representing Ontario hydro workers.

The paper sought to explore the electricity rate impact and overall economic impact of

policies stemming from the previous long term energy plan, giving two projections going forward – one where investments in nuclear generation are continued while investments in wind energy are curtailed and the other where nuclear investments curtailed and wind energy targets laid out in the Green Energy Act are continued.

“Many arguments support that high costs will arise and other arguments suggest that cost growth will be moderate,” the report states, referring to assumptions based on the 2010 long term energy plan. “As such, the costs portrayed have varied significantly and no discovered publicly available source appears to be definitive on the topic of total systems cost.”

Stating that its estimates are accurate to between two and three per cent, the report determined that under the 2010 plan, the average residential electricity bill would rise by 52 per cent between 2011 and 2017 (prior to the addition of the 10 per cent Ontario Clean Energy Benefit), leading to household monthly bills of $865 (for consumption of 800 kWh/month) once the benefit is removed in January 2016. Between 2011 and 2024, residential rates would rise by 75 per cent. Under the same plan, industrial rate impacts would increase 34 per cent between 2012 and 2017, tripling the gap that already exists between Ontario rates and the U.S. average. This figure would rise by 87 per cent between 2012 and 2024.

The report found that the bulk of the increases between now and 2017 stemmed from investments in renewable energy generation. To what degree recent changes made to the energy file have changed these projections is unknown, but the study’s findings casts some doubt on Chiarelli’s assertion that the province is starting to “turn the corner” on rate increases.

As for the economic projections based on wind and/or nuclear investments, the report takes a longer view, looking ahead to 2035 when wind installations procured under the Green Energy Act will have reached the end of their lives.

The study found that by retaining investments in nuclear while reducing investments in wind generation, Ontario stood to receive $56 billion in economic benefits – $27 billion in savings to ratepayers and $29 billion in direct investment.

For a plan that was introduced as being the saviour of the environment while being easy on wallets, the Green Energy Act has proven to be something far different. And, while the economy struggles for momentum, it is clear the province’s focus needs to recognize all factors that can impact the economy, including energy.

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