The 3 cent solution

This is a piece about conservation I wrote awhile ago for a newsletter published by Citizens for Renewable Energy. With rumours about Ontario “investing” in new nuclear capacity, with its associated financial risk, it is relevant today.

The 3 cent solution

I would like to pay higher power prices, and use the increase in price to bribe people to save electricity.

Why? Because if people consume less, the power price will be reduced, and save me money.

New power costs more than old power. A lot more. And Ontario needs a lot of new power. The less we need, the less our power will cost.

This apparent paradox – where I should pay more to bribe you to use less, should form a strong pillar of future energy policy. Let me explain.

The price that we pay for power is based on a blend of factors. Ontario Power Generation (OPG) has “heritage assets”, including major hydroelectric facilities like Niagara Falls. The price of the power from these assets is set by the Ontario Energy Board based on an allowable rate of return. Since the power costs little to produce, it is very cheap (about 2 cents/kWh). These assets supply about 20% of our power. OPG also has the Pickering and Darlington nuclear stations, which again are priced based on an allowed rate of return, and supply about 25% of our power. Today, because the cost of the nuclear power has been higher than expected, the 5% allowed rate of return is very low. This will increase to a more normal rate in the future. The price we pay for power from these plants is 5-6 cents/kWh. We are not paying the full true cost of this power, because we have not properly budgeted for waste storage (recently estimated at $24 billion), nor for plant decommissioning, and our rate of return is still below where it needs to be. The price of this power will inevitably go up.

OPG also has the coal plants, which are scheduled to be shut down, because of health and environmental effects, and also because they are old. The oldest plant, Lakeview, was shut down last year at the ripe old age of 43. Have you ever tried to keep a car that long? The price of this power is not regulated, but is instead sold into the spot market. The cost of power from the coal plants is about 4 cents/kWh, but the spot market has been averaging a little over 5 cents. OPG pays rebates to all electricity consumers if the price they realize in the spot market is higher than a certain threshold. Other players in the spot market include certain hydro facilities, natural gas facilities, and the output of the Bruce nuclear plant.

Demand for electricity rose by 1.1% last year. So we need new supply – half of the latest Pickering refurbishment, which is cost over $1 billion will be required just to meet one year of growth in demand. In addition, our plants are aging, and need replacement. So the government has purchased some new power. They purchased the output about 1375 MW of new renewable power, from wind and water. The average cost of this power was 8.5 cents/kWh. And they have purchased the output of 2300 MW of new gas fired facilities. The cost of this power is more than 8 cents/kWh, at today’s gas prices, and may be much more in the future.

So back to the price on my bill. It is made up of a blend of all of these prices – the very low cost heritage hydro, the low cost, but underpriced regulated nuclear assets, the spot price, the OPG rebate, and the cost of the newly purchased power. Of these, the most costly power is from the new facilities. The less of their power we need, the lower my cost would be. And that is why I want to be charged more. So I can bribe you to use less.

Of course, it need not be a bribe. We could simply provide you with free compact fluorescent light bulbs. Or pay a bounty on an old inefficient refrigerator, so you replace it with one that is twice as efficient. Or pay a bounty on old window air conditioners. Or plant deciduous trees on the south of your property. Or pay half the cost of a solar thermal heater.

Conservation technologies are far cheaper than new power. But since we sell our power at a blended price (just over 6 cents/kWh), they do not offer the consumer a payback in many cases. But they would offer all consumers a payback if we could get more implemented, and could avoid buying power from new sources. We should be willing to pay up to the difference between the cost of new power (about 9 cents) and our power price (6 cents), and we will be equally well off.

So that is the 3 cent solution. It is time to let the conservation bribes begin.

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