Electricity Prices

The Ontario Energy Board (OEB) ruled yesterday to cut regulated prices for consumers.  The rate will drop from 5.8 cents/kWh for the first 1000 kWh to 5.5 cents, and from 6.7 to 6.4 cents for anything above 1000 kWh.  The rates go into place on November 1.
Of course these rates are just the raw electricity price.  You also have to pay for transmission, distribution, basic monthly charge, and the always popular Debt Recovery Charge.  So while your electricity charge has dropped by .3 cents/kWh, this works out to about a 3% reduction in an average bill.

The price charged is made up of a number of things.  There is a substantial amount of power supplied in Ontario from facilities with regulated rates.  These include OPG’s nuclear plants, and OPG’s major water power projects, such as Niagara Falls and Saunders on the St. Lawrence.  This is about half of the supply.  There is some supply from contracts run by the Ontario Energy Finance Corporation.  These are contracts to buy power from a variety of places, mainly smaller waterpower projects.  There are contracts signed by the Ministry of Energy to procure wind energy from the major plants – Sault Ste. Marie, Shelburne, Port Burwell, and Goderich, and other contracts to procure energy from natural gas plants.  Most of the rest of the supply of power comes from the spot market.
It is the decline in the price of the spot market that is allowing a lower rate. Why has the spot price gone down?  The main reason is that we have brought on substantial new capacity.  The refurbishment of one of the 500 MW Pickering units is complete.  300 MW of new wind capacity is on line.  And while the output of this new contracted or regulated capacity is at a higher price than the spot market, the effect of the new capacity is to depress the spot price.  The average spot price paid to the Ferndale wind turbine from Jan 1 2006 – Sept 30, 2006 is 4.93 cents/kWh, compared to 6.99 cents/kWh for 2005.  That is a decline of almost 30%.
Some of the reason for the decline of prices in the spot market is because of much lower natural gas prices.  But the winter futures prices for natural gas are still quite high.  So the price of natural gas generated electricity is likely to rebound.  A mild summer, with the exception of the first week of August, kept demand in check, and kept prices low as well.  But new supply brought on outside the spot market is the principal driver of lower prices.

The price signal to generators from the spot market is clear.  Don’t build any new capacity.  The market doesn’t need it, and isn’t willing to pay for it.  A price of 4.93 cents won’t pay to build any type of generation.  It won’t pay to refurbish an existing nuclear plant.  It won’t pay for new natural gas or coal, or waterpower.  And it certainly won’t pay for new wind capacity.

The Ontario Power Authority has a dilemma.  Part of their mandate is to ensure adequate supply.  This means they will engage in signing contracts to buy power, to ensure new capacity is built.  But another part of their mandate is to transition to market based solutions as soon as practically possible.

Basically they have a mandate to mess up the market that their mandate says they are to transition to.

We need higher consumer rates, not lower.  Higher rates will drive intelligent conservation and efficiency decisions.  It’s not like we have nothing to do with the extra revenue – $20 billion of debt repayments would be a good start.  Lowering rates sends the wrong signal to consumers.

So we have the wrong signal to generators.  And the wrong signal to consumers.

Perhaps it is the signal to voters that drives the process.

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