On March 2nd, in announcing a plan to push electricity costs off into the distant future, the 63.8 year-old Premier of Ontario stated:
In the past few years we've invested more than $50 billion in electricity infrastructure -- new dams in the south, new towers in the north, $13 billion to refurbish nuclear power plants alone and billions more to ensure new transmission and distribution lines everywhere. These are enormously important assets that meet the demand for cleaner and reliable power everywhere in the province. These are assets that belong to all the people of Ontario and that will serve us for many decades to come.Since that time a lot has been written on the Premier's plans. This post will note works I found substantial, particularly those that try to account for the $50 billion "we've" invested. One other aspect that has to be mentioned in discussing the Premier's "Fair Hydro Plan":
We needed to rebuild the system and so we went to the bank for that money. But the terms that were set weren't fair -- particularly the amortization. Instead of paying off the mortgage over 30 years, we agreed to a term of 20.To ground the information on some fact, I'll start with slide 7 of an IESO presentation accompanying the Ontario Planning Outlook delivered in September 2016.
In effect, this generation has been subsidizing not just those who came before, but those who will come next. That's not right -- and it has been notably unfair on today's hydro users. So we're fixing that. We're refinancing the mortgage and setting a new term that stretches over a longer period. Over time, it will cost a bit more. And it will take longer to pay off. But it is fairer
I've now explained 93% of all the generating assets that were in service (likely at the end of 2015) that will remain "under contract" by 2035.
Of the contracted sites, Bruce nuclear reactors are contracted for an expected 31 year life, and the Mattagami waterpower sites have 50 year contracts. Of the generation assets that will still be under contract or owned in 20 years, most were built by generations that preceded the Premier's, and those that don't already have longer payment periods factored into existing contracts.
Perhaps because my work is largely on the costs of electricity generation in Ontario, most of which is contracted, I was particularly struck by Jay Shepherd's blog post dealing with spending by local distribution companies (LDC's).
Energy #16 – The Big Build
From 2005 to 2015, $17.8 billion in capital spending has resulted in $8.8 billion in assets (net of depreciation) being added to the distribution grid.I do strongly suggest reading the entire post, particularly if you are unclear about this:
The neat thing about capital spending, you see, is that the company doesn’t have to pay for it right away. They pay for it over the life of the asset, like a mortgage. (It’s a mortgage with an interest rate of about 7%, but it’s still like a mortgage. Just an expensive one.)
Oh, wait. Did I say “they”. My mistake. That should be “you”.
By 2015, capital spending was up to $2.23 billion per year, 258% of depreciation. Even that wasn’t the whole story. Hydro One was still trundling along, and it was still at 226% of depreciation. The rest of the industry had increased its spending to 281% of depreciation. To put that in perspective, at that rate you can replace all of your assets – assets that have an average 40 year life or more – in less than 15 years, and still have money for growth as well.The post on distribution spending motivated me to check the data for Hydro One's transmission business. In the most recent 10 years consolidated financial statements show $8.2 billion of capital expenditures, and $3.1 billion of Depreciation and Amortization. This is worse than the distribution, both because capital spending has been 265% of depreciation and amortization for a decade, and because the average service life of transmission assets (56 years) is longer than that of distribution assets.
Not surprisingly Hydro One valued transmission assets in 2016 $6 billion higher than it did in 2006.
Will the $26 billion spent on distribution and transmission benefit consumers after 20 years?
Maybe, but if capital spending has indicated assets are replaced every 15 years, maybe not.
Utilities spend what regulators allow, because regulators then allow them to profit on their increased investment. George Veigh noted the role of the regulatory structure in Ending the Cycle of Electricity Price Interventions in Ontario:
Why is Ontario prone to these cycles and what can be done to stop repeating them?The greatest rise in rates is not due to transmission and distribution cost increases, but to the cost of purchasing electricity from generators.
The best explanation for this is the weakness in the governance structure of our electricity system. The government of the day faces virtually no restrictions on its ability to develop ambitious and costly experiments. The costs of these initiatives are outside of the tax base and are realized years after the plans are launched. So the government is virtually always in the position of developing ambitious plans with costs for which they are unaccountable.
In most North American jurisdictions there are constraints on governments’ ability to do this....
In Ontario, there is no such oversight.
My friend Parker Gallant tallied up some spending in Found! Where the Wynne government spent $36 billion! His listing of costs include those already accounted for here as simply distribution or transmission. He also lists:
This list is not comprehensive (it misses natural gas-fire power plants), but by estimating capital costs on contracting capacity it introduces the methodology for estimating capital spending, and completes the listing in this post that pushes capital spending beyond $50 billion.
- “Conservation” spending, $3-4 million/year [$2.5 B]
- Wind generation as at March 31, 2017 will be approximately 4,650 MW and at a capital cost of $2.2 million per MW had a cost of [$10.2 B]
- Solar generation as at March 31, 2017 will be approximately 2,389 MW and at a capital cost of $2.6 million per MW had a cost of [$5.2 B]
- 1.“Big Becky” which went $600 million over budget in an effort to squeeze 150 MWs of capacity from Niagara Falls at a cost of [$1.5 billion]
- 2.“Mattagami” originally a $1.6 billion dollar project to increase the rated capacity by 438 MW (NB) it went over budget by $1 billion reaching a cost of [$ 2.6 billion]
- The Bruce Nuclear refurbishment (NBB) of two units came at a cost of $4.8 billion but according to Ben Chin, former VP of the OPA, the cost to ratepayers was limited to … [$3.4B]
If somebody was curious how the Premier might justify the figure, they might now be impressed.
However, the Premier stated "we've invested more than $50 billion." The reason she should explain the figure is not simply to demonstrate that much has been spent in Ontario's electricity sector, but so that we understand who she is referencing as "We."
I don't think it's us - bringing to the fore that famous Pete Townsend question, "Who are you?"
While most distribution and transmission has some variety of public ownership, only "Big Becky" is a fully public generation project.
Mattagami is a partnership, and that contract is for 50 years already, so even that doesn't justify the Premier's false "amortization" justification for delaying costs.
Private Bruce Power's refurbishment of units 1 and 2 was carried out over the 10 year period over which I found it went from a typically prices supplier of electricity to the province's low-cost provider. Investing hasn't the problem - the problem has been spending poorly.
Whereas Parker estimates the capital spending of the private companies on wind and solar generation, I have tallied up the cost of those contracts, and the value to consumers.
The $13.6 billion net liability of wind, added to the $24.4 billion net liability of solar contracts, produces a $38 billion net liability, which equals all of Ontario Hydro's gross liabilty, before valuation of its/our assets.Does the Premier place herself in with the wind and solar generators when claiming "We've invested..."
There are some big questions it would be nice to see economists address - instead of yelping yet again on carbon pricing. Much of the expense incurred in Ontario, it seems to me, is specifically because "we" did not invest. A major point of expensive feed-in tariff (FIT) contracts is to attract private capital. But in the recession when most of these contracts were signed, money was cheap. My limited understanding of Keynesian economics urges recession spending, but preferably capital spending on projects that will provide a benefit in the future - allowing the government to recoup the costs. Additionally, low capital costs are particularly important in spending on electricity sources where the vast majority of the expense is capital costs (hydro, wind, solar and nuclear are some of these).
Ontario's tariff deficit, which I've estimated at $38 billion was predictable. Some analysis and reporting by honest academics would help to avoid it re-occurring elsewhere.
conservation / "getting trash off the books"
The big news from the weekly free local paper is often the Canadian Tire Flyer, and this week was exceptional - promising 3 packs of LED bulbs for $1 due to the coupon program of the IESO.
This irks me for a number of reasons. Earlier in the week I'd found electricity exports to the states were greater in 2016 than ever before, and the real rate received for those exports was the lowest ever. Ontario also curtailed what is surely a record amount of electricity in 2016: OPG reported 4.7 TWh of potential generation lost due to surplus supply conditions. The IESO had reported curtailed wind and nuclear by this time in 2014 and 2015, but hasn't got around to admitting the numbers for 2016. Whey the do, adding up curtailed supply and the exports to the United States, sold nearer to zero than the rates paid to producers, in 2016 Ontario could have supplied another 3.1 million typical Ontario homes - for only a slight percentage more of the same overall system costs.
It's understandable that the IESO couldn't yet produce curtailment (dispatch down) figures for 2016 - it would have distracted from the focus on producing coupons.
I was inspired to do math on this by Severin Borenstein's Trash those incandescent bulbs today! Assuming 3 hours a day usage, 50-watts less consumption (the standard bulb in the ad is 10 Watts and advertised as a 60 Watt bulb replacement), and 10 cents/kWh (Ontario costs are presently much higher than this, but most service (aka delivery) charges are moving to fixed rates, and future ratepayers will be picking up a big chunk of electricity costs after July 1st).
At 33 and 1/3rd cents per bulb, the investment pays for itself in under 23 days.
At $3 per bulb (the price) the investment pays for itself in 200 days.
At the IESO people are pulling 6 figure salaries to get payback time on bulbs down to 23 days by supplying coupons. The coupon value, and the salaries of the people orchestrating this, are paid for by everybody else - now and, due to the Premier's awfulness, in the future.
On the Politicization of Electricity (intervention breeding intervention)
...the concept of having a public policy on energy use came to the fore among utility regulators. The idea was that if the utilities invested in energy efficiency, then they would not need to build so many power plants. In regulatory circles the new buzz words were “least-cost planning” and “demand-side management.”
The utilities had the good sense to be suspicious of the grandiose claim that efficiency improvements would slow the overall demand for energy. But they were soon bought off with promises of guaranteed profits on approved but expensive efficiency programs. During the late 1980s and early 1990s, a number of sound economists pointed out the flaws of asking a provider of services to reduce his own sales. Further, with amazing accuracy, these economists predicted failure.
Billions of dollars were spent by the nation’s utilities on demand-side programs with little to show for it but inflated claims. The money, of course, came from utility customers. Those who had already invested in energy efficiencies were taxed to pay for the same improvements in their competitors’ facilities. According to economist Franz Wirl both the utilities and customers gamed the system of giveaways for efficiency measures.
Then a wave of rationality struck the electricity industry. Competition for end users was instituted in many states and planned in still more. Customer choice akin to that in telecommunications was seen as the wave of the future. The regulated utilities began the wholesale dumping of their wasteful customer efficiency programs. In the industry this was known as “getting trash off the books.”