Tom Adams and Ross McKitrick, Special to Financial Post | November 12, 2014 7:00 PM ET
Wind and solar power are key drivers behind Ontario’s surging electricity prices
On Oct. 30 we published a Fraser Institute study entitled “What Goes Up… Ontario’s Soaring Electricity Prices and How to Get Them Down.” We analyzed the factors driving the rise in Ontario’s electricity prices, focusing on the so-called Global Adjustment (GA), which is a non-market surcharge set by the province to fund payments to electricity producers for above-market revenue guarantees. Our econometric analysis allowed us to track not only the impact of direct payments to power generating firms but also indirect effects arising when one distorted production decision subsequently distorts the incentives of others, boosting overall provincial liabilities. Among other things we found that adding wind power to the grid increases costs by about three times the amount of the direct payments to wind turbine operators, with the interaction effects making up the difference.
On November 3, The Canadian Wind Energy Association issued a response to our study prepared by the consulting firm Power Advisory LLC. CanWEA’s press release acknowledges that electricity prices are increasing but claims that these changes benefit Ontarians. While it is certainly true that rising prices — up 52% since 2004 in inflation-adjusted terms — have been enormously beneficial to CanWEA and its members, they are harmful to Ontario consumers and firms. It is important to understand the real factors behind price trends, and not simply to take at face value the claims of an industry group with an obvious conflict of interest in the matter.
CanWEA claims that our “study fails to acknowledge several key drivers of electricity price increases, including the costs of upgrading and renewing aging electricity infrastructure (such as transmission lines and smart meters), and charges such as the Debt Retirement Charge associated with Ontario’s past investments in nuclear power.”
This is untrue. Our study examined the impacts of all the power bill components including transmission and distribution costs, which includes smart meters. Our analysis of power bill components relies exclusively on official Ontario government sources. As shown in our Appendix A, particularly Table A1, it is clear that the Debt Reduction Charge has applied no upward pressure on rates since 2004, and transmission and distribution costs have increased 14%, while overall commodity costs increased by 68%. We focused on the rising commodity cost because it is by far the largest driver for rising rates.
The Power Advisory group complains that our study focuses only on the GA, rather than the complete wholesale cost of power (namely the GA plus the hourly market price). This is also untrue. We showed in our Figure 1 that the hourly market price has not been increasing; in fact it has fallen by more than 50% over the period of analysis. We focused on the GA because that is the component that has been driving the commodity cost increases.
Another of Power Advisory’s complaints is that our regression analysis failed to include a time trend. A time trend would be spurious in this case. We provided a detailed explanation of the formula that determines the GA (pp. 7—10) and there is nothing in it that says it has to go up each year. In other words, it is not a trending variable. Power Advisory presents a chart showing the GA with a linear trend to support its assertion that the mere passage of time is the cause of the increase in the GA. But there is no necessary relationship between time and rising electricity costs, as evidenced by the fact that power prices outside Ontario have been falling over time. The reality is that their time trend variable is merely a proxy for the real cost drivers, particularly the policy-driven increases in wind, solar, and incremental hydro-electric generation capacity.
Power Advisory’s commentary claims (without supporting evidence) that “there is no secondary impact” of wind and solar. This is simply not credible, given the fickle nature of renewables and Ontario’s storage-constrained grid. Many common operating conditions for wind power drive costs to consumers beyond those directly caused by payments to wind generators. For example, high wind output during low demand periods is clearly associated with Bruce nuclear generation curtailments and spilling of hydro-electric generation by Ontario Power Generation. The Power Advisory analysis assumes away these types of interactions, whereas our analysis captures them.
Finally, Power Advisory relies on the trite observation that “correlation is not causation.” Our statistical analysis provides clear supporting evidence for conclusions that also emerge from our analysis of the institutional structure of the Ontario power system, and it allows us to quantify the relative impacts of different components. It also allows us to test, and reject, the claim that increased renewables capacity are unrelated to rising Ontario electricity prices.
We stand by the findings of our study, and we reaffirm the conclusion that renewable power generation, particularly wind and solar power, are key drivers behind Ontario’s surging electricity prices.
Ross McKitrick, a professor of economics at the University of Guelph, is a senior fellow of the Fraser Institute. Tom Adams is an independent energy consultant.