ONTARIO ENERGY ASSOCIATION

HELP THOSE WHO NEED HELP A PROPOSAL TO REDUCE ELECTRICITY BILLS BY 12% AND STABILIZE BILLS MARCH 17, 2020

UPDATED: APRIL 29, 2020 ADDENDUM INCLUDED

To shape our energy future for a stronger Ontario.

ABOUT The Ontario Energy Association (OEA) is the credible and trusted voice of the energy sector. We earn our reputation by being an integral and influential part of energy policy development and decision making in Ontario. We represent Ontario’s energy leaders that span the full diversity of the energy industry. OEA takes a grassroots approach to policy development by combining thorough evidence-based research with executive interviews and member polling. This unique approach ensures our policies are not only grounded in rigorous research but represent the views of the majority of our members. This sound policy foundation allows us to advocate directly with government decision makers to tackle issues of strategic importance to our members.

Together, we are working to build a stronger energy future for Ontario.

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TABLE OF CONTENTS

FACTS ABOUT ONTARIO’S ELECTRICITY SYSTEM ....................................................................... II

EXECUTIVE SUMMARY ......................................................................................................................... III

OEA RECOMMENDATIONS .................................................................................................................... V

INTRODUCTION ........................................................................................................................................ 1 ELECTRICITY SUBSIDIES NOW DISPLACE OTHER PRIORITIES ...................................................... 2

BACKGROUND: ONTARIO ELECTRICITY RATES INCREASE ....................................................... 5 OEB REQUIRES LDCS TO MOVE TO FIXED CHARGES ............................................................................ 5 PUBLIC REACTS NEGATIVELY: GOVERNMENT RESPONDS WITH SUBSIDIES .......................... 6

ONTARIO ELECTRICITY BILLS IN PERSPECTIVE ........................................................................... 6 ONTARIO RESIDENTIAL RATES AMONG LOWEST IN NORTH AMERICA ..................................... 6 ONTARIO RESIDENTIAL RATES AMONG LOWEST IN WORLD ......................................................... 7

COMPARISONS TO QUEBEC AND MANITOBA INVALID ............................................................ 10 WHY NOT PURCHASE CHEAP POWER FROM QUEBEC? ................................................................... 12

RESIDENTIAL HOUSEHOLD IMPACTS ............................................................................................ 13 TOTAL HOUSEHOLD ENERGY COSTS HAVE FALLEN ........................................................................ 13 HOME ENERGY COSTS NOW AT A HISTORIC LOW ............................................................................. 14 WHAT COSTS HAVE AFFECTED HOUSEHOLDS? ................................................................................. 16

CURRENT ELECTRICITY SUBSIDIES BY TYPE .............................................................................. 17 ELECTRICITY COST REFINANCING ........................................................................................................... 18 ONTARIO REBATE FOR ELECTRICITY CONSUMERS (OREC) ......................................................... 20 RURAL OR REMOTE RATE PROTECTION (RRRP) ............................................................................... 20 DISTRIBUTION RATE PROTECTION (DRP) ........................................................................................... 21 ONTARIO ELECTRICITY SUPPORT PROGRAM (OESP) ...................................................................... 21 ONTARIO ENERGY AND PROPERTY TAX CREDIT ............................................................................... 22 LARGER SUBSIDIES FOR WEALTHY HOUSEHOLDS ........................................................................... 22

THE POLITICS OF ELECTRICITY RATES AND SUBSIDIES ........................................................ 23 1993 RATE FREEZE ......................................................................................................................................... 23 2002 RATE FREEZE ......................................................................................................................................... 24 2003 RATE FREEZE REMOVAL ................................................................................................................... 24 2010 LONG TERM ENERGY PLAN .............................................................................................................. 24 2013 LONG TERM ENERGY PLAN .............................................................................................................. 25 FAIR HYDRO PLAN (FHP) .............................................................................................................................. 25 CONCLUSION ON POLITICS AND RATE SUBSIDIES ............................................................................ 25

FIXED COST SYSTEM ............................................................................................................................ 26

ANALYSIS OF 12% REDUCTION OPTIONS THROUGH SUBSIDIES ........................................ 27 MEASURED AGAINST WHAT? ..................................................................................................................... 28 OPTION 1: IMMEDIATE 12% REDUCTION VIA SUBSIDIES ON INHERITED COSTS .............. 28 OPTION 2: IMMEDIATE 12% REDUCTION VIA SUBSIDIES WITH INFLATION CAP .............. 29 OPTION 3: GRADUALLY PHASE OUT SUBSIDIES: WRITE-OFF ELECTRICITY COST

REFINANCING ON TAX BASE TO ACHIEVE 12% .................................................................................. 30

ECONOMIC GROWTH AND DEMAND .............................................................................................. 33

CONCLUSION ........................................................................................................................................... 34

APPENDIX 1: OESP ................................................................................................................................ 35

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FACTS ABOUT ONTARIO’S ELECTRICITY SYSTEM

• Ontario residential electricity rates are amongst the lowest in North America

• Ontario residential electricity rates are also amongst the lowest in the world

o Countries with lower rates all have dramatically higher carbon emissions from their electricity system

o Ontario residential electricity rates are the lowest in the world (with Norway and Taiwan) as a percent of median household income when compared to other countries

• Ontario has one of the lowest carbon emitting electricity systems in the world

• Facts for those who like to compare Ontario to Quebec or Manitoba

o Quebec and Manitoba get almost all their power from low-cost legacy hydro assets (95% and 97% respectively)

o Ontario gets 25% of its power from low-cost legacy hydro assets, 60% from nuclear

o Fair comparisons for Ontario would be jurisdictions that require other fuel sources to meet their needs, like Nova Scotia, Alberta, New York or Ohio. These jurisdictions all have higher residential electricity rates than Ontario.

• In the past decade in Ontario

o Average monthly residential electricity bills increased from $104 to $112 in constant (inflation-adjusted) $2017

o Natural gas bills declined by $30 ($2017)

o Altogether, household energy bills have declined by $22 per month, or about $264 annually for the typical household

• Electricity bills are at historic lows in Ontario as a percentage of household income

o Electricity bills currently average about 1.2% of household income

• Electricity subsidies in Ontario have increased from $426 million in 2016-17 to $5.6 billion in 2019-20

o A large component of this comes from the 2017 Electricity Cost Refinancing (ECR) component of the Fair Hydro Plan (FHP) introduced to lower bills in the short-term, to be paid back by future electricity ratepayers with interest

o Under Ontario’s current subsidy regime, higher income households with larger homes are receiving much higher subsidies than moderate- and low-income households

• Under the FHP, electricity rates were set to begin increasing at 7% per year between 2021 and 2029

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EXECUTIVE SUMMARY Ontario is currently spending approximately $6 billion to subsidize residential electricity bills, a large portion of which goes to households who do not need help with their bill. The Ontario government is now spending more on these electricity subsidies than it is on the combined Ministries of: Agriculture, Food & Rural Affairs; Economic Development, Job Creation & Trade; Environment, Conservation & Parks; Infrastructure; Labour; Municipal Affairs & Housing; and Natural Resources & Forestry. Ontario is also now spending more on electricity subsidies than on its entire transportation system. How did we get into this position? In 2016 and 2017, in response to rising electricity rates, voter anger reached unprecedented levels in Ontario. The pace of these rate increases had very real impacts on a subset of Ontario households. It was exacerbated by public scandals related to electricity, which included gas plant cancellations and Auditor General of Ontario reports critical of government decisions, undermining public confidence. A number of public opinion polls showed that electricity rates had become the number one top-of-mind issue for voters, displacing more typical number one issues like health care, jobs and the economy. The real impact experienced by certain electricity customers (e.g. low-income households who rely on electricity for heat) cascaded into a broader reaction by voters that was vastly disproportionate to the actual impact on them personally. The electricity system became a totem for all Ontarians’ angst and discontent with the provincial government. One could find common cause with family members and friends in complaining about “hydro bills”. Ontarians channelled their anger and frustration into this common cause. Voter electricity anger in turn brought immediate pressure on provincial politicians and the government to take meaningful immediate action. The 2017 Ontario election featured an incumbent government campaigning on a recently implemented 25% bill reduction plan, an NDP party promising a 30% bill reduction, and a PC party promising an additional 12% bill reduction. This did not happen by accident. In the midst of this voter electricity anger, Ontarians were not going to vote for someone unless they were promising to do something dramatic about “hydro rates”. The net result of all of this is that Ontario is now spending about $6 billion annually to subsidize electricity rates. Since this time, voter agitation regarding electricity rates has subsided. This provides Ontarians with an opportunity to calmly and rationally examine the options before them and ask whether continued subsidies or an additional 12% reduction subsidy is necessary. This paper provides background information to put residential and small business1 electricity bills in Ontario into perspective. The previous section summarizes a few of these facts. Ontario has one of the most affordable and greenest electricity systems in the world. Yet, most Ontarians are not aware how fortunate they are compared to the rest of

1 This paper focuses on Regulated Price Plan (RPP) rates and voters. The RPP goes to about 5 million customers, including up to 500,000 small businesses and farms. It does not delve into commercial and industrial rates. The politics of electricity in Ontario is driven primarily by residents who can vote, as opposed to businesses who cannot. Other organizations, like the Canadian Manufacturers and Exporters, have issued research papers regarding industrial electricity rates in Ontario. The issues related to commercial and industrial rates are different, require separate consideration, and are not examined in this paper.

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the world when it comes to residential and small business electricity rates and affordability. Yes, there have been missteps along the way in the management of our system, but those are behind us. Ontario’s electricity system costs have now stabilized. If we make the right policy decisions today, Ontarians could benefit from stable electricity rates going forward. Background is also provided on the fixed cost nature of Ontario’s electricity system. Ontario’s electricity system costs about $21 billion annually to run. Most of these fixed costs are related to hard assets or firm contracts. That means there are very limited options available to the government to lower costs in a significant way. As a result, subsidies would be required to implement any meaningful additional reduction in electricity rates. Further background is provided on the various subsidy programs that are currently active in Ontario. A number of these subsidies were expanded significantly in 2017. The largest was the Electricity Cost Refinancing (ECR) component of the Fair Hydro Plan (FHP), discussed further below. However, there was a considerable expansion of assistance to rural and remote electricity customers, and subsidies to assist low-income electricity bill-payers were also doubled. We examine three options the provincial government could pursue in relation to its commitment to lower electricity bills by 12% in detail. For each option, we outline the implications for both ratepayers and taxpayers. We start by outlining the public plan for electricity bills inherited by the new government in 2018. Under the FHP, between 2022 and 2029, electricity bills were planned to increase by 7% per year to pay for the cost and interest associated with the Electricity Cost Refinancing (ECR). The ECR involved borrowing to lower rates currently and then have future electricity ratepayers pay it back with interest. The three subsidies examined are as follows: OPTION 1: IMMEDIATE 12% REDUCTION VIA SUBSIDIES ON INHERITED COSTS The OEA estimates that between now and 2045, this plan would require an additional $60 billion in subsidies factoring interest costs to be paid by Ontario taxpayers. Under this plan, rates would still rise by about 7% per year between 2021 and 2029, as it is simply being layered on top of the FHP. OPTION 2: IMMEDIATE 12% REDUCTION VIA SUBSIDIES WITH INFLATION CAP This option would eliminate the planned 7% rate increases between 2021 and 2029 and relieve electricity ratepayers of a $36 billion future obligation. However, implementing this option will require massive subsidies. The OEA estimates that this option would cost Ontario taxpayers about $213 billion between now and 2045. OPTION 3: PHASE OUT ELECTRICITY COST REFINANCING SUBSIDIES This option is the lowest cost option for provincial taxpayers. It would see bills remain stable, increasing by about 1.5% more than inflation each year until such time as electricity bills cover system costs. This option would result in electricity bills for Ontarians that are, on average, 13% below the cost plan inherited by the government, exceeding the government’s commitment. The OEAs recommendations on the next page flow from this analysis.

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OEA RECOMMENDATIONS This paper has provided background that puts electricity bills in Ontario into perspective. A majority of Ontarians are benefitting from an electricity system that is low cost, affordable and green. They do not need massive subsidies to lower their bills, and they do not think that the government should be borrowing to do so. Based on this background, the OEA makes the following recommendations.

1. MEET 12% RATE REDUCTION COMMITMENT BY WRITING OFF ELECTRICITY COST REFINANCING SUBSIDIES ON THE TAX BASE This will protect electricity ratepayers from years of high rate increases to pay for the borrowing costs of subsidies being used to lower bills today. Between now and 2045, the average bill payer would face a bill that is 13% lower than outlined in Ontario’s 2017 Long Term Energy Plan, exceeding the government’s commitment.

2. GRADUALLY PHASE-OUT ELECTRICITY COST REFINANCING (ECR) SUBSIDIES This will save Ontario taxpayers billions of dollars that can be used for other government priorities. By doing it gradually, electricity bills in Ontario will remain stable and predictable, which is something valued by ratepayers.

3. ELIMINATE THE INFLATION CAP In order to implement the OEA’s recommendation to phaseout of ECR subsidies, the government will need to allow bills to go up by a little more than inflation. For this reason, the inflation cap will need to be eliminated.

4. MAINTAIN THE RECENTLY ENHANCED LOW-INCOME ONTARIO ELECTRICITY SUPPORT PROGRAM (OESP) This program provides a high level of assistance for low-income households. For many low-income households, this subsidy is large enough to offset more than half of their electricity bill. It also provides higher levels of assistance to those dependent on electric heat who were disproportionately impacted by electricity rate increases.

5. MAINTAIN THE RECENTLY ENHANCED RURAL AND REMOTE RATE PROTECTION PROGRAM (RRRP/DISTRIBUTION RATE PROTECTION) The enhanced RRRP provides a high level of assistance to rural households who face higher distribution costs. It also is tremendously helpful for the many rural Ontarians who do not have access to low-cost natural gas for home heating.

6. LEAVE PST REBATE IN PLACE In order to meet the objective of this paper of keeping electricity bills stable, the OEA does not recommend removing the PST subsidy at this time.

7. MAKE ENERGY COST MINIMIZATION AN ONGOING FOCUS The OEA commends the Government of Ontario for its emphasis on keeping energy costs as low as possible, while still retaining a reliable energy system. For example, increasing access to low-cost natural gas will save some households up to $2500 annually. The government also amended the Fair Hydro Plan borrowing structure, saving an estimated $4 billion in future borrowing costs for ratepayers. Continued focus on energy cost minimization will help assist in phasing out subsidies.

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INTRODUCTION In recent times in Ontario, electricity costs and the management of the province’s electricity system have garnered significant public and voter attention. So much so, that electricity costs in 2016 and 2017 became the number one voter concern in many polls, over issues like health care, the economy, education and jobs2. The Ontario public became very agitated and angry about electricity costs in the lead up to the last provincial election. Underpinning some of this public concern was the rapidly increasing electricity rates brought on by the overhaul of about two-thirds of Ontario’s power production fleet.3 All three main political parties in Ontario responded in the same fashion to this situation. In its September 12, 2016 Speech from the Throne, the government of the day announced the removal of the provincial sales tax (8%) from electricity bills for residential and small business ratepayers, effective January 1, 2017.4 When that failed to soothe voters sufficiently, in March of 2017, the government announced the Fair Hydro Plan, which lowered electricity bills by another 17% for residents and small businesses to take effect on May 1, 2017, in addition to some new funding for low-income, rural and remote customers, all through borrowing. All this amounted to a 25% bill reduction for the typical residential ratepayer. The NDP party promised a 30% bill reduction. The PC party then promised an additional 12% bill reduction in their election platform. None of this happened by accident. The Ontario public was very agitated about electricity costs and was not going to vote for someone unless they were promising to reduce electricity bills. Voter anger has led to some large policy actions by the provincial government, and potential additional actions to meet commitments made during a period of voter electricity anger. These actions and potential actions have significant consequences for both Ontario taxpayers and electricity bill-payers. More recently, public anger regarding electricity bills has subsided significantly. As the chart below shows, electricity bills were only identified as a priority by 1% of respondents in a recent OEA poll. Now that the dust has settled on this issue, Ontarians have an opportunity to step back and take a reasoned and rational look at where we are today with respect to electricity costs. We need to closely examine the implications of existing rate reduction policies and potential policies to try and reduce electricity rates further currently being contemplated.

2 See for example Innovative Research Group’s poll for the OEA: https://energy-ontario.com/wp-

content/uploads/2018/03/Greg_Lyle_Polling_Presentation_-_ENERGYCONFERENCE16_-_28.09.16_-2.pdf 3 It is not the intention of this paper to rehash the underlying causes of significant electricity rate increases that took place between 2010 and 2017. That has been done by numerous other authors including the Auditor General of Ontario. 4 https://news.ontario.ca/opo/en/2016/09/speech-from-the-throne.html

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What would you say is the most importantissue facing Ontario today?

4%1%

3%1%1%1%1%1%

1%1%1%1%1%

1%2%2%2%

2%3%

4%4%

5%8%8%

9%11%

18%

0% 2% 4% 6% 8% 10% 12% 14% 16% 18%

Other

None/nothing

Don't know/refused

Crime

Traffic

Energy bills

Homelessness

Wages

Drugs/substance abuse

The Conservatives

Carbon tax

Seniors/elderly

Immigration

Justin Trudeau/Fed govt

Petroleum prices

Funding cuts

Cost of living

Housing

Economy

Taxes

Jobs

Government/leadership

Doug Ford/Ont. Govt

Education

Environment

Finances/budget

Healthcare

Source: OEA poll via 1,100 live provincewide telephone interviews conducted May 17-26, 2019 by Maple Leaf Strategies.

ELECTRICITY SUBSIDIES NOW DISPLACE OTHER PRIORITIES Where has all this voter anger and subsequent political and government response taken us? As shown in the chart below, the Ontario government is now spending more on subsidies for electricity rates than it is on the following other government Ministries and associated priority areas combined:

• Agriculture, Food and Rural Affairs

• Economic Development, Job Creation and Trade

• Environment, Conservation and Parks

• Indigenous Affairs

• Infrastructure

• Labour, Training, and Skills Development

• Municipal Affairs and Housing

• Natural Resources and Forestry.

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Electricity Subsidies vs. Other Government Priorities

5.6

0

1

2

3

4

5

6

Electricity Subsidies Ministries

$ b

illio

ns

Agriculture

Economic Development

Environment

Indiginous Affairs

Infrastructure

Labour

Municipal Affairs & Housing

Natural Resources

2Source: Ontario Ministry of Finance. 2019-20 Third Quarter Finances. January 2020.

To provide another perspective on this, the chart below compares current electricity subsidies to some select priority government programs. Electricity subsidies are now larger than the entire budget for the Ministry of Transportation, which includes Ontario roads and funding for transit. It is also larger than the direct funding provided to Ontario’s colleges and Universities.

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Electricity Subsidies vs. Other Government Priorities

5.6 5.2 5.1 4.7 4.3

0

1

2

3

4

5

6

Electricity Subsidies Colleges &Universities

Ministry ofTransportation

Drug Programs Long-Term Care*

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illio

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3

Sources: Ontario Ministry of Finance. 2019-20 Third Quarter Finances. January 2020.Government of Ontario. Expenditure Estimates. 2019-2020 Volume 1. *Ontario Ministry of Finance. 2018 Ontario Budget.

As we will see later in this paper, most of these electricity subsidies are going to households who do not really need assistance. On top of this, consideration is being given to expanding subsidies even further. Ontarians are at a crossroads where we must decide if this is the right priority and next step for our province.

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BACKGROUND: ONTARIO ELECTRICITY RATES INCREASE This section provides a brief summary as to what happened with electricity rates in Ontario in the 2006 to 2017 period. It is well known that Ontario electricity bills increased significantly between 2006 and 2017. Ontario’s total system cost increased from $15.4 billion in 2006 to $20.3 billion in 2017 in inflation-adjusted dollars (Constant $2017).5 This was driven almost entirely by an increase in the cost of generation. The generation cost increases were driven by: decommissioning of coal plants; their replacement by new natural gas plants; the beginnings of a nuclear fleet refurbishment; and increases in wind and solar renewable power, a significant portion of which was procured non-competitively at fixed prices through FIT (feed-in-tariff) contracts.6 Residential electricity rates during this period went from 5.5 cents per kWh to 10.3 cents, an 87% increase. The energy commodity portion of the bill increased from 55% of the average bill in 2006 to 67% of the bill in 2017. These changes impacted all bill-payers. However, it is worth noting that some bill-payers were impacted much more dramatically than others. For example, households with high electricity use (e.g. households dependent on electric heat) experienced a much more dramatic impact than say, for example, a condominium dweller where the energy consumption is much lower. OEB REQUIRES LDCs TO MOVE TO FIXED CHARGES There were other policy changes being made concurrently in the system that impacted some bill-payers more than others. In 2015, the Ontario Energy Board (OEB) gave direction to local distribution companies (LDCs) to transition most of their charges from variable charges (per kWh) to fixed charges.7 This change resulted in some winners and losers in terms of impact. For example, a single senior living in an apartment, who typically uses very little electricity, would have experienced a significant increase in LDC charges on their bill as a result of this change. Beneficiaries of this change would have been, for example, large electricity users (e.g. those with electric heat) who would end up with a much lower LDC charge. However, the beneficiaries would not have noticed any benefit as they were experiencing the rate increases noted above. Another example of a negatively impacted group was cottagers, who, as low energy users, would previously have had lower bills. Although this change was designed to have no impact to the average household, the rising fixed charges on electricity bills for those households negatively impacted drew a lot of public and media attention. Having this change layered on top of rising variable electricity commodity rates did not help matters.

5 IESO, 2019. Table prepared for OEA. This data is presented in a chart in the section entitled Fixed Cost System later in this paper. 6 Ontario’s Auditor General estimated that the additional cost of procuring power non-competitively, versus using competitive procurement, to be about $9.2 billion. Auditor General of Ontario. 2015 Annual Report. Chapter 3. 7 Ontario Energy Board. EB-2012-0410. A New Distribution Rate Design for Residential Electricity Customers. April 2, 2015.

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PUBLIC REACTS NEGATIVELY: GOVERNMENT RESPONDS WITH SUBSIDIES During this period, the government responded to public negative reaction by adding subsidies to the bill. First, there was the Ontario Clean Energy Benefit8, a 10% reduction on the total cost of electricity charges. It was introduced in January 2011 and later removed on January 1, 2016. This removal exacerbated negative public reaction to rising electricity prices. There were some low-income programs added as well. The Debt Retirement Charge, being used to pay for previous government subsidization of electricity rates, was removed from the bill. And finally, the previously mentioned Fair Hydro Plan (FHP) was introduced in March of 2017. When you put all these things together, voter anger had reached a fever pitch by late 2016 early 2017. Some of it was warranted, as some specific households experienced a fast pace of increase in their bills, which was no doubt difficult to adjust to. However, the impact on the typical household was relatively modest. Nonetheless, it became something everyone in the public could agree on – they were angry about electricity bills. It was one thing everyone could agree on at the dinner table. That’s a brief history. In the following sections, we attempt to put the issue into perspective with detailed background information.

ONTARIO ELECTRICITY BILLS IN PERSPECTIVE ONTARIO RESIDENTIAL RATES AMONG LOWEST IN NORTH AMERICA We begin by putting Ontario electricity rates in context. Despite years of relatively high increases, residential rates in Ontario remain amongst the lowest in North America. Rates in Ontario are lower than in almost all U.S. states. The only jurisdictions in Canada or the U.S. that have meaningfully lower rates are Quebec and Manitoba. In fact, Ontario residential rates are 36% lower than that paid by the average U.S. ratepayer.

8 https://news.ontario.ca/mof/en/2010/11/ontario-introduces-electricity-cost-relief.html

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Residential Electricity Rates in North America, 2019

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Sources: OEA based on U.S. Energy Information Association. Electric Power Monthly. October 24, 2019; andHydro Quebec. 2019 Comparison of Electricity Prices in Major North American Cities. 2019

ONTARIO RESIDENTIAL RATES AMONG LOWEST IN WORLD An even broader perspective compares Ontario electricity rates to those around the world. Once again, Ontario electricity rates are also amongst the lowest in the world. Among those countries that have meaningfully lower rates, all have household incomes that are a fraction of those in Ontario.

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Global Residential Electricity Prices, 2018

0

5

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Sources: OEA based on International Energy Agency (IEA) data and GlobalPetrolPrices.com.

For example: in China, incomes are about a fifth of Ontario incomes, and India they are about 10% of Ontario incomes. As a percent of household income, Ontario rates are close to the lowest in the world. This is how the same chart looks if we divide electricity costs for 700 kWh of monthly consumption by income.9

9 700 kWh was chosen only because it is the average consumption of an Ontario household, so recognizable to Ontario readers. The purpose here is to compare the cost of a kilowatt of electricity to income, so any volume chosen will show the same ranking of outcome. Actual consumption levels per household vary significantly between countries. One major reason has to do with incomes. Countries with higher incomes generally have higher energy uses. In economics terms, electricity is a normal good, and has a positive income elasticity. Ontario is one of the higher income jurisdictions in the world, so one would naturally expect higher electricity consumption levels.

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Annual Electricity Costs* as a Percent of Median Household Income, 2018

1.7% 2.3% 2.3% 2.5% 2.2%

0%

5%

10%

15%

20%

25%

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Sources: OEA based on International Energy Agency (IEA) data and GlobalPetrolPrices.com for electricity costs.Gallup survey for median household income. https://news.gallup.com/poll/166211/worldwide-median-household-income-000.aspx

*assumes monthly consumption of 700 kWh for comparison purposes

Saudi Arabia is the only country in the world that has meaningfully lower electricity rates as a percentage of household income than Ontario. There is one more perspective on this same graph that is important. The chart below outlines the grams of greenhouse gas emissions (GHGs) per kilowatt hour (kWh) in 2013 (the year for which data was readily available to the OEA) for the same countries in the same order. This is otherwise known as the “carbon intensity” of electricity. Notice that all the countries to the left of Ontario (those that have lower average costs per kWh for residents from the first chart in this series) have electricity grids with very high emissions. They may have low costs, but they are burning coal or other fossil fuels to power their grid. Ontario has one of the cleanest electricity grids in the world. Since 2013, Ontario’s grid likely would have lower GHG emissions than shown here, as the last coal plant closed in 2014 and additional wind power was added.

Ontario Energy Association 10

Carbon Intensity of Electricity Production Sector, 2013

368 13 24

0

100

200

300

400

500

600

700

800

900

1,000

Sau

di A

rab

ia

Mex

ico

Ru

ssia

Arg

enti

na

Ch

ina

Ind

ia

Taiw

an

Turk

ey

Ko

rea

On

tari

o*

Sou

th A

fric

a

Un

ite

d S

tate

s

Hu

nga

ry

No

rway

Ch

ile

Bra

zil

Po

lan

d

Slo

vak

Rep

ub

lic

Cze

ch R

epu

blic

Gre

ece

Swed

en

Fin

lan

d

New

Zea

lan

d

Fran

ce

Net

her

lan

ds

Swit

zerl

and

Au

stri

a

Un

ite

d K

ingd

om

Jap

an

Au

stra

lia

Irel

and

Po

rtu

gal

Ital

y

Spai

n

Bel

giu

m

Ger

man

y

Den

mar

k

g /

kWh

Sources: OEA based on http://www.compareyourcountry.org/climate-policies?cr=oecd&lg=en&page=2; individual research for countries not included in this source; andToronto Atmospheric Fund. A Clearer View on Ontario’s Emissions. Electricity Emissions Factors & Guidelines. 2019 Edition.

* Ontario data is for 2014.

COMPARISONS TO QUEBEC AND MANITOBA INVALID It is a common ploy amongst those looking to inflame the debate on electricity prices in Ontario to compare Ontario rates only to Quebec, Manitoba or British Columbia. It is important to understand why this is unreasonable and inappropriate. These three jurisdictions have a geographic topography that allows them to meet all of their electricity needs almost entirely through low-cost legacy hydro infrastructure – hydro plants that were built decades ago. Other jurisdictions in Canada are not as fortunate and must meet their needs through a mix of alternative resources which typically will have higher costs than legacy hydro projects. Quebec and Manitoba have amongst the lowest electricity rates in the world. While it would be nice to have similar rates in Ontario, wishful thinking will not address the realities of meeting Ontario’s electricity needs going forward. The next section profiles the fuel source for electricity generation for Canada’s six largest provinces to provide some perspective on this issue. It shows that Quebec and Manitoba, Ontario’s two neighbours to which it is commonly compared, get 95% and 97% respectively of their energy generation from hydro. Most of these are very cost-effective legacy hydro projects.10 Ontario, on the other hand, gets only 26% of its electricity from hydro. A fairer comparison for Ontario would be Alberta or Nova Scotia, which like

10 Provinces in Canada are learning that large new hydro projects can be expensive. In B.C., the Site C hydro dam has gone over budget and is expected to put upward pressure on rates. In Manitoba, the Keeyask dam project and associated transmission has gone over budget and also will put upward pressure on rates. And in Newfoundland, the Muskrat Falls project has gone so far over budget that rates are projected to go from 12 cents per kWh to 21.4 cents as a result.

Ontario Energy Association 11

Ontario do not have the topography to meet its electricity needs through hydro and now depend on a diverse mix of fuel types to meet electricity needs.

If we wanted a fairer comparison of electricity rates with immediate neighbours, the chart on the next page compares the electricity system’s fuel mix in New York, Ohio and Michigan. These jurisdictions are more like Ontario in that they are dependent on a diverse fuel mix for electricity production. Like Ontario, New York and Ohio have the

5%1%

26%

7%

60%

Ontario

Petroleum Natural Gas

Biomass Hydro

Wind Nuclear

4%

95%

1%Quebec

Petroleum (<0.1%) Natural Gas (<0.1%)

Wind Hydro

Biomass/Geo Solar (<0.1%)

58%

14%

12%

9%4%4%

Nova Scotia

Natural Gas Wind

Hydro Petroleum

Biomass/Geo

Source: National Energy Board. Provincial and Territorial Energy Profiles. https://www.cer-rec.gc.ca/nrg/ntgrtd/mrkt/nrgsstmprfls/cda-eng.html

Electricity Generation by Fuel Source and Province, 2017

2%

6%

90%

B.C.

Petroleum Natural GasBiomass HydroWind (1%)

45%

45%

5%

3%

3%

Alberta

Coal Natural GasWind HydroBiomass

1%

97%

2%Manitoba

Natural Gas OtherNuclear HydroRenewables

Ontario Energy Association 12

benefit of a decent portion of their fuel mix coming from hydro assets. As we saw earlier in the chart that outlined electricity rates in North America by jurisdiction, Ontario has significantly lower residential electricity rates than these three neighbours. In addition, carbon-based fuels represent 35%, 47% and 65% respectively of the electricity production in these jurisdictions – dramatically higher than that of Ontario at 5% currently.11

Electricity Generation by Fuel Source, 2019

35%

37%

22%

6%

New York

Natural Gas-Fired Nuclear

Hydro Renewables

47%

31%

19%

3%

Ohio

Natural Gas-Fired Nuclear

Hydro Renewables

37%

27%

26%

1%8%

Michigan

Natural Gas Nuclear

Hydro Renewables

Source: Energy Information Association. State Profile and Energy Estimates. https://www.eia.gov/state/?sid=US

WHY NOT PURCHASE CHEAP POWER FROM QUEBEC? There are some Ontarians and organizations who regularly suggest Ontario can solve its problem simply by importing electricity from Quebec. However, Quebec uses a large amount of its electricity capacity in the winter, as Quebecers generally use electricity to heat their homes. Ontario also has a large winter peak in its consumption. This means that there may be limitations in Quebec’s ability to reliably meet all of Ontario’s needs. Furthermore, Quebec has never formally and publicly put forward an offer to Ontario that can be evaluated and contrasted with alternate solutions (e.g. the status quo or other energy service providers). In particular, there has never been a proposal that guarantees to meet Ontario’s capacity needs throughout critical times of year. They have offered behind closed doors “energy deals” (as opposed to “capacity deals”) to a province that already has excess energy given its contracted energy supply. There is no evidence to date that Quebec is willing to offer Ontario a capacity arrangement that meets Ontario electricity reliability requirements. In addition, significant transmission upgrades would be required, which would be expensive, and possibly problematic given modern public reaction to new infrastructure development projects.

11 U.S. Energy Information Administration. Electric Power Monthly. October 2019.

Ontario Energy Association 13

Through the Independent Electricity System Operator (IESO), Ontario is developing tools that will enable Quebec to offer its services in Ontario going forward. Firstly, Ontario’s capacity auction has been expanded to include imports. Secondly, the IESO is launching a resource adequacy consultation to discuss how Ontario is going to meet its needs going forward. This presents an opportunity for Quebec to participate and openly outline what they are willing to offer to meet our needs with other resources who will be doing the same in this process.

RESIDENTIAL HOUSEHOLD IMPACTS This section puts the electricity rate increases discussed previously into context. We noted above that not all households experienced the same impact from these changes. A large increase in electricity rates would have impacted electrically heated households more than others, as they generally use a lot more electricity than other households. About 18% of households in Ontario rely on electricity as a heat source, while two-thirds of households use natural gas for heat, and the remainder some other non-electric fuel source.12 However, negative voter reaction at the time was strongly spread across all voter households. In the following sections, we take a closer look at what happened to household costs during this period. TOTAL HOUSEHOLD ENERGY COSTS HAVE FALLEN The chart below demonstrates what happened with energy costs for a typical Ontario household in the decade between 2008 and 2017. After adjusting for inflation, by 2017 the monthly electricity bill increased from $104 to $112, an increase of $8 per month, or about $96 annually. However, natural gas prices dropped during this decade13, and the average monthly natural gas bill dropped from $93 to $63 per month, a savings of $30 per month, or $360 annually. Overall, a typical Ontarian’s home energy bill dropped from an average of $197 monthly to $175 monthly, an annual savings of about $264.

12 Statistics Canada. Table 38-10-2086-01. Primary heating systems and type of energy. 2017 13 Natural gas prices reached a peak in 2007 and 2008.

Ontario Energy Association 14

Ontario Average Monthly Home Energy Costs, 2008 and 2017 Constant $2017

$104 $112

$93 $63

$197

$175

$0

$50

$100

$150

$200

$250

2008 2017

Co

nst

ant

$2

01

7

Natural Gas

Electricity

1

Sources: OEA based on Statistics Canada. Table 11-10-0222-01. Household spending, Canada, regions and provinces.Statistics Canada. Survey of Household Spending. 2008Statistics Canada. Table 326-0021 Consumer Price Index, annual

During this period the provincial government introduced a variety of new subsidy programs which offset some of the electricity generation rate increases outlined earlier. We will review some of these programs and their cost implications in a subsequent section. As a contrast, average annual water bill costs for Ontario households is shown during the same period. These increased from $393 in 2008 to $528 in 2017, an increase of $135 in inflation adjusted dollars. Municipalities in Ontario have been moving away from subsidizing the costs of the water system through property tax bills, with some municipalities instituting annual rate increases of 9% per year during this decade.14 In spite of this rate of increase and household impact, water bills in Ontario have received little public attention. HOME ENERGY COSTS NOW AT A HISTORIC LOW To put electricity and natural gas costs into a historic perspective, the chart below outlines both costs as a percentage of household income over a long time period. Electricity costs

14 https://www.thestar.com/news/city_hall/2013/12/18/toronto_water_rates_going_up_9_per_cent.html

Ontario Average Annual Household Water Costs2008 and 2017, $2017

$393

$529

$0

$100

$200

$300

$400

$500

$600

2008 2017

Co

nst

ant

$2

01

7

Sources: OEA based on Statistics Canada. Table 11-10-0222-01. Household spending, Canada, regions and provincesStatistics Canada. Survey of Household Spending. 2008Statistics Canada. Table 326-0021 Consumer Price Index, annual

Ontario Energy Association 15

were 1.1% of household income in 1981, and now are almost the same at 1.2%, close to historic lows for the province. In Ontario electricity costs peaked at 1.8% of household income in 1993 as the costs of the Darlington nuclear plant began to be added to bills.

Ontario Household Home Energy Expenditures as a Percentage of Household Income

1.1%

1.8%

1.4%1.5%

1.2%

0.9%

0.7%

1.2%

0.6%

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

1.6%

1.8%

2.0%

Electricity Natural Gas

Source: OEA based on Statistics Canada. Table 36-10-0225-01 Detailed household final consumption expenditure, provincial and territorial, annual.Statistics Canada. Table: 36-10-0224-01. Household sector, current accounts, provincial, and territorial, annual.

Electricity rates begin to rise again as a percentage of household income starting in 2010, peaking again at 1.5% of household income in 2016. There was a rate increase in 2016 as the Ontario Clean Energy Benefit (OCEB), which reduced bills by 10% and was funded by taxpayers, was taken off the bill. Offsetting this increase was the removal of the Debt Retirement Charge at the same time. The net effect of these two changes alone was to increase residential bills by about $11 monthly15, an approximate 7.5% increase. At the same time, residential rates under the RPP increased by 10% between 2015 and 201616. That means that altogether, in one year, Ontario households faced approximately a 17.5% rate increase. By 2018, after the introduction of the Fair Hydro Plan (FHP), electricity bills dropped down to 1.2% of income, close to a historic low. Natural gas has followed a different trajectory. Natural gas bills were 0.9% of household income in 1981 with some relatively minor annual changes over the next two decades. Natural gas prices increased significantly in 2001 and reached a peak of 1.2% of household income in 2003. Beginning in 2009, natural gas prices began to drop due in part to significant new supply from fracking in the U.S. By 2018, natural gas prices had reached an historic low, being just 0.6% of household income.

15 https://www.cbc.ca/news/canada/toronto/debt-retirement-charge-disappearing-from-home-hydro-bills-1.2619632 16 https://www.oeb.ca/rates-and-your-bill/electricity-rates/historical-electricity-rates

Ontario Energy Association 16

Altogether, household energy costs for the typical Ontario household are now at their lowest level at any time since 1981, totaling 1.8% of household income. WHAT COSTS HAVE AFFECTED HOUSEHOLDS? It is becoming increasingly evident from the data reviewed so far that electricity bills have not been a serious problem for most Ontario households. So what costs have been affecting households? Ontario households have faced some cost pressures, offset by some cost declines. The chart below provides a breakdown of changes in annual household expenditures in Ontario for categories that saw more than a $300 increase in constant $2017 (i.e. adjusted for inflation).

Household Expenditures by Major Change, 2010-2017 Constant $2017

Larger Expenditure Increases

$1,875

$382

$29$369$578

$319

$450

$847

$476

Housing CommunicationsElectricity RecreationUniversity Tuitioin Financial ServicesPension/Retirement Gifts, Support Payments & CharityOther

Larger Expenditure Decreases

-$115

-$397

-$397

-$330

Natural GasClothingTransportationHome entertainment equipment

Source: OEA based on Statistics Canada. Table 11-10-0222-01 Household spending, Canada, regions and provinces

The data shows that housing costs have seen the largest increase in household expenditures at $1,875. This is primarily due to higher mortgage and rent payments. Gifts, support payments and charity, followed by university tuition make up the next largest increases in expenditures. Electricity costs were added to the chart to put into perspective the impact on household expenditures for the average household. Compared to other expenditure categories, the change in electricity expenditures is insignificant. The chart also outlines those areas that saw reductions of over $100 in expenditures. These included natural gas, clothing, transportation and home entertainment equipment expenditures.

Ontario Energy Association 17

CURRENT ELECTRICITY SUBSIDIES BY TYPE Since the introduction of the Fair Hydro Plan (FHP) in 2017, subsidy costs for electricity bills have been the largest rising government expenditure. The chart below shows that the budget for cost relief programs has gone from $426 million in the 2016-17 fiscal year, to a forecast $5.6 billion for 2019-20.

Ontario Electricity Cost Relief Programs

$426

$2,834

$4,242

$5,573

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

2016-17 2017-18 2018-19 2019-20F

mill

ion

s

1Sources: Government of Ontario. 2019 Economic Outlook and Fiscal Review. Queen’s Park Printer for Ontario. 2019.

Ontario Ministry of Finance. 2019-20 Third Quarter Finances. January 2019.

The table below delineates the various subsidy programs that make up the forecast of subsidies for 2019-20. In this section we will review the largest subsidies on this list. The dominant program is the $4 billion for “electricity rate mitigation”. This funding relates to the “Electricity Cost Refinancing” component of the FHP, which is explained in further detail below. When the FHP was introduced, funding for the both Ontario Electricity Support Program (OESP) and the Rural or Remote Rate Protection Program (RRRP) were also expanded.

Ontario Energy Association 18

Ontario Electricity Price Mitigation Programs, 2019-20

On-Reserve First Nations Delivery Credit $26,200,000

Ontario Electricity Support Program $213,972,000

Distribution Rate Protection $294,400,000

Rural or Remote Rate Protection Program $252,400,000

Ontario Rebate for Electricity Consumers (PST rebate) $1,200,000,000

Northern Ontario Energy Credit $28,900,000

Electricity Rate Mitigation (previously Electricity Cost Refinancing) $3,557,000,000

Total $5,572,872,000 Source: OEA based on Expenditure Estimates for the Ministry of Energy, Northern Development and Mines (2019-20) and Ministry of Energy, Northern Development and Mines – Supplementary Estimates, 2019-20, and FAO, Fair Hydro Plan, Spring 2017.

ELECTRICITY COST REFINANCING To understand why electricity subsidies have shot up by $5.2 billion annually, one needs to understand the Electricity Cost Refinancing (ECR) component of the FHP. This component of the FHP introduced short-term bill subsidies to lower rates by 17% on average. When added to the previously introduced 8% sales tax rebate, this totalled a 25% bill reduction.

Electricity Cost Refinancing Component of Fair Hydro Plan

10

12

14

16

18

20

22

2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 2041 2042 2043 2044 2045

An

nu

al P

re-T

ax C

ost

($

bill

ion

s)

Status Quo: Pre-FHP Fair Hydro Plan (FHP)

$19 billion: subsidies

Average annual bill increase of 7%: 2021-2029

12%

$40 billion future ratepayer obligation

Source: OEA based on Financial Accountability Office of Ontario. Fair Hydro Plan. Spring, 2017

Ontario Energy Association 19

$19 billion in debt associated with the short-term subsidies were to be accumulated in a debt vehicle on the balance sheet of Ontario Power Generation (OPG) to be paid back with interest by future electricity bill-payers.17 With interest, future bill-payers were going to be paying a total of $40 billion in additional charges on the electricity bills.18 Starting in 2022, the plan was to have bills begin increasing at a high rate (on average 7% per year) until such time as bills were 12% higher than they would have been.19 Bills were then to remain 12% higher until 2045. It is worth noting that most of the funding outlined above goes to all households, including high- and medium-income households who likely do not really need assistance with their electricity bill. Those households may appreciate having their electricity bill lowered, but those same households will either pay for those costs through their taxes or through future electricity bills. Polling by the OEA has shown that Ontarians have very little awareness of the costs associated with current subsidies of electricity rates. Once they are made aware, OEA polling has shown that a majority of voters react negatively to programs that involve borrowing money in order to lower bills today and think such programs should be eliminated. The OEA’s 2019 poll, summarized in the chart opposite, showed very little support for subsidizing bills to lower them today. A 2018 poll done for the OEA by Innovative Research Group shows that Ontarians views on this has remained consistent over time. It found that 63% of respondents agreed with the statement, “We should stop pushing costs into the future, even if that means paying more today.”20 What’s more, a more detailed breakdown of the responses shows that a strong majority of even those who are struggling to pay their electricity bills agree with that statement.

17 Financial Accountability Office of Ontario. Fair Hydro Plan. Spring, 2017. 18 Ibid. 19 Ibid. 20 https://innovativeresearch.ca/wp-content/uploads/2018/10/OEA-2018-Presentation.pdf

63%20%

18%

We should continue to keep costs down today, even if it means paying more in the future.

We should stop pushing costs into the future, even if that means paying more today

Don’t Know

OEA Poll: Fair Hydro Plan 1st choice

14% 45% 25% 8% 8%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Ontario

Continue with the former Liberal Government policyEliminate the programHave taxpayers pick up the costNoneDon't know

Source: OEA poll via 1,100 live provincewide telephone interviews conducted May 17-26, 2019.

“Which of the following three proposals for dealing with electricity prices do you prefer?”

Ontario Energy Association 20

Only 18% of respondents agreed with the statement, “We should continue to keep costs down today, even if it means paying more in the future”. In early 2019 the Ontario government introduced Bill 87, Fixing the Hydro Mess Act, 2019 to take effect on May 1, 2019. Bill 87 made some changes to elements of the Fair Hydro Plan (FHP). One change was to move the debt vehicle off of OPGs books, resulting in an estimated long-term interest cost savings of up to $4 billion due to the government’s lower cost of borrowing.21 This new structure, and other changes to the FHP, was described by the government as the “wind down” of the FHP. However, the government has not made any announcements about who is going to be responsible for the debt being accrued to subsidize electricity rates. In Bill 87, the Government of Ontario gave the Independent Electricity System Operator (IESO) the authority recoup some or all of this debt through a financing entity.22 The provincial government has not yet stated its intention related to the debt currently being accrued to lower electricity bills. ONTARIO REBATE FOR ELECTRICITY CONSUMERS (OREC) The Ontario Rebate for Electricity Consumers (OREC) program was announced in September of 2016 and first began on January 1, 2017. The program provided a rebate of 8% of the base electricity bill invoice, meant to be equivalent to the provincial portion of the HST. The program is funded by Ontario taxpayers. On July 9, 2019 the Ontario government announced changes to the OREC to consolidate it with the refinancing component of the Fair Hydro Plan (FHP).23 The reform also changed the way subsidies are presented on bills: rather than have the subsidies embedded in rates, bill will now show total costs and a separate line item will delineate for bill-payers the subsidy amount provided to them for that bill. This new consolidated line on bills amalgamates bill reduction subsidy programs into a renamed Ontario Electricity Rebate.24 RURAL OR REMOTE RATE PROTECTION (RRRP) The Rural or Remote Rate Protection (RRRP) program provides financial assistance to eligible customers located in rural or remote areas (e.g., Hydro One R2 customers) where the costs of providing electricity service to these customers greatly exceeds the costs of providing electricity to customers located in higher density urban locations. When the FHP was introduced, another element of the plan was to shift the cost of the RRRP program from the rate-base to the tax-base (including expansions to the program, discussed below).

21 Financial Accountability Office of Ontario. Fair Hydro Plan: An Assessment of the Fiscal Impact of the Province’s Fair Hydro Plan. Queen’s Printer for Ontario. 2017. p.12, www.fao-on.org 22 Bill 87, Fixing the Hydro Mess Act, 2019. 23 https://news.ontario.ca/mndmf/en/2019/10/more-transparent-electricity-bills-coming-to-ontario-households.html 24 https://www.ontario.ca/page/changes-your-electricity-bill

Ontario Energy Association 21

DISTRIBUTION RATE PROTECTION (DRP) The FHP also expanded and increased subsidies delivered through the RRRP program by creating a new Distribution Rate Protection (DRP) subsidy. The DRP provides distribution rate relief to additional customers served by LDCs with the highest rates. This change expanded eligibility for the RRRP from 350,000 rural residential customers to about 800,000.25 Customers eligible for DRP in the expanded RRRP include: Hydro One R2 and R1 customers, Northern Ontario Wires, Lakeland Power, Chapleau, Sioux Lookout, InnPower, Atikokan and Algoma. Under the new program, Hydro One R2 customers received an additional subsidy (over and above other subsidies) of about $75 per month, while R1 customers received about $18 per month.26 ONTARIO ELECTRICITY SUPPORT PROGRAM (OESP) The OESP was introduced in Ontario on January 1, 2016.27 Low-income households became eligible to receive subsidies ranging from $20 to $50 per monthly that varied depending upon both income level and size of household. To qualify, households were required to fill out an application form. With the start of the FHP, the provincial government made a number of changes to the OESP that took effect on May 1, 2017. Firstly, the size of the credits was increased significantly, from a range of $20-$50 per month to $25-$75 per month. Income eligibility was also expanded. In addition, a larger subsidy was made available for low-income households dependent on electricity for heat: subsidies for these households could range from $68 to $113 per month.28 Finally, the funding of the program was changed from being a per kWh charge on electricity bills (i.e. paid by ratepayers) to the provincial tax base (taxpayers).29 Detailed tables showing funding amounts based on income and household size are included in Appendix 1. The chart below demonstrates just how beneficial the program can be for low-income households. For a low income three-person household living in an apartment with an income of $35,000, their bill would get reduced from about $52 to $7. With a larger household size or lower income, their bill could be negative, resulting in a credit on their account. There are currently households with negative bills due to the OESP. There is also a Low-income Energy Assistance Program (LEAP) that provides one-time grants towards electricity or natural gas bills for low-income households who are behind on their bill and facing a service shut-off.

25 https://news.ontario.ca/mndmf/en/2017/03/enhancing-electricity-support-and-conservation-programs.html 26 Ibid. 27 https://www.oeb.ca/industry/policy-initiatives-and-consultations/ontario-electricity-support-program-oesp 28 https://www.oeb.ca/sites/default/files/backgrounder-OESP-20170426.pdf 29 https://ontarioelectricitysupport.ca/FAQ

Ontario Energy Association 22

Together with the cost of the RRRP mentioned above, the cost of the expanded OESP and RRRP together was estimated to cost taxpayers $2.5 billion over three years.30

Example OESP Impact

$52$45

$7$0

$10

$20

$30

$40

$50

$60

Electricity Bill Total BeforeOESP

Subsidy Final Electricity Bill

3 Person Household Living in an Apartment $35,000 Income

350 kWh/month consumption

Source: Ontario Energy Association.

ONTARIO ENERGY AND PROPERTY TAX CREDIT Ontario also has a tax credit for low income households who can receive up to $1,085 to help with energy and property tax costs. The energy component of this program is estimated to cost $490 million in 2019.31 LARGER SUBSIDIES FOR WEALTHY HOUSEHOLDS Having reviewed the spectrum of electricity subsidies, this section discusses the distributional impact of the larger subsidy programs which go to all households: Electricity Cost Refinancing; Ontario Rebate for Electricity Consumers; and Electricity Rate Mitigation. These programs represent 85% of the provincial subsidies in 2019-20.

30 https://news.ontario.ca/mndmf/en/2017/3/enhancing-electricity-support-and-conservation-programs.html 31 Ontario Ministry of Finance. Taxation Transparency Report, 2019.

Ontario Estimated Residential Electricity Subsidies by Home Size, 2020

$203 $415

$1,750

$-

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800

$2,000

Apartment (800) Single Detached(1800 sq ft)

Mansion (10,000)

Source: Ontario Energy Association.

Ontario Energy Association 23

Electricity consumption is positively correlated with income. On average, the higher the income, the larger the electricity consumption. Home size is also correlated with income – wealthier households generally live in larger homes. Therefore, the net effect of current Ontario subsidy programs is to provide larger subsidies to higher income households, and huge subsidies to very wealthy households. Someone who lives in an 800 square foot apartment is currently getting an estimated annual subsidy of about $200. In Ontario, there is a large portion of low-income households who live in apartments. Single family homeowners who generally have larger incomes and homes than apartment dwellers are getting double the amount of subsidy. However, someone living in a 10,000 square foot mansion in Ontario is getting an annual subsidy of about $1750. In conclusion, based on current program design, a disproportionately high share of current provincial electricity subsidies is going to high-income households.

THE POLITICS OF ELECTRICITY RATES AND SUBSIDIES Ontario governments have a recent history of implementing various types of electricity subsidies which get paid for either by taxpayers or by future ratepayers, or undone by a future government through a rate increase. The motivation for the subsidy in each case was political – it was implemented against the advice of system planners. This section examines this recent history, and the political fortunes of governments deploying this tool. 1993 RATE FREEZE It has been well documented that the original Darlington nuclear plant construction went well over budget. The original budget was $3.9 billion32 but its actual cost came in at $14.5 billion.33 The costs of the project began coming online in the early 1990s, while a major recession caused a drop in demand. As a result, electricity rates increased by 31% between 1991 and 1993.34 As has become customary in Ontario, then NDP Premier Bob Rae responded by freezing residential electricity rates at 4.3 ¢/kWh in 1993. The rate freeze remained in effect until May 2002. The freeze meant that Ontario Hydro’s revenues did not cover its costs, so its debt began to balloon – rates were being subsidized. The “residual stranded debt” ultimately had to be paid back by future electricity ratepayers in the form of a “Debt Retirement Charge” on electricity bills that began on May 1, 2002 (the day of market opening in Ontario).35 The NDP government was not re-elected.

32 https://en.wikipedia.org/wiki/Darlington_Nuclear_Generating_Station 33 Duane Bratt. Canada, the Provinces, and the Global Nuclear Revival: Advocacy Coalitions. December 2012. 34 Jamie Swift & Keith Stewart. Hydro: The Decline and Fall of Ontario’s Electric Empire. Between the Lines. October 2004. 35 Auditor General of Ontario. 2011 Annual Report. Chapter 3. Section 3.04. Electricity Sector – Stranded Debt. http://www.auditor.on.ca/en/content/annualreports/arreports/en11/304en11.pdf

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2002 RATE FREEZE When the PC government launched a new electricity market in May of 2002, it removed the 4.3 ¢/kWh rate cap that had been in place since 1993. Unsurprisingly, after 10 years of being capped, wholesale prices rose to about 6.2¢/kWh. On November 11, 2002, facing a 2003 spring election, new Premier Ernie Eves responded by re-imposing the 4.3 ¢/kWh rate cap.36 The price cap at this time was subsidized by Ontario taxpayers. The PC government was not re-elected. 2003 RATE FREEZE REMOVAL During the 2003 Ontario provincial election campaign, the Liberal Party ran on a platform of maintaining the electricity rate freeze. However, at the same time they had promised to balance the budget from an inherited $5.6 billion deficit. Once in office, the government discovered that the rate cap subsidy had cost Ontarians more than $700 million by October 2003. Then Premier Dalton McGuinty announced the removal of the price cap and “a price regime that better reflects the true cost of electricity” estimated to be closer to 6¢ kWh.37 Higher tier rates were increased to 5.5 cents shortly thereafter, a 28% increase.38 The Dalton McGuinty Liberal government was subsequently re-elected. 2010 LONG TERM ENERGY PLAN In 2009 the Ontario government launched the Green Energy and Green Economy Act initiative. The initiative was launched in the wake of the 2008-09 recession with the objectives of creating 50,000 jobs and further greening Ontario’s electricity system (the coal plant closures had already been announced and process started). In 2010, under Minister Brad Duguid, the Ontario government released its first Long Term Energy Plan (LTEP) which outlined the combined impacts of the Green Energy and Green Economy efforts and the coal plant closures. The LTEP announced the expected impact on rates resulting from the capital investment associated with the plan: “residential electricity prices are expected to rise by about 7.9 per cent annually (or 46 per cent over five years).”39 Once the LTEP was released, the size of the rate increase drew considerable public attention.

36 https://www.theglobeandmail.com/news/national/eves-freezes-power-prices/article25425877/ 37 https://www.theglobeandmail.com/news/national/mcguinty-to-lift-cap-on-electricity-to-tackle-deficit/article20452126/ 38 https://www.oeb.ca/rates-and-your-bill/electricity-rates/historical-electricity-rates. Two-tiered rates were first introduced in 2004 in Ontario. The first lower tier rate was 4.7 cents. 39 Government of Ontario. Ontario’s Long-Term Energy Plan: Building Our Clean Energy Future. 2010.

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In preparation for a potential public response, the government introduced the Ontario Clean Energy Benefit (OCEB) to take effect in January 1, 2010. The OCEB was a taxpayer-funded subsidy that reduced residential and small business bills by 10% and was to be in effect until December 31, 2015. The program cost about $1.1 billion annually.40 The Dalton McGuinty Liberal government was re-elected in 2011 with a Minority. 2013 LONG TERM ENERGY PLAN In 2013, under new Premier Kathleen Wynne, the Ontario government released the 2013 Long Term Energy Plan. The plan announced that electricity rates would rise by 42% over five years.41 The Kathleen Wynne Liberal government was re-elected with a Majority in 2014. FAIR HYDRO PLAN (FHP) As outlined in the Current Subsidies section above, the government introduced the Ontario Rebate for Electricity Consumers (OREC) program January 1, 2017 in response to voter agitation over rising electricity rates. The program provided a rebate of 8% of the base electricity bill invoice, meant to be equivalent to the provincial portion of the HST. The program is funded by Ontario taxpayers. When that failed to soothe voters sufficiently, in March of 2017 the government announced the Fair Hydro Plan (FHP), which lowered electricity bills by another 17% for residents and small businesses to take effect on May 1, 2017. This was in addition to some new funding for low-income, rural and remote customers, all through borrowing. Combined, this amounted to a 25% bill reduction for the typical residential ratepayer.42 The Kathleen Wynne Liberal government was reduced to 7 seats in 2018. CONCLUSION ON POLITICS AND RATE SUBSIDIES The recent history in Ontario demonstrates that a number of successive governments have introduced rate subsidies in response to voter reaction or out of fear of re-election consequences. The history suggests there is very little evidence that introducing new electricity rate subsidies improves re-election prospects. Governments who introduced rate subsidies were generally not re-elected. Conversely, governments that have removed subsidies or announced significant rate increases have been re-elected.

40 Commission on the Reform of Ontario’s Public Services. Public Services for Ontarians: A Path to Sustainability and Excellence. 2012. 41 Government of Ontario. Achieving Balance: Ontario’s Long-Term Energy Plan. December 2013. 42 https://news.ontario.ca/opo/en/2017/03/premiers-statement-on-ontarios-fair-hydro-plan.html

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FIXED COST SYSTEM Before we review options to reduce electricity bills in Ontario, it is important to give some context on the cost make-up of Ontario’s electricity system. Ontario’s electricity system is largely made up of costs that are fixed in the short- and medium-term. Here is a description of some of those fixed costs:

• Distribution costs: the distribution system is a capital-intensive system in which the vast majority of costs are fixed.

• Transmission costs: similarly, Ontario’s transmission system costs are predominantly fixed capital costs.

• Rate-regulated assets: a large portion of Ontario’s generation fleet is owned by Ontario Power Generation (OPG) and is “rate-regulated”, including a large hydro dam fleet and the Darlington nuclear plant. These assets are not expected to change significantly in the near future so they can be considered fixed.

• Generation contracts: most of the remaining portion of Ontario’s generation costs are locked into long-term contracts.

• Nuclear fleet: going forward, even after the Pickering Nuclear Plant shuts down, Ontario will get close to half of its power from its nuclear plants. Together, Darlington and Bruce Power are currently embarked on a $25 billion refurbishment of these plants. It seems unlikely that Ontario will abandon this refurbishment plan given our dependence on nuclear power43.

Ontario Electricity System Costs, 2006 - 2017

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43 The provincial government has “off-ramps” that can be exercised 12 months prior to each reactor refurbishment start date, and as the owner of OPG could choose to take similar action on the Darlington refurbishment.

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The current total cost of Ontario’s system is approximately $21 billion annually. Note in the chart above that outside of generation costs, other system costs have largely been relatively flat over time: they have generally kept pace with inflation. Between 2006 and 2017, the costs of generation in Ontario’s system increased by about $5 billion annually over and above inflation, accounting for most of the cost increases in Ontario’s system. To lower electricity bills immediately by 12% for RPP customers, it would take approximately $1.5 billion in savings if this were to be accomplished by reducing system costs. Given that the vast majority of system costs are fixed or locked into contracts, the OEA is not aware of any options available to the government that can deliver $1.5 billion in immediate savings. The only avenue available to the government to lower bills immediately is to introduce additional subsidies. However, this may not be necessary for the government to meet its commitment to lower bills. We explore this further in the next section.

ANALYSIS OF 12% REDUCTION OPTIONS THROUGH SUBSIDIES Previously, we examined the origins of the various electricity subsidies currently in play in Ontario and how they are funded. We also reviewed the design of these programs and what they mean for existing and future ratepayers. This gives us the foundation we need to explore additional rate mitigation options going forward. Given our system is composed primarily of fixed costs, options to reduce bills by 12% will require subsidies to make up most of the reduction. The OEA’s rough estimate is that about $1.5 billion would be required to reduce electricity bills by 12% for residential customers, farmers and small businesses currently on the Regulated Price Plan (RPP). What follows is an analysis of the implications of a few options to address electricity rates through subsidies. While there are an infinite number of possible variations, the options outlined below “bookend” both the range of options and the associated implications that are likely available to the government. At one end of the spectrum, the government can choose an option that lowers rates today, to be paid back by future ratepayers – the continuation of the Electricity Cost Refinancing under the FHP. These types of options minimize the impact on taxpayers, but involve high rate increases and higher costs in the future for ratepayers. At the other end of the spectrum, the government could use only the tax-base to subsidize rates. This type of option provides the largest benefit to ratepayers, but is very costly for taxpayers. The OEA asked the Institute of Fiscal Studies and Democracy (IFSD) to review each of these options and provide their opinion as to the implications for both provincial taxpayers and provincial electricity ratepayers based on publicly available data. The IFSD’s more detailed analysis can be found in a separate companion paper to this study, entitled Options for Reducing Electricity Rates in Ontario and Implications for Rate Payers and Taxpayers.

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For this analysis, the OEA and IFSD used data from the Financial Accountability Office’s (FAO) 2017 report on the Fair Hydro Plan. This is the most detailed publicly available information that allowed for this analysis. We acknowledge that there may have been some changes in the cost structure since that report was written. However, we believe that the FAO’s data allow us to give readers a sense of the orders of magnitude faced by both taxpayers and ratepayers by the choices facing them. Given that the provincial government recently revealed that the estimated current annual subsidies are now $5.6 billion, which is $1.6 billion (40%) higher than the estimates made for the FHP, the taxpayer cost estimates provided below are conservative in that they may understate the cost implications to either taxpayers or ratepayers. MEASURED AGAINST WHAT? Before we analyse each of the options, it is important to establish a frame of reference for the 12% reduction commitment. What are we measuring a 12% reduction commitment against? The OEA believes the appropriate measure is the bill/cost profile that the government inherited after the election in June 2018. This profile was shown in the Electricity Cost Refinancing chart shown previously in the Current Electricity Subsidies by Type section. This is sometimes referred to as the “cost curve”. This cost profile was announced as part of the Fair Hydro Plan (FHP), was ensconced in the 2017 Long Term Energy Plan, and publicly documented by Ontario Financial Accountability Office in a report on the FHP. OPTION 1: IMMEDIATE 12% REDUCTION VIA SUBSIDIES ON INHERITED COSTS The most simple and straightforward option is for the Ontario government to introduce an additional subsidy to lower RPP costs by 12% over and above the ratepayer cost profile they inherited from the previous government. For this option, we assume that the provincial government chooses to proceed with the FHP/2017 LTEP plan to have future electricity ratepayers pay for the costs of subsidies initiated through Electricity Cost Refinancing (ECR) program, as planned with the FHP and also enabled as an option in the current government’s Bill 87.44 As noted above, the green curve represents Ontario’s current “cost curve” – the bill cost profile inherited by the government. This option reduces costs for Ontario taxpayers by making Ontario ratepayers responsible for all of the ECR costs.

44 Bill 87 gave the Independent Electricity System Operator (IESO) the authority recoup some or all of the FHP subsidy accumulated debt and interest through a financing entity.

The “Cost Curve”

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Source: OEA based on Financial Accountability Office of Ontario. Fair Hydro Plan. Spring, 2017

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This option costs the taxpayers of Ontario $1.5 billion annually in the early years and grows to about $2.5 billion in later years. According to IFSD’s calculations, this option would cost taxpayers an additional $58 billion by 2045 in direct subsidies. There would be up to $39 billion in additional interest costs if the province is in a deficit position. That would bring the total cost of this option to $97 billion for the government/taxpayers. In spite of all this borrowing and interest, electricity ratepayers will still face rising bills as the government begins to recoup the cost of FHP associated debt from ratepayers. As was shown for the ECR previously, under this option ratepayers would still face bill increases averaging about 7% between 2021 and 2028.

Option 1: 12% Reduction via Subsidies on Inherited Costs

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Source: OEA based on Institute for Fiscal Studies & Democracy data, March 2020.

* Assumes that the Ontario government exercises option to have future electricity ratepayers pay for the costs of subsidies introduced, as per Fair Hydro Plan and 2017 Long Term Energy Plan.

OPTION 2: IMMEDIATE 12% REDUCTION VIA SUBSIDIES WITH INFLATION CAP Another option is for the government to leave in place the indefinite cap on electricity bills which holds their rate of increase to inflation, introduced in Bill 87. In this case, the government would be choosing not to collect the costs of subsidies associated with the ECR component of the FHP from future electricity ratepayers. On top of that, the government would move to immediately lower bills from their current level by 12% by introducing additional subsidies. Under this option, Ontario taxpayers would absorb the $19 billion cost associated with lowering bills under the ECR program, rather then trying to collect it with interest from future ratepayers at an estimated cost of $36 billion for future ratepayers. This has the effect of eliminating the green cost curve inherited by the government.

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Option 2: 12% Reduction With Inflation Cap

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In addition, the government would then use subsidies to lower rates by another 12%. According to the IFSD, this option would cost the government/taxpayers an additional $115 billion in direct subsidies. In addition, if the government is in a deficit position, there could be additional interest costs of another $98 billion, for a total potential cost to taxpayers of $213 billion. As mentioned, with the recent discovery that current subsidies are 40% higher than those forecast under the FHP, this likely represents an underestimate of the cost implication for taxpayers. This option provides the largest benefit to ratepayers. Ratepayers benefit by having the taxpayers absorb the $19 billion in short term borrowing costs under the ECR component of the FHP, thereby wiping out a $40 billion future obligation they were facing. On top of that, the government would be spending an additional $111 to $195 billion by 2045 (and more beyond that if the subsidy was left in place). OPTION 3: GRADUALLY PHASE OUT SUBSIDIES: WRITE-OFF ELECTRICITY COST REFINANCING ON TAX BASE TO ACHIEVE 12% The third option presented is for the Ontario government to take steps to gradually phase out electricity subsidies. Under this option, Electricity Cost Refinancing (ECR) subsidies going forward would be gradually phased out until they are fully eliminated by 2029. This would result in bills increasing by about 3.5% annually between 2021 to 2029.

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To do this, taxpayers would absorb (i.e. write-off)45 all subsidy costs associated with the ECR component of the FHP. As with option 2, this includes the $19 billion in short term subsidies, thereby eliminating an estimated $40 billion obligation on future ratepayers. Doing this eliminates the need for steep rate increases beginning in 2022 to begin recovering this debt. This approach keeps electricity bills stable, so Ontarians have predictable bills for the foreseeable future.

Option 3: Phase Out of Subsidies

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New lower cost curve after various government actions.

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Source: OEA based on Institute for Fiscal Studies & Democracy data, March 2020.

$20B direct subsidy cost$30B potential interest cost$50B total potential cost3.5% annual bill increases until 2029

As part of this option, we also outline a lower new system cost curve that could be the result of various government actions. There are things the government has done, and may continue to do, that lower system costs. For example, in July 2018 the provincial government announced the cancellation of energy contracts would save $790 million.46 In January 2019, Bruce Power announced savings of $200 million that would benefit ratepayers.47 Also, in September of 2018 the provincial government chose to respond to the Auditor General’s criticism of the accounting treatment of the Fair Hydro Plan and moved the borrowing costs under the plan from OPG onto the province’s books48, saving an estimated $4 billion. Any efforts to lower system costs will reduce the amount of

45 There are many who have suggested that Ontario “write-off” the costs of some of the electricity generation infrastructure that was added through the Green Energy and Green Economy initiative. Ontario’s Auditor General estimated that the projects added through this initiative cost approximately $9.2 billion more than they would have if competitive tendering had been used. If provincial taxpayers absorb the subsidies associated with the ECR component of the FHP, they will have effectively written-off this excess cost and more. 46 https://news.ontario.ca/mndmf/en/2018/07/ontario-to-cancel-energy-contracts-to-bring-hydro-bills-down.html 47 https://www.brucepower.com/2019/01/25/bruce-power-delivers-200-million-in-efficiencies-to-electricity-system/ 48 Ontario Ministry of Finance. A Plan for the People. Ontario Outlook and Fiscal Review. 2018. p. 33.

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subsidy required and time needed to phase out subsidies. For the purposes of this option, we assume a modest and gradual reduction of system costs as a result of government effort to find cost-savings. According to the IFSD, this option would result in an additional $20 billion in direct subsidy costs to ensure the subsidy phase out is gradual and does not result in large electricity rate increases in any year. If the government is in a deficit position, the additional interest cost could be as high as $30 billion. This option reduces the burden on Ontario taxpayers compared to either Option 1 or 2 to pay for electricity subsidies over the long run. It avoids the large rate increases needed between 2021 and 2028 required if ratepayers are required to bear the cost of short-term subsidies. Over time, this option will eventually free up billions of dollars in savings for the provincial government that will be available for other provincial priorities like health care, education, infrastructure, economic development and budget balancing. Finally, Option 3 allows the government to meet its commitment to reduce electricity bills by 12%. The chart below outlines how much lower electricity rates would be under this option for the average residential ratepayer when compared to Ontario’s cost/rate plan outlined in the FHP and 2017 Long Term Energy Plan (LTEP). Ratepayers will start seeing benefits by 2022, compared to the 2017 LTEP plan. Between 2022 and 2045, electricity bill would be on average 13% lower than those outlined in the 2017 LTEP. If the government proceeds with this option, they will have exceeded their commitment to lower electricity rates by 12%.

Option 3:Average Bill % Lower than Government Inherited Cost Profile

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ECONOMIC GROWTH AND CONSUMPTION Discussions about electricity bills and rates in Ontario invariably focuses solely on the supply side of the equation and costs. This ignores the fact that changes in demand can have a significant effect on bills. Between 2005 and 2009, the province of Ontario saw a decline in total grid consumption of electricity from 157 to 138 terawatt-hours (TWh). The chart below isolates the impact of this change alone and outlines the impact on a typical residential bill-payer who uses 700 kWh per month. The decline in consumption alone was responsible for a 13% increase in the bill for a typical customer in Ontario. This is because in Ontario’s fixed costs system, there were fewer customers to share total system costs.

Impact of Consumption Decline on Typical Ratepayer, 2005-2009

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Source: OEA based on IESO, MODULE 1: State of the Electricity System: 10-Year Review, August 2016

When thinking about electricity bills and rates in Ontario, we must pay attention to the demand side of the equation as well – to economic growth and associated policies. If a short-term49 loss of load due to economic decline causes rate increases then conversely, economic growth can help lower rates. In a separate paper, the OEA will be exploring this issue further and discussing options for Ontario to maintain and grow demand to help lower costs. Ontario currently does not have a dynamic economic development-oriented rate structure to encourage economic growth. This is something that should be explored seriously.

49 The OEA acknowledges that in the long-term, all system costs are variable. Significant sustained economic growth that caused a significant demand increase would require an increase in the generation stock and associated costs, reducing the effect of downward pressure on rates described here. This would be a good problem for Ontario to have.

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CONCLUSION Electricity rate increases that took place over the past decade had a significant impact on a relatively small segment of Ontario’s population. However, that impact cascaded into a broader public reaction that was vastly disproportionate to the actual experience of most households. This disproportionate reaction in turn invoked responses from government with programs that provide large subsidies, the majority of which go to households who do not need help. So much so that electricity subsidies now represent one of the largest expenditures in government, crowding out other spending priorities. It is unfortunate that electricity rates had to increase. Certainly, some costs incurred were avoidable, and voters are right to be angry about policies being implemented without disclosure to the public about the cost consequences. However, it remains the case that the majority of costs to upgrade Ontario’s electricity generation fleet were necessary and supported by Ontarians (e.g. eliminating the coal plants, replacing them with natural gas plants and refurbishing our nuclear plants). This paper has provided information that puts electricity costs in Ontario into perspective. Ontario is fortunate to have one of the most affordable and greenest electricity systems in the world. In spite of this, Ontario spending billions of dollars to subsidize residential and small business electricity bills through borrowing and most of those subsidies go to people who do not require assistance with their electricity bill. Most Ontarians are unaware that these very large subsidies are in place and that as taxpayers they are picking up the cost through debt and interest costs that are compounding. There is no strong evidence to suggest that additional subsidies are required to lower electricity rates even further. Additional subsidies will need to be paid for by either taxpayers or future ratepayers. This paper explores some of the consequences for both taxpayers and electricity ratepayers, who are most often one and the same, from options to further lower electricity rates through subsidies. Based on this review and the facts of Ontario’s situation, the OEA provides seven key recommendations in the Executive Summary of this paper.

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APPENDIX 1: OESP The OESP on-bill credit amount will depend on how many people live in the house and the combined household income after tax. OESP Monthly Credit Amounts by Household Income Level50

Household Income (After Tax) Household Size (Number of people living in household)

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$28,000 or less $45 $45 $51 $57 $63 $75 $75

$28,001 – $39,000 $40 $45 $51 $57 $63 $75

$39,001 – $48,000 $35 $40 $45 $51 $57

$48,001 – $52,000 $35 $40 $45

For some customers, the need to use more power is unavoidable. If your home is electrically heated, or you rely on an approved medical device requiring a lot of electricity, OESP offers a higher level of assistance.

OESP Monthly Credit Amounts by Household Income Level – Energy Intensive

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$28,001-$39,000 $60 $68 $75 $83 $90 $113

$39,001-$48,000 $52 $60 $68 $75 $83

$48,001-$52,000 $52 $60 $68

50 Source: Ontario Energy Board. https://ontarioelectricitysupport.ca/FAQ

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Ontario Energy Association 1

ADDENDUM: APRIL 29, 2020 This paper was originally written in early 2020 and planned for release on March 17, 2020 at an OEA speaker series event. March 17th was the date a state of emergency was declared in Ontario related to the global COVID-19 pandemic. Most organizations, including the OEA, had chosen to cancel their events in advance of this. The OEA recognizes that as a result of the pandemic, the world has changed significantly since this policy paper was written. Concerns about previous election commitments made over two years ago are not likely to be a priority for most Ontarians. We have significant new challenges ahead of us and as a society, we need to shift our focus and efforts on those. The original paper focused on options available to the government to meet its election commitment to reduce electricity bills by 12%. However, much of the information presented in the original paper remains relevant for our current situation. This addendum utilizes the information from the original paper to provide an updated perspective on Ontario’s current situation with respect to electricity rates, subsidies, and the path forward.

UPDATE ON OUR CURRENT SITUATION On March 24th, 2020, the Ontario government announced that it would be suspending time-of-use (TOU) electricity rates and reduce rates to the off-peak rate of 10.1 cents perk kilowatt-hour for a period of 45 days. The OEA estimates that the single rate necessary to keep revenues at pre-announcement levels is 12.8 cents, so this represents a 21% rate reduction (and a 27% rate increase to remove this subsidy). The estimated cost of this measure is $162 million/45 days, over and above existing subsidies. The government estimated that the typical household would save about $20 per month; small businesses $150; and farms more than $300. While this rate reduction may or may not get extended, the OEA assumes that this is an emergency measure, and will not become permanent. We therefore do not include these additional subsidies in our updated analysis. The chart below outlines Ontario’s current situation with respect to general subsidies that go to all RPP recipients (subsidies for low-income, rural and remote households are not included). The chart outlines the trajectory of subsidy costs in Ontario if no other policy actions are taken. With the enactment of Bill 87 in May 2019, the rate of increase for bills for RPP customers is capped at the rate of inflation. Given where underlying system costs are, this will require approximately $103 billion in subsidies to sustain this policy out to 2045. In addition, the province is currently foregoing the PST revenue that would have collected if rates were set at a level to recover costs. The foregone PST revenue out to 2045 will total approximately $40 billion. Direct subsidies under the status quo therefore total approximately $143 billion. The interest cost associated with these subsidies is estimated to be an additional $85 billion. Altogether then, the total cost of the status quo by 2045 will be approximately $228 billion.

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DEMAND DROP MEANS INCREASED SUBSIDIES As with the previous cost charts in this report, the above chart is based on data from the Ontario Financial Accountability Office report on the Fair Hydro Plan. More recently, the IESO reported that Ontarians are now using 10-12% less power compared to two years ago.51 This drop in energy consumption means that there would be roughly 10-12% less commodity revenue to contribute towards Ontario’s mostly fixed system costs. That, in turn, will mean higher costs for some customers, and higher subsidy costs for the government. As we saw previously in this paper, the 2005-09 energy consumption reduction was estimated to have contributed to a 13% increase in rates. Non-RPP Class B customers will see their bills go up because they are not eligible for the Ontario Electricity Rebate and therefore their bills are not protected by an inflation cap currently. RPP customer bills, on the other hand, are protected by an inflation cap. That means that the government will end up picking up the cost of lost system revenue due to lower demand. The length of time that demand will be lower in Ontario, and how deep that demand drop will be, is uncertain. However, given the challenges associated with COVID-19 and the length of time expected to find a vaccine, it does seem likely that demand will not come back to previous levels in the near future. Therefore, the subsidy estimates shown in the chart above underestimate total subsidies. Given the uncertainty related to demand, the OEA has not attempted to estimate the additional subsidy cost, or amount of rate increase that will be experienced by non-RPP Class B customers.

51 IESO. An overview of COVID-19 impacts on electricity system operations. April 23, 2020.

Status Quo: Current Subsidy Outlook

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An

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al C

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Subsidy with Inflation Cap Underlying Cost Foregone PST

$103 B

$40 B

Subsidies $143 BInterest Cost $ 85 BTotal Cost $228 B

Source: OEA.

Ontario Energy Association 3

TIME-OF-USE IN PERSPECTIVE When working from home became the norm in response to the pandemic, the Premier of Ontario began hearing from many households that they were very concerned about having to pay peak TOU rates while their families were at home. In typical Ontario fashion, electricity rates rocketed to the top of the public agenda, with calls for the Premier to take action to address this situation. Ontario’s Premier responded quickly to allay public concerns by eliminating TOU and setting rates at the lowest TOU off-peak rate. The OEA publicly commended the Premier for his leadership in providing reassurance and a sense of calm as public concern became heightened with the unfolding state of emergency. The good news is that Ontario has been successful in creating awareness for electricity customers about TOU rates and their objective of incenting consumption at off-peak times. So much so that the public now has a distorted perception about the cost of using electricity in Ontario during peak times. TOU rates were first introduced in Ontario in 2006 in association with a provincial target for province wide installation of smart meters by 2011. The policy rationale underlying this is that reduced peak demand reduces the amount of generation/capacity needed in the province. Reducing peak consumption means that the province does not have to build as much generation or pay for additional capacity reduction measures, thereby reducing system costs and rates for ratepayers. A 2016 study by the Brattle Group found that TOU pricing reduced summer peak consumption in Ontario by an average of 3.26% when first introduced, but that the load shifting effect diminished over time. The study found that by 2014, the summer peak reduction had fallen to 1.18%.52 One reason for the limited impact might be that peak TOU rates in Ontario have never been set at the level necessary to drive large changes in peak consumption. Another might be because rates in Ontario are very low, so the cost of using electricity during the peak is not that high. These are also reasons why the recent public reaction to facing peak rates while working from home is vastly disproportionate to the actual impact on most households. SOME EXAMPLE IMPACTS The typical Ontario household uses about 700 kWh of electricity monthly. Some estimates suggest that working from home can lead to an increase in electricity usage of between 2 and 7%. A 7% increase represents 49 kWh per month on average. If all of that increased consumption were to happen during the peak (which is unlikely), this would represent an increased monthly household cost of about $10 per month. This is not a large impact for a household whose head is fortunate to have retained employment. The reason that the impact is so small goes back to an earlier finding of this paper: electricity rates in Ontario are very low.

52 The Brattle Group. Analysis of Ontario’s Full Scale Roll-out of TOU Rates – Final Study. Prepared for the Independent Electric System Operator. February 03. 2016.

Ontario Energy Association 4

Here are some additional example estimates by the OEA that put into perspective the increased electricity costs associated with working from home:

• Cooking lunch every workday using stove for 15 minutes: cost = $1.56/month

• LCD TV on 10 hours daily versus 2 hours (e.g. kids using TV): cost = $4.50/month

• More lights on during day: cost = $2.00/month The OEA recognizes that increased electricity costs are a concern for those who have lost their employment as a result of the lock-down. Following on the theme of this paper, we will speak to that concern in the conclusion of this addendum.

PANDEMIC IMPACT ON WORKING HOUSEHOLDS The table below tries to put the typical household budget into perspective for a household where the household earner is now working from home. These represent rough estimates by the OEA based mostly on data from Statistics Canada on expenditure levels for the average household and OEA assumptions about how those have been impacted by the shut-down. These are not detailed research estimates and only meant to be illustrative. For those who have been fortunate and able to retain their employment and work from home, the primary household budget impact is a drop in household expenses. Just in the example categories below, the typical household in Ontario is seen as saving about $1,000 per month in household expenses due to the shut-down.

Expenditure Category Estimated Monthly

Savings

Transportation (fuel, depreciation, taxi, public transportation) $ 259

Retail shopping net change $ 280

Making lunch at home vs. takeout/restaurant $ 250

Recreation Services (sporting events, zoos, museums, theatres, etc.) $ 175

Hair grooming $ 37

Dry-cleaning $ 5

Other $ 50

Total $ 1,056

Source: OEA. These savings dwarf the expected increase in electricity costs that working households are experiencing during the current lockdown. From a public policy perspective, additional broad-based electricity subsidies to lower electricity rates for households working from home actually provides a windfall to those households, whose monthly household costs for many items have dropped considerably.

BROAD SHALLOW SUBSIDIES VS. TARGETED RELIEF The COVID-19 pandemic has had a devastating impact on many families and businesses. Many people have lost their employment indefinitely. Some permanently. Some

Ontario Energy Association 5

businesses have shut down and lost all their revenues. Some businesses have already closed permanently. Others will be challenged to recover, or simply will not be able to recover from an extended period without revenues. What seems likely at the time of writing of this addendum is that governments at all levels will need to marshal significant resources to help affected citizens and businesses recover. Both federal and provincial governments across Canada have already responded with a wide variety of programs to help individuals and businesses. Most of these programs have been targeted and provide high levels of support to individuals and businesses directly affected by the pandemic. Targeted relief is much more cost-effective than broad based subsidies. Therefore, targeted programs allows government to provide a much higher level of support to those in need given financial constraints. With respect to electricity, the Ontario government’s short-term emergency response was to increase subsidies to all RPP customers, regardless of their need for assistance. A broad-based shallow subsidy. A shallow electricity subsidy will not be of much assistance to a severely impacted individual or business. Given that the estimated cost of the additional subsidy is estimated to cost $162 million for 45 days (about $1.3 billion annually) the OEA recommends that Ontario end this new subsidy as quickly as possible and focus its funding and efforts on programs to help those households who have been adversely financially impacted by the lock-down.

CONCLUSION This addendum has provided some updated context to the information contained in the original March 17th report. Even though the situation and priorities facing Ontario have changed dramatically since the original writing, we find that the main conclusions and recommendations from the original study still remain valid for our current circumstance. In fact, given the seriousness of the new challenges facing Ontario, the recommendations to move away from general subsidies for all households to targeted funding to those who need it most have even more validity. Ontario is on track to spend at least $228 billion subsidizing electricity rates over the next 25 years for households, the majority of which do not need such a subsidy. At the same time, many households and businesses have been devastated by the impact of the global pandemic and associated lockdown. Ontario will need all the resources it can marshal to help these struggling households and business. The provincial government should move as quickly as possible to phase out broad-based non-targeted electricity subsidies and use those funds to help our impacted households and businesses, and to assist in accelerating our economic recovery from this devastating pandemic.