Ontario government takes action to reduce electricity costs

Ontario's Minister of Energy, Northern Development and Mines (a.k.a. Energy) announced actions addressing electricity sector costs on Thursday. I summarized points from viewing the Minister announce the changes on Twitter:

1. moving conservation cost from ratepayers to taxpayers is moving costs - not reducing costs;
2. reforming the [Ontario Energy Board] is nice, but regulatory costs are neither a big portion of bills nor what drove rate increases;
3. showing cost of [un]Fair Hydro Plan is also a positive - but also doesn't address costs.

While I was initially underwhelmed by the changes described by the Minister, having now reviewed the extensive material posted due to yesterday's announced changes I need to correct the misinformation I posted, and be more appreciative of some of the other changes.  

The main news release is titled, Ford Government Taking Bold Action to Fix Hydro Mess, and it shows I misinterpreted action on conservation as simply moving costs from ratepayers to taxpayers:

Find savings of up to $442 million by refocusing and uploading electricity conservation programs to the Independent Electricity System Operator (IESO)

The savings referred to are either efficiencies, in uploading programs from local distribution companies (LDC's) to the system operator (IESO), or program revisions. This is much clearer in reading a Ministerial Directives delivered to the IESO

From a directive instructing the operator to wind down the Conservation First Framework (CFF):

The IESO's recent system planning assessment, which includes ongoing benefits from energy efficiency, indicates that Ontario has sufficient options to satisfy electricity demand needs for the near term.
It is therefore appropriate to re-evaluate the current CDM programs and to refocus efforts on the most cost-effective initiatives and discontinue programs and delivery models that are less effective in driving cost efficiencies and meeting system needs.

...
1. To take all steps necessary to immediately discontinue the [Conservation First Framework].

The directive also cancels an Industrial Accelerator Program (IAP), but that program has not been responsible for a significant portion of electricity supply cost whereas conservation spending has been about $450 million annually in recent years. A second directive instructs the IESO to produce new interim consumer demand programs to replace the CFF for the next 21 months, at a much lower cost:

The IESO shall not exceed a total budget of $353 million for the Term.

 While these figures justify the $442 million in savings claim to me, the government shows different totals in an explainer. Perhaps there were more conservation charges that the IESO excluded in global adjustment accounting. Regardless, there is a list of programs that are expected to be in the interim plan produced by the IESO, and a list of programs not expected to continue. I'll note that included in the list not expected to continue is the "Instant Discounts" program the IESO has claimed to be its most cost effective program.

I'm glad to see I wasn't the only skeptic about those claims.

_____

The reform of the Ontario Energy Board (OEB) isn't a topic I follow closely, but I do want to talk to the scale of the challenges in reforming the sector to address costs.

The existing structure is constructed on numerous laws and regulations. The Bill introduced this week to enable the announced changes includes alterations of:

• Electricity Act, 1998;
• Ontario Energy Board Act;
• Ontario Fair Hydro Plan Act, 2017
• Ontario Rebate for Electricity Consumers Act, 2016

There's significant paperwork involved. The majority of it addresses the structural changes at the Ontario Energy Board proposed under its modernization initiative.

The Minister's letter to the OEB notes some of the changes in law required for the government to act in addressing conservation's costs:

...I have also directed the OEB and provided it with the authority to amend or revoke conservation related licence conditions for electricity distributors...
In addition to these actions, amendments are being proposed to the Electricity Act, 1998 that would enable IESO to accept government revenues to fund conservation programs and other procurement contracts, should the government decide to do so in the future. 

Using government revenues to fund electricity procurements, including conservation, is something that the current structure was designed to avoid doing. I've long argued the global adjustment, designed specifically to allow the full recovery of supply costs from ratepayers, became abused to allow the frivolous contracting of, in particular, 2008 to 2011. The [un]Fair Hydro Plan addressed the excessive cost by pretending there will be a significant residual value to the general ratepayer of private generation as long-term (mostly 20-year) contracts expire.

While the changes in funding rate cuts, and accounting for the obviously stranded liabilities of contracts, particularly feed-in tariff (FIT) contracts, lack the clarity of the immediate savings in the conservation changes, they should be much more significant in the longer term.

Effective November 1, 2019, the government will:

• Prohibit the Financial Services Manager and the Fair Hydro Trust from incurring further debt

It's important to understand this statement, taken from yet another explainer on the planned changes. The [un]Fair Hydro Plan has already deferred over $4.3 billion and by November 1st the borrowing will probably exceed $6 billion. There is no asset for the future ratepayers to back this debt - it's closer to the truth to state that future ratepayers are the asset that allows the debt to be sold. Regardless, by November 1st the government is now committing to cancel this $2.5 billion per year scam.

What will replace it is not entirely clear, but it won't be by significantly raising the bills of regular consumers as those increases are to be capped at the rate of inflation. I find that promise unnecessarily complicated as there are many charges on a bill - including the poorly named "delivery" charges for the wires that differs from one distributor to another. The best change, in my opinion, would be to limit the rise of the energy rate (cent/kWh) portion of the bill only. Regardless, I wholeheartedly support the announced change that will display the full price on the bill, as per the OEB's rate planning process, and separately the reduction in the bill due to what will hopefully be called a subsidy - not that it's clearly a subsidy of the end consumer: the subsidy is mostly of the generators contracted at excessively high prices (FIT is particularly).

Changes to regulations are being made to allow the taxpayer to finance the revenue shortfall; the conservation costs are being reduced, and a promise that consultations with industry will occur will hopefully lead to a replacement of the abused, and abusive, Industrial Conservation Initiative (a.k.a. Class A). The government needed to cut about $2.5 billion a year if it was to eliminate the deficits due to the [un]Fair Hydro Plan, and probably another billion or so if it was to keep its election promise of a further reduction. The proposed changes will not do that, but I should not have hastily discounted the good for want of the perfect.

The changes involved with the childishly named "Fixing the Hydro Mess Act" will have some immediate impact in reducing costs and, more importantly, does boring legal detail work required to facilitate more aggressive cost reductions in the months ahead.

Note:
When the current government was elected I wrote 6 recommendations for reducing costs:

1. Repeal the Green Energy Act (done)
2. Empower the regulator (not convinced this is being done - but there are changes to the OEB)
3. End Conservation spending (reductions now occurring)
4. Restrict eligibility to the ICI (hoping this is next - coming out of industrial pricing review)
5. Review/Cancel Contracts where possible (some cancellation has been done)
6. Make a Versailles (the Ministry is still in Toronto, but the Minister is from as far from the city as possible)