The Liberal government has assured homeowners that Ontario's coming cap-and-trade system is no clear and present danger to hydro bills – but the companies pumping out gas-fired electricity say carbon pricing should hike the cost of power.

Nevertheless, the government says it will try to offset the price increases by funnelling cap-and-trade cash to consumers and relying more on nuclear and renewable energy sources.

The government has already said (in the budget, no less) that cap and trade will drive up the cost of natural gas by around 3.3 cents per cubic metre, and, as a result, increase home heating bills by around $5 a month. Natural gas distributors will also be the largest purchasers of the system’s carbon credits, which the companies need to emit greenhouse gases emanating from their business.

But, on its webpage for the carbon-pricing program, the government boasts that “households will not see increases in their electricity rates as a result of the cap and trade program.”

“The electricity we consume every day is already largely carbon-free, thanks in large part to Ontario’s early action to close coal-fired power generation,” it adds.

Well, sort of.

What’s left unsaid is that 28 per cent of the province’s electricity capacity comes from fossil-fuel-fired sources, according to the Independent Electricity System Operator, the agency that manages the power system. In addition, the province will have to rely on gas – as well as nuclear, solar and wind power – as nuclear reactors begin going offline for repairs and rebuilds later this year.

"All natural gas purchased in Ontario, whether for industrial, commercial, or residential customers will be covered by cap and trade," said Jamie Ellerton, spokesperson for the Ontario Natural Gas Alliance in an email. "This will drive up the cost of electricity as natural gas generators set the market clearing price."

ONGA is a partnership between Ontario's two largest natural gas distributors: Enbridge Gas Distribution and Union Gas.

Moreover, the Association of Power Producers of Ontario (APPrO) told the IESO in April that cap and trade would nudge electricity prices northwards. The group is made up of more than 100 companies that generate electricity in the province, including gas plant operators.

In a submission on the province’s 2016 power planning outlook (OPO 2016, for short), APPrO quoted the IESO as expecting cap-and-trade costs “will ultimately make [their] way into the electricity market.”

“Carbon pricing should result in an increase in the Market Clearing Price within Ontario’s wholesale electricity market when gas-fired generation is on the margin, as the cost of carbon is embedded into the offer prices of carbon emitting generators (this is expected to also result in a decrease in the Global Adjustment),” states the group.

The Global Adjustment charge is the difference between the Hourly Ontario Energy Price (which is actually made up of the aforementioned Market Clearing Price) and the price guaranteed to regulated and contracted electricity generators. Most, if not all of, gas-fired electricity in Ontario is contracted by the IESO.

The APPrO notes that “virtually all” electricity sector GHG emissions come from natural gas power. As a result, it says nearly a quarter of Ontario’s installed electricity capacity could be affected by cap and trade.

“Possible electricity market adjustments from cap-and-trade regulations should be assessed as part of the OPO 2016 conclusions, especially given the current expectation of increased utilization of gas-fired generation,” said APPrO. “The cost impact of cap-and-trade on gas-fired generation should be calculated and presented in the OPO 2016.”

Energy Minister Bob Chiarelli told reporters on Thursday that money raised by selling emission allowances under cap and trade – the government is anticipating it will receive nearly $2 billion a year – will be put towards the Global Adjustment charge.

In her 2015 annual report, Auditor General Bonnie Lysyk said GA fees had risen from $650 million in 2006 to more than $7 billion in 2014. She also estimated electricity consumers would pay an additional $133 billion in GA costs from 2015 to 2032.

“Some cap-and-trade revenue will go into the Global Adjustment, which is a way to balance costs in the system,” said Chiarelli. “And within the Global Adjustment it will be applied to residential customers, which has the effect of reducing their bill by about $24 a year.”

Chiarelli also pointed out the Ontario Electricity Support Program and conservation programs that consumers can tap to lower their electricity bills. He said natural gas-fired generation won’t be relied on as heavily as once thought, as the government and Ontario Power Generation are attempting to operate the Pickering nuclear plant for four years longer than originally planned, to 2024. That proposal still has to be approved by the Ontario Energy Board and Canadian Nuclear Safety Commission.

“Actually, natural gas is going to be replacing it much less than originally contemplated,” Chiarelli said. “If we’re successful with the licensing of Pickering, the extension, that’s going to cover a good three to five years of the refurbishment, where we’ll be using the emissions-free to replace the units that are coming out at Darlington or Bruce.”

Chiarelli also said the province would also use more renewable energy sources going forward, the price of which has dropped since the McGuinty government years.

The minister’s comments came on the same day as a letter from the Ontario Chamber of Commerce that called for the government to wait until 2018 to begin the cap-and-trade system. The government, however, is striving to cut greenhouse gas emissions by 15 per cent below 1990 levels by the end of 2020, 37 per cent by the end of 2030, and 80 per cent by the end of 2050.

During Thursday’s question period, Environment and Climate Change Minister Glen Murray said “further delays or a delays period” for cap and trade “would mean that the cost of the transition to Ontario businesses would be much higher.”

To contact the reporter on this story:
gzochodne@qpbriefing.com
416-212-5913
Twitter: @geoffzochodne

Cap and trade likely to cause higher electricity prices, power producers say

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