Frances Woolley is a professor of economics at Carleton University, where she teaches public finance
The Ontario Progressive Conservative party promises to end mandatory time of use pricing, and stop “compelling seniors to do laundry late into the night.”
Most seniors I know are smart enough to work out how to take advantage of any opportunity to save some cash -- whether through old technology like clothes lines or new technology like washing machines with timers.
So I don’t believe that the issue is really time of use pricing. The issue is that time of use pricing isn’t generating the kind of savings people want: savings big enough to make up for the inconvenience.
There are three reasons why not.
The first is that Ontario’s old regulated price plans favoured small households over larger families. Consumers paid a higher price for power if they used more than a certain amount each month. So, for example, a one-person household consuming 400 kWh per month paid 6.8 ¢/kWh under the May 2011 rate schedule, while a four-person household consuming 300 kWh per person paid, on average, 8 per cent more, or 7.35 ¢/kWh.
Time of use pricing means that big households and small households pay the same rates. That’s fair -- but it means singles and couples are seeing their prices increase.
The second reason consumers aren’t seeing savings now is that the biggest benefits of time of use pricing will be seen years down the road. Ontario’s electricity system is “built for the peak.” The province has to have sufficient energy-generating capacity to avoid blackouts during the hottest summer days, when every air conditioner from Vankleek Hill to Thunder Bay is running full tilt.
Time of use pricing means people use less power during peak times. That means we don’t have to build new capacity to meet that peak demand -- and that will save money in the long term.
Plus, if people can be persuaded to use power when the wind is blowing -- at night, for example -- we can use wind power more effectively, and lessen our reliance on gas and nuclear power. That doesn’t just save cash, it saves the environment too.
But future savings don’t help consumers today -- and that’s a second reason some people aren’t happy. The costs of time of use pricing are clearly visible. People are feeling them now. The long-term benefits are real, but the precise value of those benefits, and when exactly we will see them, is as yet unknown.
The third reason that time of use pricing isn’t benefiting retail consumers is that when Ontario households change their electricity usage other people have an opportunity to profit: businesses who buy electricity on the wholesale market, and energy users outside of Ontario.
Imagine what would happen if every single laptop user in Ontario decided to save money by unplugging their computer and running on battery power between the peak hours of 5:00 and 7:00 p.m., then recharging their computer during the evening.
The immediate effects would be felt in the “wholesale market”. That’s where electricity producers bid for the opportunity to supply power to the Ontario electricity system, and the “wholesale price” -- the lowest price that will guarantee enough electricity production to meet Ontario’s consumption needs -- is set.
If people start using less power at peak times, and the quantity of electricity demanded falls, then the peak wholesale price will fall too. But if people use more power overnight, then the wholesale price of off-peak power will rise.
The typical Ontario family doesn’t pay the wholesale price for electricity, so changes in the wholesale price won’t have any immediate impact on the average household’s electricity bill. Wholesale price changes affect two types of users.
The first is large businesses -- manufacturing companies, for example -- who buy electricity in the wholesale market. Changes in the wholesale price of electricity have a direct impact on those firms’ bottom lines.
Wholesale price changes also affect exporters: companies who export Ontario-generated power to Quebec, Manitoba, Michigan and New York. Exporters pay the wholesale price for Ontario power, and sell it for the going rate elsewhere. Conceivably a reduction in Ontario use could end up benefitting out of province electricity consumers, if it reduces export prices (or hurting out of province consumers, if export prices rise). But it’s not clear that more profitable exports have any direct benefit for Ontario consumers.
Perhaps installing smart meters in Ontario was a sound investment, perhaps it wasn’t.
But we’ve done it.
Now that we’ve got the smart meters, the policy challenge is: how can we use them to generate benefits for the average Ontario electricity consumer?
Author's note: This post has benefitted from input and discussion from Derek Olmstead, a doctoral candidate in the Department of Economics at Carleton University.