The political firestorm raging in Ontario about the cost of cancelling two natural-gas-fired power plants reminds me of a conversation I had with then-premier Dalton McGuinty in 2005. At the time, I was head of Encana Corp. and we were co-chairing a Public Policy Forum event. As we chatted privately before the dinner, he said: "As a gas producer, you must be happy we're going to close our coal-fired power plants." I replied: "Well, it's not a big deal in the context of our North American gas markets, but you'd better make sure those gas power plants are built before you shut the coal plants."
Eight years later, Ontario power consumers are stuck paying $585-million for two gas-fired plants that were never built. That's just the tip of the iceberg. Mr. McGuinty's decision to shutter the coal-fired plants was followed in 2010 by his government's Green Energy and Economy Act, aimed at replacing some of the coal-fired power with highly subsidized wind and solar energy while, supposedly, turning Ontario into the green power capital of North America.
Ontario offered so-called feed-in rates almost four times the existing system rates for wind, and more than 10 times for solar power. Like bees to honey, wind and solar companies rushed to sign 20-year, rate-guaranteed contracts.
A report last spring by the conservative Fraser Institute think tank estimated the green subsidies would add almost $6-billion to household electricity costs and $12-billion to business and industrial costs, transforming Ontario's previous low-cost electricity economic advantage into a crushing competitive millstone.
The report concluded: "Electricity prices for large users in Ontario are now among the highest in North America and are expected to increase by 40 per cent to 50 per cent further in large part to pay for costs incurred under the GEA [green energy act]."
The report calculated that Ontario's manufacturing and mining sectors would be particularly hard hit, driving down manufacturing investment returns by 29 per cent and mining returns by 13 per cent. But almost all businesses will feel the pain and job losses will be severe.
"The province's claim that 50,000 jobs will be created by the GEA was unsupported by any formal analysis and the province has since admitted both that the vast majority of any GEA-related jobs will be temporary, and that the 50,000 figure does not account for offsetting permanent job losses due to electricity price increases under the GEA," the report concluded. "Consequently, the claim has no basis in fact."
Taken together, the green energy subsidies will add some $18-billion to Ontario power rates, more than 30 times the $585-million cost of the power plant cancellations. But it gets worse because, as in the case of the cancelled power plants, Ontarians still won't get the power supply they're paying for, or at least not much of it.
The Fraser analysis found that 80 per cent of Ontario's wind power is generated when it isn't needed and dumped into the U.S. power market at a substantial loss.
Ontario's Auditor-General estimates the province has already lost close to $2-billion on surplus wind power exports. And because wind either doesn't blow, or blows when the power isn't needed, seven megawatts of wind energy are required to provide one MW of reliable capacity. That means six more megawatts of "standby" gas power generation must be built for every seven MW of subsidized green power, piling hundreds of millions of dollars per year onto beleaguered consumers.
The enormous cost of Ontario's disastrous electricity policies brings into focus a broader and more fundamental governance issue applying to all provinces. Direct government expenditures require a detailed line-by-line budget that is subject to extensive political debate and examination by auditors-general. Budgeted expenditures must be covered either by tax revenue or by borrowing.
Ontario would have encountered vociferous opposition to the green energy act if the government had been required to include the gigantic cost of the power subsidies in its budget.
Instead, it simply directed utility regulators to comply with policies that will cost Ontarians tens of billions of dollars – an unacceptable and undemocratic form of taxation by stealth, to which the citizens of all provinces should demand an end.