Tom Adams is an independent researcher focused on energy consumption. Ross McKitrick is a professor of economics at the University of Guelph.
Ontario consumers have poured billions into conservation programs that promise to increase the efficient use of electricity and save them money. The Ontario Power Authority spent nearly $400-million on conservation programs in 2013 alone. And one Ontario government agency – the Independent Electricity System Operator – plans to spend an additional $3.1-billion for these programs through 2020.
But do these programs actually save consumers money?
What little auditing has been done in Ontario has almost completely ignored metered consumption for households and calculates benefits based on vastly inflated values for saved energy. In a new study for the Fraser Institute, we take a critical look at these programs and conclude that they are, in fact, likely a waste. The best current evidence indicates that conservation programs cost about two dollars for every dollar they save, in ordinary circumstances where supply matches demand. In Ontario's situation, where supply far exceeds demand, and generators are being paid to not generate, official claims that conservation saves money are even more implausible.
In reality, just because a government program uses words like "efficiency" or "conservation" does not mean that it's efficient or conserves resources. Governments overstate the benefits of these programs by assuming people buy more energy than they truly need. One recent study of U.S. government analyses showed that this false assumption accounts for between 80 per cent and 90 per cent of the claimed benefits of new energy efficiency regulations.
By contrast, standard economic analysis suggests that so-called "negawatts" (electricity consumption avoided) must eventually be more expensive than existing rates. The inherent contradiction of conservation programs is that, if steps to reduce electricity consumption were truly cost-reducing over all, they must also be cost-reducing at the level of individual households and businesses, in which case there is no need for governments to force their adoption.
Nor is energy efficiency necessarily a cost-saving option for businesses, which typically use a mix of energy, labour, capital and materials to make goods and services. Forcing businesses to use less energy may simply push them to make costlier substitutions.
An important new study out of the University of California, Berkeley, looked at participants in the U.S. Weatherization Assistance Program. The authors were able to construct a randomized sample of program participants and non-participants, making it the first-ever experimental test of a major household energy conservation program using metered consumption data.
An apparent puzzle in the energy literature has been the low level of voluntary investment by households in efficiency improvements that, according to engineering models, would save them money. The Berkeley study shows that households were right and the models were wrong: On average, the models predicted 2.5 times more energy savings than actually realized, and the program cost $2 for every $1 saved in energy – even after accounting for the value of reduced air pollution emissions.
Nevertheless, Queen's Park just announced a $100-million home energy retrofit program just like the one that failed so badly in the United States and a previous Ontario plan that cost $573-million. This is part of a pattern: Ontario energy plans rely on unsubstantiated, overly optimistic claims and a determined refusal to check whether costs exceed benefits. Our study digs into the analyses behind the province's conservation plans and finds either an absence of credible data or overly optimistic numbers based on methodologies known to be unreliable.
Ontario seems determined to gamble on costly new energy conservation programs without first weighing the costs and benefits objectively. As with the Green Energy Act, this is working out badly, with taxpayers and ratepayers left paying even higher bills.