Significant energy costs threaten Ontario’s competitiveness
September 25, 2018 — The high cost of electricity is an all-too-common—albeit perfectly legitimate—complaint in Ontario, especially when those gripes come from the energy-intensive manufacturing sector. It is only natural for this sector to feel under attack when both federal and provincial government policies find new ways of increasing its cost of doing business.
While labour is typically the No. 1 cost and concern across the board for manufacturing business owners, electricity—especially in Ontario—remains a close second. But when you look at the cost of electricity from the perspective of what a regular person would consider fair then, viscerally, it ranks No. 1.
Every owner knows wages will go up; increases are predictable, and they plan for them. Owners know they need to pay talent what it’s due, and that’s fair.
In stark contrast, from 2006 to 2014, the electricity portion of the hydro bills of residential and small-business consumers in Ontario increased by 70%, according to a 2015 annual report by Ontario’s Auditor General, Bonnie Lysyk.
“In particular, the Global Adjustment (GA) fees, covering the excess payments to generators over the market price, cost consumers $37 billion during that period, and are projected to cost another $133 billion from 2015 to 2032,” said Lysyk. “We found the planning process had essentially broken down over the past decade, and the electricity power system did not have an overall technical plan in place for the last 10 years that was reviewed by the Ontario Energy Board (OEB), as required by legislation.”
Ontario’s Ministry of Energy essentially ignored the legislated process that would have involved the Ontario Power Authority (OPA)—which has since merged with the Independent Electricity System Operator (IESO)—and OEB in electricity planning. Instead, the ministry issued two policy plans and 93 ministerial directives or directions that “did not fully consider the state of the electricity market, did not take long-term effects fully into account and, sometimes, went against the OPA’s advice” between 2004 and 2014.
Among the policies that have created Ontario’s electricity pricing crisis, according to research by the Fraser Institute, are phasing out coal-power generation, granting wind and solar generators long-term guaranteed contracts above market prices, and the aforementioned GA charge that, in part, pays generators not to produce any power.
“Shuttering coal-power generation plants had very little effect on air pollution,” claimed the Fraser Institute’s authors in their executive summary. “Had the province simply continued with retrofits to the coal plants then underway, the environmental benefits of the shift to renewables could have been achieved at one-tenth the cost.”
Also according to the institute, residential electricity costs increased by 71% between 2008 and 2016 in Ontario (more than double the national average increase of 34%); Toronto residents paid, on average, $60 more for electricity per month than other Canadians; and large industrial users in Toronto saw electricity prices jump 46% between 2010 and 2016, while the average increase in electricity costs for the rest of Canada was only 14% for large industrial users.
Killing a community
Ontario’s high electricity prices reduced employment in manufacturing by some 75,000 jobs between 2008 and 2015, add the authors of Fraser’s “Understanding changes in Ontario’s electricity markets and their effects.”
By way of example, the high cost of electricity drove about 20 manufacturing jobs out of the Central Wire Industries (CWI) plant in Perth, Ont., last year, according to a report by Kelcey Wright Johnson of the Erin Advocate in July 2017. As the price of power increased in Ontario, the company decided to redistribute its production capabilities within its multiple North American sites, and stop manufacturing completely at its Erin branch.
“Power is becoming more difficult and expensive to afford in Ontario,” said Paul From, CEO of CWI. “Until the provincial government finds a way to restructure the debt and electricity costs associated with past and future power generation contracts, and streamlines its regulatory compliance requirements for small- and medium-sized enterprises (SMEs), CWI’s growth and expansion will most likely occur outside of Ontario.”
“It’s very disappointing to see this happen in Canada,” he added. “We are a Canadian company. We employ more than 80 people here in Perth. This whole thing with power, people have to realize, is really difficult.”
Poaching from afar
In a letter to Bill Morneau, the federal finance minister, in January 2018, the Canadian Manufacturing Coalition noted capital investment and foreign direct investment have fallen nationwide, resulting in weakened productivity and global competitiveness, and fewer innovations.
While the coalition made a number of suggestions, such reducing corporate taxes and introducing an investment tax credit, it fell short of pointing a finger at the cost of electrical energy.
“The U.S. is out-competing Canada for new direct investment,” it says. “With the U.S. passing massive tax reform legislation to reduce the overall corporate and personal tax burden and spur investment, innovation and growth, Canada needs to respond to reverse these investment trends and leverage broader economic growth across the country.”
Not only is the U.S. out-competing Canada, but American jurisdictions are also targeting Ontario-based businesses, trying to convince them to move south of the border. And their sales pitches are extraordinary.
Jocelyn Williams Bamford, vice-president (VP) of Toronto-based Automatic Coating, founded the grassroots Coalition of Concerned Manufacturers of Ontario (CCMOO) in 2006. The coalition brought together like-minded business owners who were worried about such issues as the provincial government’s implementation of a cap-and-trade program, electricity rate increases and GA charges.
In Bamford’s case, Automatic Coating is paying three times the price of electricity as its competitors outside the province.
“Electricity is our third most major cost of doing business,” she explains. “It hurts the bottom line.”
The idea for CCMOO all started with an invitation to an information session on cap-and-trade which, Bamford admits, she nearly didn’t attend.
“I was so busy and we are a low emitter, so I thought it was not going to affect us,” she says. “I was horrified to find out we SME manufacturers were the ones that were going to pay for it!”
Bamford explains large emitters receive credits, while mid-range emitters could also opt in and get credits, but “the small emitters could not opt in, and we had to pay through cap-and-trade prices that were added to our gas and natural gas costs. I went back to the office and got all my energy bills together to see if we could opt in, but we couldn’t because we don’t emit enough greenhouse gases (GHGs). I thought this was perverse!”
It was then that Bamford noticed the GA line item on her electricity bill, but had no idea what it was for, nor did those around her. Bamford’s investigation eventually led her and 35 neighbouring businesses into the office of Brad Duguid, then Ontario’s minister of energy, for a roundtable discussion.
“At the roundtable, everyone had the same issues with uncompetitive rates for electricity,” Bamford shares. “These companies that were expanding, yes, but in other provinces and into the U.S., because this province was not open for business.”
Was the minister informative? Did he put their minds at ease?
“Brad gave us political talking points that were not based in reality,” she recalls. “After the meeting, the business leaders said they felt worse than before. We realized no one was representing our interests. One of the attendees said we needed to form a coalition. And so we did.”
One of the coalition members’ September 2017 electricity bill came out to $52,339.70, just for its manufacturing plant, not the offices. Broken down, it looked like this:
$4,250.02 for electricity @ $0.01/kWh (rounded)
$4,709.67 for delivery
$1,156.63 regulatory charges
$2,007.32 debt retirement
And, wait for it...
$34,194.68 Global Adjustment @ $0.12/kWh (rounded)
With a markup like that, no wonder Ontario manufacturers are ripe for the picking by outside economic development agencies.
For example, Bamford shares an email that was sent to one of the CCMOO members from an economic development group serving a southern state, parts of which have been edited/redacted by me:
Our economic development team will be visiting various companies in your region, and would be interested to meet with you and learn about any plans [you] have for expanding operations.
Our team can provide information about our business climate, incentives and workforce that may prove helpful with your growth planning.
I just wanted to let you know about some of the incentives for companies that set up shop in the state.
• 200,000-sf hangar that is free for your use.
• 170,000-sf metalworking plant with cranes and presses that are free for your use.
• Free real estate.
• No state property tax, no state inventory tax, no state sales tax.
• Seven electric power companies to choose from.
• Over 8,000 people have been found “Ready to Work” in manufacturing.
• Proximity to distribution hub.
But relocating isn’t all that easy, either, suggest the energy management consultants at 360 Energy.
“Relocating operations to another jurisdiction changes multiple variables, not just trade conditions,” say David Arkell, president and CEO, and Jennifer Niece, director of sustainability and client services. “Labour and energy costs, labour availability, jurisdictional taxes, permitting and environmental regulations, and reliability of energy supply are all important considerations.”
Any help for SMEs?
In a 2017 survey by the Canadian Federation of Independent Businesses (CFIB) about energy in the manufacturing sector, 57.3% of respondents claimed their total business electricity costs increased by 20% or more during the past three years.
In that survey, a whopping 76.6% of respondents said their electricity bill increase was primarily because of changes in pricing, not a change in the quantity they used. And because of the higher prices, 42.4% said they had delayed investments in their businesses, approximately 10% reduced their employees’ hours, 10% reduced the size of their workforce and 19.3% considered closing their business or relocating to another jurisdiction.
“The biggest help for smaller business is the same thing that has helped residents: the 25% or so saved through the Fair Hydro plan,” said Ryan Mallough, senior Ontario policy analyst for CFIB. “For Class B consumers, eight% comes from removing the provincial portion of the HST from their bill. The other 17% comes partially from removing some of the social programs off of the bill and onto the general tax base, but largely from the government’s refinancing of the GA charge.”
Mallough says this refinancing has effectively lowered the GA by 3.29 cents from where it otherwise would have been. This was done by renegotiating existing contracts to extend over a longer period (like re-mortgaging your home).
This plan provides about four years’ worth of relief, but it’s only temporary.
“After four years, prices will start climbing again, and we will be on the hook for those payments for a long time, well into the 2030s,” Mallough notes. “It’s the definition of short-term gain for long-term pain.”
The program that is the big hitter for larger businesses, he adds, is the Industrial Conservation Initiative (ICI), which sees eligible Class A users pay GA fees based on the amount they contributed to Ontario’s total energy consumption during the five peak days of each year. (These are usually the hottest days in the summer, though they can vary.)
“If business owners are smart and a little lucky, they can time it so they contribute nothing—basically shutting their plant down—during those five days, reducing their GA costs to zero,” Mallough points out. “A McMaster University study found a business like Ford reduces productivity by 15 to 20 days per year trying to time those five peak days to reduce their costs through the ICI program.”
And while there are a number of smaller programs for businesses—like incentives for retrofitting lights and windows or buying new energy-efficient equipment—Mallough says the reviews are mixed, having heard anecdotally that, depending on the business, these programs have either helped or provided no relief.
Medium-size manufacturers, meanwhile, have often been caught in “the forgotten middle,” he says.
“To qualify for the Fair Hydro plan, you must have a peak monthly electricity demand of 50 kW or less and an annual consumption of less than 250,000 kWh total (or operate a farm),” he explains. “A mid-sized tanning salon tends to pass that peak demand mark, so you can imagine most manufacturers who are operating big machines or assembly lines are out of luck. Even if they are low-demand, many pass that 250,000 kWh threshold well before the year is out, so they don’t qualify.”
To qualify for the ICI, you must have at minimum an average monthly peak demand of 500 kW (“It used to be more than 3 MW, but the government reduced it under the Fair Hydro plan”). Many mid-sized or smaller manufacturers are not big enough to meet the average demand and, therefore, don’t qualify.
For the ones that do, “it takes mega-companies like Ford 15 to 20 days to get this right and they can hire full-time energy experts,” Mallough points out. “It’s much more difficult for a small manufacturer to spend the time figuring out the system.”
How do we fix this?
“Over the past decade, our electricity prices have doubled,” note Shelley Bacon and Todd Stafford of Brockville-based Northern Cables, another member of CCMOO. “We have more and more competition from outside of Canada that has not suffered the same increase in costs.”
Northern, too, has been approached by various U.S. economic development agencies, offering many incentives to relocate.
“In addition to the established lower tax rates at both the state and federal levels, electricity rates in the U.S. are stable, predictable and, on average, one-half of Ontario’s,” say Bacon and Stafford. “Ontario must address the cost of electricity to industries providing employment. The province must evaluate the green energy projects to ensure they can stand alone and be tax-neutral to consumers,” say Bacon and Stafford. “Ontario must stop attacking industrial companies and adopt supportive stances that encourage investment and job growth.”
Note from the author
I started researching and writing this article earlier this year, before the June 2018 provincial election. Since taking office, the new Conservative government has decided to cancel and wind down 758 renewable energy contracts and has vowed to end the cap-and-trade program. More changes are coming... time will tell how they play out.
About the author
• “Hydro rates force wire production out of Erin”, Kelcey Wright Johnson, SouthwesternOntario.ca (Erin Advocate), July 2017, tinyurl.com/y8k7bj2x.
• “A resilience strategy for trade-exposed business”, David Arkell and Jennifer Niece, Energy-Manager.ca, March 2018, tinyurl.com/ycufgrn8.
• “Poor policies largely to blame for Ontario’s electricity prices: Fraser”, EBMag.com, April 2018, tinyurl.com/yc7ddpvu.
• “Canadian manufacturing is at a critical juncture”, EBMag.com, January 2018, tinyurl.com/y7lkf8o4.
• “Ontario’s electricity planning essentially broken down over the past decade”, EBMag.com, February 2016, tinyurl.com/y7mhhal5.
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