The Price of Power: Comparative Electricity Costs across Provinces

Abstract

To provide a comparative view of electricity costs across Canada, this Commentary presents cost estimates for each province’s electricity system in 2018 and monthly costs facing representative consumer profiles in each province for 2019. In 2018, Ontario, Nova Scotia and Alberta had the highest unit system costs for power – estimated at $143/MWh in Ontario, $133/MWh in Nova Scotia and $122/MWh in Alberta. Provinces relying predominantly on hydro generation have the lowest unit system costs: in 2018, Quebec and Newfoundland and Labrador had the lowest unit system costs at $70/MWh, followed by Manitoba ($87/MWh) and British Columbia ($97/MWh). However, while useful in comparing electricity costs across provinces, the system cost in a given province is not charged uniformly to each consumer class. The complex set of rate components results in unit power costs (i.e., $/MWh) that, in turn, differ between consumer classes. In most provinces, industrial consumers pay the lowest unit power costs, followed by commercial consumers, with small business and residential consumers paying the highest unit costs. The exception is Ontario, where taxpayer-funded rebates result in very low power costs for residential and small business consumers while industrial and commercial consumers face higher costs relative to other provinces. As well, electricity costs have increased for various consumer classes over the past five years – particularly in Ontario and Alberta. The analysis of components of systems’ costs and consumers’ rates revealed that growth in Alberta’s system costs and consumer rates was primarily driven by increases in transmission and distribution costs, while in Ontario, heightened energy costs (through the growing Global Adjustment, which covers the gap between contract costs and market rates) drove increased costs for non-residential consumers. Although Ontario’s industrial consumers may benefit from the Industrial Conservation Initiative (the “ICI,” under which a consumer may reduce its share of the Global Adjustment by avoiding the year’s five highest peak demand periods), such rate reductions are not automatic, and any reduction of the Global Adjustment under the ICI for a given consumer shifts these costs onto other consumers. This analysis of electricity prices underscores several important policy considerations. These are particularly relevant as policymakers contemplate changes to the design of markets and structure of electricity rates. First is closer alignment of the marginal prices (that is, the price of an incremental unit of electricity), facing different classes of consumers with the marginal costs for providing electricity – for example, introduction of dynamic or time-of-use pricing, as well as critical peak pricing and direct load control. Second is the efficient allocation of fixed system costs (e.g., the infrastructure for transmission and distribution, as well as the costs of generation) – for example, through lower prices for more price-sensitive consumers to avoid defection of load or departure from the grid. Finally, policymakers should scrutinize the competitiveness of a province’s overall system costs in order to ensure the efficient attraction and retention of economic activity. If all other costs are equal, an industrial firm – particularly in a trade-exposed, electricity-intensive industry – will rationally locate production in the jurisdiction where the producer minimizes its electricity costs. Therefore, the comparative costs of generating electricity can be an important source of comparative advantage for a given province – for example, the access to relatively low-cost hydroelectric resources in Quebec or Manitoba.

Keywords: Energy and Natural Resources; Electricity; Provincial Comparisons

JEL Classification: L94; Q41