Since 2006, the price of off-peak electricity in the Canadian province of Ontario has increased from 3.5 to 8.7 cents per kWh - nearly 150%. Electricity delivery charges, which are separated on Ontario energy bills and vary across the province, have also risen substantially. Low-density population areas and First Nations Reserve communities have seen the most significant surges in pricing and, not surprisingly, non-payment rates in these communities has been on the rise. As a result, there is a growing interest among Ontario’s many First Nations communities to find locally-owned, locally-operated energy solutions to protect against rising rates and afford some degree of energy independence.
On a rising tide of wide-spread public dissatisfaction over electricity costs, Premier Kathleen Wynne announced Ontario’s new Fair Hydro Plan on March 2, 2017. It is expected that this Plan could be implemented as soon as May of this year and reflected on June hydro bills.
Fair Hydro in a Nutshell
The Fair Hydro Plan makes significant cuts, proposing an overall decrease in hydro rates by 25% from last year’s rates, on average, plus new or expanded ways for the most vulnerable customers to take advantage of further credits and rebate.
It calls for the following changes:
- An 8% rate reduction, applied as an on-bill credit, coming from the provincial portion of HST. (This credit has been appearing on bills since January 1, 2017.)
- A 17% reduction coming from a re-financing of the Global Adjustment (i.e. the long-term contractual obligations of the IESO with respect to renewable electricity generation procurements, conservation initiatives and other programs and costs).
- A “rate-freeze,” limiting any rate increases to that of inflation (approximately 2%) for the next four years.
- Additional reductions provided via access to credits, including:
o an expansion to the Ontario Electricity Support Program (OESP) providing greater access to the program which can provide program participants with up to $360-425 per month in credits and additional support for those with unique hydro needs, such as electric heating or an in-home medical device which requires a lot of energy, and for First Nation, Inuit and Métis customers who may be eligible for an additional $45-75 per month in credits;
o the continuation of the Ontario energy and property tax credit (up to $227 per year for on-reserve residents) and the Northern Ontario energy credit ($148 per year for an individual and $227 for a family); and
o the First Nations On-Reserve Delivery Credit which removes the delivery charges for all on-Reserve households and the monthly delivery charge for customers of licensed distributors who charge bundled rates (providing an estimated $85 benefit, per household).
- Additional reductions may be available through the new Affordability Fund which supports customers who are ineligible for OESP by providing them with funds to make energy-efficiency improvements to their homes.
No Free Lunch
When it comes to on-Reserve First Nations communities, the impact of this announcement is significant. If all of the announced programs come to fruition this summer, they will have a compounding effect and households on-Reserve will almost certainly see immediate and noteworthy reduction in their monthly hydro bills. This is good news for First Nations —but should it stop First Nations communities from pursuing alternative electricity generation and distribution options? We think not.
Despite this rate freeze and the rebates, we are skeptical that the rate reductions can hold out over the longer term. Eventually, someone always needs to pay piper. For a lesson in modern history, consider the rise in electricity prices currently taking place in Argentina or Nigeria. More locally, consider the history and impact of the rate freezes which took place in Ontario during the Ernie Eves government era (2002). There is no free lunch.
The Fair Hydro Plan is careful to state that the inflation cap on rate increases is only meant to last four years. After that, it is unclear what will happen to the rates. They could potentially balloon back up to present rates or, more likely, to a rate level adjusted upward to correct for current indulgences. The reality is, the province estimates that the decision to refinance the Global Adjustment will result in an additional $1.4B per year in interest fees and, together with the cost of the additional rate reduction programs, the Fair Hydro Plan is expected to cost the province about $2.5B over the next three years. (These are substantial sums for an economy the size of Ontario’s.)
Many commentators expect that this means that there will be a four year reprieve only to be followed by an onslaught of rate rises later. After all, the current bank loan needs to be paid off and it is likely that there will be new, ongoing maintenance expenses incurred and new infrastructural upgrades needed over the years which will only add to the overall cost of the system.
Second, the 25% rate reduction is helpful in the short term, but the real benefit to on-Reserve customers is the elimination of the delivery fee and the expansion of the additional credit and rebate programs. However, it is very hard to tell how long these programs will or can stay on the books. For example, the OESP can be revoked at any time. Rates and thresholds for OESP eligibility are set by Ontario Energy Board (OEB) regulation and subject to ongoing review. In coming years, the OEB is entitled to resolve to extend the program further or cut it back, depending on their assessment of the program at the time. Similarly, the tax credits, which are applied through the Ontario Trillium Benefit, are also subject to continual review where the political party in charge can move to remove the program at any time, or adjust the quantum of the benefit.
A Window of Opportunity for First Nations Leaders
If the Fair Hydro Plan is passed into law this summer, Hydro One customers, particularly First Nations communities, can embrace the rate relief for now, but there is the spectre of high costs looming at a later date. Indeed, if you look closely at it, what the Fair Hydro Plan does is take the pressure off of Chiefs and Band Councils to immediately act with respect to their energy future, and provide time to look carefully at the micro-grid and distributed energy solutions that are becoming available - to review technology options, seek partners, make plans and source funding over the next 2-4 years so that they can implement an effective plan that allows them to achieve energy independence and/or rate certainty over the longer term. Prudent Band business managers will see the Fair Hydro Plan as giving Chiefs and Band Councils some breathing room to make careful decisions now to effect positive, locally-owned and operated energy solutions over the next few years.