In December 2013, Premier Kathleen Wynne’s Government adopted a policy of Conservation First with respect to electricity and natural gas.¹

Conservation First means investing in all cost-effective and achievable energy efficiency resources before investing in new supply.

This new policy is both revolutionary and common sense.

It is revolutionary because the Government of Ontario’s preferred option for meeting our electricity needs for more than 100 years has been the construction of large centralized electricity generating stations. For example, one of the justifications for the Government’s previous Long-Term Energy Plan, was that it would retain “the maximum number of high-quality, high-paying nuclear industry jobs in the province while providing opportunities for long-term growth of the nuclear industry.”²

It is also common sense for the following reasons:

• It will lead to lower energy bills;
• It will lead to lower greenhouse gas emissions;
• By raising the energy productivity of our manufacturing and resource industries it will increase their competitiveness, which will lead to GDP and job growth;
• It will reduce the outflow of Ontario dollars to Western Canada and Pennsylvania to purchase natural gas and to Saskatchewan to purchase uranium, which will also lead to more jobs in Ontario.

Unfortunately, two of Ontario’s energy agencies, the Independent Electricity Operator (IESO) and the Ontario Energy Board (OEB) are failing to implement Premier Wynne’s Conservation First policy.

IESO

The IESO is responsible for long-term planning with respect to Ontario’s electricity system. Unfortunately, it does not have a plan or a budget to achieve all of our feasible and cost-effective energy savings opportunities.

Furthermore, Ontario’s electricity savings targets are substantially lower than those of leading U.S. jurisdictions. For example, the goal of Ontario’s electricity conservation programs is to reduce Ontario’s total electricity consumption by less than 1 per cent per year between now and 2020.³ In contrast, the annual electricity savings targets of Massachusetts, Rhode Island and Vermont are 2 per cent or greater.⁴

As Figure 1 reveals, the cost of saving electricity (3.5 cents per kWh) is 60 per cent to 80 per cent lower than the forecast cost of new electricity supply from a re-built Darlington Nuclear Station (8.9 to 16.6 cents per kWh).   Nevertheless, the IESO’s 2015-2020 electricity conservation budget ($2.4 billion)⁵ is 80 per cent lower than Ontario Power Generation’s “high-confidence” estimate of the cost of re-building Darlington ($12.9 billion).⁶

OEB

The OEB is implementing policies which will frustrate the achievement of Conservation First with respect to both electricity and natural gas.

Residential Rate Design

Historically, Ontario’s electricity distribution utilities (e.g., Hydro Ottawa, Toronto Hydro) recover their costs of distributing electricity from their residential customers through a combination of a fixed monthly charge and a volumetric distribution charge based on the number of kilowatt-hours (kWh) consumed.

The fixed monthly charge does not vary with a customer’s electricity usage and is the same for all customers irrespective of whether they live in a small apartment or a mansion.

The volumetric distribution charge varies with electricity usage. As a result, the volumetric charge provides consumers with a reward for conserving electricity.

However, the OEB has recently decided to require all electric utilities to eliminate their volumetric distribution charges for residential consumers and to recover all of their distribution costs through their monthly fixed charge.⁸

At the present, on average, Ontario’s electric utilities recover approximately 50 per cent of their residential distribution costs from their fixed monthly customer charges and the remaining 50 per cent from their volumetric distribution charges. Therefore for the average residential consumer, the OEB’s proposal would lead to a doubling of their fixed monthly customer charge.

Eliminating the volumetric charge will undermine Premier Wynne’s Conservation First policy by reducing consumers’ incentive to save energy and their ability to reduce their bills.   For example, elimination of Toronto Hydro’s 1.5 cents per kWh volumetric distribution charge would reduce its residential customers’ financial incentive to conserve electricity by 8 to 13 per cent.⁹

Conserving electricity is in the financial self-interest of all consumers since it reduces the need for new high-cost electricity generation, transmission and distribution infrastructure that pushes up everyone’s electricity rates.

The OEB’s policy is also unfair since the cost of providing electricity distribution service to a large home is much greater than providing service to a small home. That is, recovering 100 per cent of a utility’s distribution costs via a uniform, fixed monthly charge will overcharge small homeowners and undercharge large homeowners. It is Robin Hood in reverse.

According to the OEB, it also plans to implement this policy for the customers of Enbridge Gas Distribution and Union Gas in the future.¹⁰

Natural Gas Utility Conservation Programs

In March 2014 Ontario’s Energy Minister, Bob Chiarelli, issued a legally-binding directive to the OEB to create a new Demand Side Management (DSM) Framework which would “enable the achievement of all cost-effective DSM.”

On December 22, 2014, the OEB issued its new Demand Side Management Framework for Natural Gas Distributors (2015-2020).¹¹ Unfortunately, its new Framework is contrary to the Conservation First directive that it received from Energy Minister Chiarelli. Specifically, it failed to create a regulatory framework that will enable the achievement of all cost-effective DSM. Instead it:

1. Capped Enbridge’s and Union’s conservation budgets at $75 million and $60 million respectively;
2. Directed Union Gas to make optional one of the most cost-effective energy conservation programs in North America; and
3. Limited the profit incentive for Enbridge and Union to expand their energy conservation programs and budgets.

Conservation Budget Caps

The OEB’s decision to arbitrarily cap the gas utilities’ conservation budgets will prevent the achievement of all cost-effective DSM resources.

While the new budget levels set by the OEB represent a significant increase in spending, it is worth noting that the gas utilities’ new combined maximum annual conservation budget is still 65 per cent lower than Ontario’s annual electricity conservation budget despite the fact that our natural gas consumption is more than 50 per cent greater than our electricity consumption.

According to the OEB, its arbitrary budget caps are appropriate since it assumes that many customers will not be able to participate in energy conservation programs.   However, this assumption ignores the fact that virtually all of the gas utilities’ customers have participated in the utilities’ previous conservation programs. For example, in 2013, 82 per cent of Union Gas’ large volume industrial customers took advantage of its energy efficiency incentives.

According to a Navigant Consulting report,¹² Enbridge would need an energy conservation budget in excess of $200 million per year to achieve 50 per cent of the cost-effective DSM in its franchise areas by 2024. Energy conservation programs on this scale would lead to a $9.7 billion (2015$) net reduction in energy bills.

A steady increase in the gas utilities’ DSM budgets to $200 million per year each by 2020 would raise gas rates by approximately 1 per cent per year.   However, actual bills would fall since the percentage reduction in natural gas consumption would be greater than the percentage increase in rates. In addition, it is important to remember that natural gas commodity costs have fallen by 35 per cent since 2010.¹³

The rate impact of larger DSM budgets can also be offset by changing the way these efficiency investments are treated. For example, the rate impacts of supply side infrastructure investments (e.g., the GTA Gas Pipeline) are minimized by amortizing their costs over the expected economic life of the infrastructure. On the other hand, 100 per cent of the costs of the utilities’ conservation investments are recovered from ratepayers during the year in which they are incurred (even if the measure, such as a new furnace, will be in place for many years). As a result, the rate impact of a dollar invested to improve energy efficiency is much greater than the rate impact of a dollar invested in a new pipeline. Amortizing efficiency investments over the lifetime of the measure is a logical and reasonable approach for minimizing the rate impact of rising energy conservation budgets.

“De-Mandating” the Most Cost-Effective Conservation Program in North America

Union’s large volume industrial energy demand-side management (DSM) conservation program, which provides financial incentives to stimulate energy productivity investments, is the most cost-effective energy conservation program in North America.

On average, each dollar that Union provides to its industrial customers to encourage them to invest in energy efficiency leads to $54 of total resource cost (TRC) savings which is the net present value of all the energy savings generated from a DSM program (including gas, water, and electricity), while subtracting the costs for the DSM technologies as well as the program costs.

In 2013, this program was responsible for 77 per cent of the $326 million of TRC savings created by all of Union’s energy conservation programs.

Nevertheless, the OEB is directing Union to eliminate these financial incentives that generate these huge bill savings. According to the OEB, financial incentives are not necessary since “these customers are sophisticated and typically competitively motivated to ensure their systems are efficient.” However, this assertion ignores two important facts.

First, Ontario’s industries are not undertaking all of their cost-effective energy efficiency investments. According to a Canadian Manufacturers & Exporters report, if all the remaining economically feasible best practices were implemented, Ontario’s total industrial energy consumption would fall by 29 per cent by 2030 relative to the business as usual scenario.

Second, our manufacturing companies often require a payback period of one year or less for their energy efficiency investments.   As a result, financial incentives are necessary to motivate them to make cost-effective energy productivity investments that have payback periods greater than one year.¹⁴

In response to the OEB decision, Union Gas is proposing to increase its annual energy conservation budget by 97 per cent between 2013 and 2020.   However, as a result of the cancellation of its most cost-effective energy conservation program, its total annual energy savings will fall by 55 per cent.¹⁵

Limiting the Profit Incentive for the Gas Utilities to Grow their Energy Conservation Programs and Budgets

In the past, the OEB linked Enbridge’s and Union’s profits to the size of their energy conservation programs and budgets.   By expanding their programs and budgets, the gas utilities could increase their profits. The OEB has now severed this link.

According to the OEB’s new rules, the maximum annual DSM profit bonus will be $10.45 million and it “will not be a function of the gas utilities’ DSM budget. The incentive amount available will not increase or decrease relative to approved DSM budgets, and is not to be increased annually for inflation.”¹⁶

As a consequence, the gas utilities no longer have a profit incentive to seek OEB approval for bigger and better conservation programs to create larger bill savings for their customers. On the contrary, as a result of the OEB’s decision, the gas utilities must increase their natural gas throughput volumes and their supply-side infrastructure to increase their profits.

Conclusion

The IESO and the OEB are needlessly harming our economy and environment by failing to implement Premier Wynne’s Conservation First policy.

* Jack Gibbons is the Chair of the Ontario Clean Air Alliance.   In addition, Mr. Gibbons assists Environmental Defence with its Ontario Energy Board interventions.

1. Ontario, Ministry of Energy, Achieving Balance: Ontario’s Long Term Energy Plan, (Toronto: Ontario Ministry of Energy, December 2013) [Achieving Balance] at 3, 20.
2. Ontario, Ministry of Energy, Ontario’s Long-Term Energy Plan: Building Our Clean Energy Future, (Toronto; Ministry of Energy, November 2010) at 23-25.
3. Ontario’s electricity savings target for 2020 is 7 TWH. In 2014 Ontario’s total electricity consumption was 139.8 TWH. Ontario Power Authority, Conservation First Framework Update: Presentation to SAC (June 24, 2014), at 7 – 8 [Presentation to SAC]; IESO, “2014 Electricity Production, Consumption, Price and Dispatch Data”, online: IESO <http://www.ieso.ca/Pages/Power-Data/2014-Electricity-Production-Consumption-and-Price-Data.aspx>.
4. American Council for an Energy-Efficient Economy, The 2014 State Energy Efficiency Scorecard (October 2014), online: ACEEE at 38 <http://aceee.org/research-report/u1408>.
5. Presentation to SAC, supra note 3 at 7-8.
6. Re Ontario Power Generation Inc, Payment Amounts for Prescribed Facilities for 2014 and 2015 (Decision with Reasons) (20 November 2014), EB-2013-0321, online: OEB at 54 <http://www.ontarioenergyboard.ca/oeb/_Documents/Decisions/dec_reasons_OPG_20141120.pdf>.
7. Ontario Clean Air Alliance Research, Ontario’s Electricity Options: A Cost Comparison (1 October 2014) <http://www.cleanairalliance.org/wp-content/uploads/2014/10/options2.pdf>.
8. Ontario Energy Board, Board Policy: A New Distribution Rate Design for Residential Electricity Consumers, EB-2012-0410 (April 2, 2015) [OEB Rate Policy].
9. Ontario Clean Air Alliance Research, Doubling the Fixed Monthly Customer Charge; A Review of the Ontario Energy Board’s Proposal to Guarantee the Residential and Small Business Distribution Revenues of Ontario’s Electric Utilities (May 2014).
10. OEB Rate Policy, supra note 8 at 2-3.
11. Ontario Energy Board, Report of the Board: Demand Side Management Framework for Natural Gas Distributors (2015-2020) (OEB, 22 December 2014) [OEB DSM Report].
12. Navigant Consulting Inc, Natural Gas Energy Efficiency Potential Study: Final Report Prepared for Enbridge Gas Distribution (15 January 2015), at xii, 118.
13. Ontario Clean Air Alliance Research, Reducing Ontario’s Greenhouse Gas Emissions Due to Natural Gas Consumption (January 26, 2015), online: OCAAR at 3 <http://www.cleanairalliance.org/wp-content/uploads/2015/03/gas-ghgs.pdf>.
14. Ibid at 4.
15. In 2013 Union Gas’ conservation budget was $32,838,926 and its 2013 conservation programs will lead to cumulative gas savings of 2,820,834,405 cubic metres. It is now seeking OEB approval for a 2020 conservation budget of $64,714,000 which is forecast to produce 1,280,000,000 of cumulative gas savings. See Union Gas, Final Demand Side Management 2013 Annual Report, (4 November 2014), at 17-18; Union Gas Limited Application for approval of 2015-2020 Demand Side Management Plans (Application) (1 April 2015), EB-04-0029, OEB at Exhibit A (Tab 3), p 6, p12.
16. OEB DSM Report, supra note 11 at 22.