The Ontario Energy Board (OEB) recently released the Regulated Price Plan (RPP) rates for 2025. The rates declined, which is good news. However, the amount of the subsidy under the Ontario Electricity Rebate (OER) also declined from 19.3% to 13.1%. To see if there is a net benefit, I performed the following analysis using the NOTL Hydro 2024 rates and the time of use (TOU) rates.
As can be seen there is a drop in the cost of power of 10% or $8.52. The delivery charge also drops slightly due to the drop in the cost of line losses as the cost of power has fallen. However, this is more than offset by the $9.69 reduction in the OER subsidy.
This net impact is intended. The goal of the subsidy is to moderate the increase in the price of electricity from year to year. Also, there will be changes to the other non-cost of power rates. Transmission charges are expected to increase by 11%, NOTL Hydro’s net charges will be flat but only because we had some large one-time charges in 2024 and we do not yet know if there will be any changes to regulatory rates for 2025.
Even though the benefit of the lower cost of power is being kept by the Government of Ontario, that is not necessarily a bad thing. The OER is a subsidy so is being paid for out of tax revenues. The lower the subsidy the lower the impact on the provincial deficit.
The OEB report gave two reasons for the drop in the cost of power, a $259 million surplus collected in 2024 and a decrease in global adjustment payments to nuclear and natural gas generators.
The 2024 surplus is nice and not unusual. The setting of RPP rates is always an estimate so there will always be a surplus or shortfall. In 2023 there was a deficit of $342 million. Given the uncertainties the estimates are usually quite good. The swing from a deficit to a surplus has a combined impact of 9% of the cost of power of $6.8 billion so is the cause of most of the rate reduction. The other cause of the rate decline is more interesting and has nothing to do with global adjustment.
This table shows the expected cost and contribution to electricity supply in 2024 and 2025 as used to estimate the RPP rates. Of note is the contribution of natural gas. The cost is expected to fall 25% from $114 to $85 per MWh while its use is expected to climb to 17% of all sources of generation. This has helped reduce the total cost of power on a per unit basis even though the cost of nuclear and hydro, the dominant sources of supply, are both rising. This has contributed a further 0.6% to the decline in the cost of power.
A declining cost of power is always a good thing and a comparatively low cost of electricity is necessary for electrification. However, the growing use of natural gas in Ontario’s electricity supply mix, as shown in the chart, creates a few concerns:
- The Province has consistently touted its “green energy” as a benefit when attracting industry. This was mentioned in a presentation I recently saw by one of the new electric battery manufacturers that is building a new plant. This claim becomes problematic as the use of natural gas grows.
- The carbon benefits of electrification rely on switching from carbon-based fuels to greener electricity. These benefits decline as the amount of carbon fuels used to generate electricity grows.
The Province has claimed that the increase in the use of natural gas is temporary and needed until the new nuclear generation comes into operation. While I do not dispute this, it feels there is a little more the Province could be doing to encourage more renewable energy. This would not be by overpaying like the Green Energy Act but by adjusting regulations to make the use of some renewable energy more competitive. Some examples include:
- Allowing community solar. These are large solar projects that are collectively owned by community members who can use their share of the solar output for net metering. This provides solar to consumers for whom it would not otherwise be possible (condo and apartment dwellers) and large solar installations have a lower cost per kW.
- Allowing wind farms in the Great Lakes. Obviously, there is much more to this example that would need to be examined but the growing success of off-shore wind farms around the world make this look attractive.
- Make net metering simpler and more understandable for customers to encourage more to make this investment.