The Ontario economy is starting to show signs of life as the province slowly reopens. The worst of this wave of the COVID-19 pandemic appears to have passed, and hopefully we are better prepared to manage any future spikes. Servers can return to restaurants, real estate agents can start showing houses, and manufacturers can start making things again.
The return to a new normal was supposed to mean a return to the policies of old, including the province’s outdated, clunky, and inherently backwards industrial electricity pricing system known as the Industrial Conservation Initiative (ICI). Luckily, the province stepped in and froze the global adjustment for companies that participated in the ICI program for the next two years. Essentially, they paused the program but, they should go further and kill the ICI program completely.
The ICI program was created in 2010 and allows the province’s biggest businesses to get a break on the global adjustment component of their electricity bill if they shut down during the 5 highest usage hours of the year. The idea was that paying companies to shut down production when the electricity grid was at full capacity was cheaper than building new power plants or importing power from other jurisdictions to cover these demand spikes.
The program always favoured those with flexible operations. A pulp and paper mill could shut down for a few hours without much issue, but General Motors needs to pump out as many cars a day as possible to compete. One company would get millions of dollars in savings while the other would pay as much as $110,000 a megawatt-hour – about 860 times the price charged to an Ontario household.
Even worse, only the biggest companies could qualify, with medium-sized manufacturers left out of the program. Ontario’s biggest companies paid just over $2 billion in global adjustment charges on their electricity bills in 2018 while medium-sized businesses paid over $9 billion.
The program made some sense in 2010, but things have changed. Throughout the 2010s energy generation capacity came online in droves thanks to overly generous renewable contracts handed out by the McGuinty government. The province is now gripped with an oversupply of power, meaning the grid does not hit full capacity nearly as often.
Worse yet, the generous savings of the ICI program have created a whole new spinoff industry of companies offering services to help big players predict the demand spikes to guarantee their companies would shut down during the right times of the year. In essence, the ICI program created a provincially funded industry designed at its core to shut down Ontario businesses and the economy. All the while, medium-sized businesses and Ontario families subsidized the ICI program through their hydro bills.
When the complaints from mid-level factories got too loud, the Liberal government expanded the program to include smaller and smaller companies. They used this trick in 2015 and again in 2017, doubling down on a program that rewards companies for sitting idle instead of positively contributing to the economy.
Then, COVID-19 happened. Industrial energy demand plummeted. Electricity usage by motor vehicle manufacturers in the province dropped by more than 60 per cent. Vehicle sales went from over $8 billion in April 2019 to just under $2.3 billion in April 2020.
Allowing the ICI program to continue in the wake of the pandemic would have been completely backwards. When Ontario’s largest job creators are finally getting back to regular operations, the government would have offered them millions of dollars to shut down again through the ICI program. It is quite literally the opposite of the message the premier and the government want to sell. Never has Premier Doug Ford even thought to say, “Ontario is open for business, but only sometimes.” As the province exits its state of emergency, it needed to hit pause on the ICI program.
The government got it right for now, but what should they do moving forward? The C.D. Howe Institute published a memo to the minister of energy earlier this year proposing a logical and straight forward alternative: a demand response auction. Essentially, companies that can afford to shut down when called upon put forward competitive bids offering their services. If the province reaches a situation where it needs to reduce the demand on the energy grid it calls the winning companies and asks for a temporary shutdown in exchange for full payment. Loblaw stores unplug their freezers for an hour, companies use natural gas power they already have installed as backup generators, or a large greenhouse complex temporarily turns off its heaters.
The key is that the businesses only participate in the program if they can afford to and are only asked to shut down when the province’s grid absolutely needs it. Instead of everyone preemptively shutting down in case the grid reaches capacity, demand response only gets used when the grid approaches capacity. Demand response maximizes efficiency and productivity at a time when Ontario desperately needs both.
For the other companies that used alternative methods like batteries or co-generation to ensure they hit the peak hours of demand, they can still use those technologies to reduce their own electricity bills or participate in the demand response auction. These investments are still valuable, but now the government can ensure it only pays for what it actually needs. For the other big players that could not participate in ICI, their rates become predictable and stable, giving them the certainty, they need to make proper investment decisions in the future.
By hitting pause on the ICI program, the government brought logic and sanity back to Ontario’s industrial electricity system. Manufacturers can manufacture, workers can work, and the economy can begin healing itself. However, if the government does nothing to stop the program from returning in the future, Ontario’s biggest employers will do exactly what successive governments had done on industrial electricity policy prior to the pandemic: stand idly by.