Report predicts soaring power costs

May 14, 2002

Report predicts soaring power costs

At peak demand, Ontario electricity could cost hundreds of times normal rates

Electricity prices in a competitive market can soar to hundreds of times normal levels during periods of peak demand, warns a confidential report commissioned by the Ontario government and released to The Globe and Mail under the province's freedom of information law.

The report, by Cambridge Energy Research Associates, bases its conclusion on the behaviour of "wholesale markets in several regions of the United States [that] have experienced price spikes of up to several thousand dollars per megawatt-hour in recent years. This is [hundreds of times] above normal."

During these periods, which are most likely to occur during the summer, it says that producers with electricity to sell "were able to charge whatever rate the market would bear."

The firm also predicts that after Ontario's Tories open the electricity market to competition - they did so this month- rates "are likely to be higher than prices that would have prevailed in a closed-market environment." This contradicts some claims that Energy Minister Chris Stockwell and other officials used to justify the open market.

The report says rates are likely to be driven up as Ontario electricity producers sell power - possibly as much as 10 per cent of normal demand - the United States. This will leave less electricity to meet Ontario consumers' needs.

It warns the government: "This could become a politically sensitive issue with a commodity as essential as electricity."

The study was completed in April, 2000, for Ontario's Independent Electricity Market Operator, known as the IMO. It is the government entity that now runs a stockmarket-type exchange for the province's electricity power buyers and sellers.

Cambridge and the Ministry of Energy had been fighting The Globe for the past 18 months to keep the report secret.

The province originally had hoped to open its electricity market to competition in November, 2000, but postponed that until May 1.

The report, titled Electricity Price Trends in the U.S. Midwest and Northeast, studied power price behaviors in areas of the United States that will help set future Ontario electricity prices because of transmission-line connections between the province and the adjacent U.S. market.

Cambridge, a prominent energy consultant, said that companies can produce electricity for $20 to $25 (U.S.) per megawatt-hour, or the amount of juice needed to power about 1,000 homes for that time, but that during high demand periods there is "a breakdown in competitive market price formation" and prices reach "several thousand dollars."

In the study, Cambridge says electricity has "unique characteristics" and is unlike a normal commodity because it can't be stored and must be produced and consumed instantaneously. Those characteristics make it vulnerable to rapid price swings.

"Volatility is an inherent characteristic of all commodity markets, but the electricity market is extreme," the report says.

Since the Ontario market opened for competition two weeks ago, prices have averaged around $30 (Canadian) per megawatt-hour. The Globe was in the midst of an appeal to Ontario's Information and Privacy Commissioner, seeking an order for the study's release, when the ministry made it public.