Ontario’s huge nuclear debt and other things Dutton doesn’t understand about cost of electricity

It seems our alternative Prime Minister Peter Dutton’s favourite topic is your electricity bill.  Given how much he talks about electricity prices, you’d think he might know a fair bit about what makes up your electricity bill, wouldn’t you?

According to Dutton and his Shadow Energy Minister Ted O’Brien, the problem is all about too much renewable energy in the mix. And their answer to the problem is nuclear power, as well as more gas.

According to Peter Dutton, “We can’t continue a situation that Labor has us on of a renewables only policy because, as we know, your power prices are just going to keep going up under this Prime Minister.”

Instead, according to Dutton, “we could be like Ontario, where they’ve got 60 or 70 per cent nuclear in the mix, and they’re paying about a quarter of the price for electricity that we are here in Australia.”

O’Brien, elaborated on this point by saying:

“We will have plenty of time in due course to talk about the costings [for their nuclear plan] once we release them here in the Australian context. But I point to Ontario in Canada, there you have up to 60 per cent of their energy mix in the grid, coming from zero emissions, nuclear energy. Their households pay around about 14 cents kilowatt hour. There are parts in Australia that will be paying up to 56 cents a kilowatt hour from July 1 this year.”

Once you actually delve into these numbers it becomes apparent that O’Brien and Dutton don’t seem know much about electricity costs and pricing.

But even worse, they don’t know how badly Ontario’s taxpayers and electricity consumers were burnt by their utility racking up huge debt building nuclear power plants equal to $70 billion in current day Australian dollars.

Do Dutton and O’Brien understand your electricity bill?

You can actually look up what Ontario households pay for electricity via the Ontario Energy Board’s bill calculator website.

This provides you with a break down on the charges a typical household faces depending on the utility you choose (although there’s no difference in per kWh rates across them because the rates are set by the regulator). Below is an example screenshot.

Now if you take the average of the three time-of-use rates above you end up with 13 cents in Canadian dollars (ignoring consumption levels across each rate time period). If you then adjust this into Australian dollar terms you get 14.3 cents – so that appears to be where O’Brien got his number.

But notice there’s also other very significant items in this bill separate to the kilowatt-hour charge? There’s a “delivery” charge which is the cost of paying for the  distribution and transmission poles and wires. There’s also regulatory charges and also their sales tax is known as “HST” rather than GST for us.

So the Ontario 14 cents per kilowatt-hour charge that O’Brien and Dutton are referring to covers only the wholesale energy portion of their bill.

In Australia, we pay a majority of the costs of distribution and transmission in our cents per kilowatt-hour charge, in addition to wholesale energy costs, and then we get GST added on top. O’Brien and Dutton don’t seem to have appreciated this important aspect of electricity pricing in this country, which is different to Ontario.

But it actually gets worse.

I went digging on the official government energy retailer comparison sites- www.energymadeeasy.gov.au and www.energycompare.vic.gov.au and I initially couldn’t find a single Australian retailer selling electricity at 56 cents per kilowatt-hour. 

This was based on looking at offers based on a single rate tariff. Then I had a brainwave and looked at time-of-use rates. In Queensland and Victoria I still couldn’t find anyone wanting to charge me 56 cents for the peak period. 

But eventually I succeeded. Right at the bottom of the EnergyMadeEasy list of retailer offers – which were ordered from best to worst – sat EnergyAustralia as the worst offer, charging 57 cents for the peak period in South Australia (although with a compensating high solar feed-in tariff of 8.5 cents).

But for the rest of the day I’d pay between 18 to 31 cents. Although if I went for the best deal offered by EnergyMadeEasy, which was Momentum, then my peak rate would be 37 cents – a long way short of 57 cents.

To help out O’Brien and Dutton, I’ve prepared the table below which provides a proper apples versus apples comparison (as opposed to apples vs peak rate bananas).

It lists retail prices for the four NEM states after excluding network and retail operating costs as well as GST.

This is built up using a mixture of several electricity retailer offers recommended by Energy Made Easy and Victoria’s Energy Compare website and then deducting the network and retail costs estimated by the Australian Energy Regulator and the Essential Services Commission, as well as GST. Note this residual charge includes not just the cost to the retailer of obtaining energy from wholesale markets, but also environmental scheme charges such as the Renewable Energy Target. 

Note: these prices are derived from actual retailer offers in the market, not the Regulators’ default or price cap offer (called the default market offer). The default price cap offer is typically 10% to 15% higher than what most consumers can get by shopping around. So if someone cites wholesale energy and environmental costs estimated by the regulator in their default market offer as an alternative to the estimates in the table above, you can safely assume they are higher than what retailers actually pay.

So, rather than paying four times more than the 14.3 cents Ontario households pay for electricity, we actually pay anywhere between 1% to 19% less. For the nerds and sceptics I’ve provided a full and thorough explanation in an appendix section of this article on how these results were derived.

Ontario’s nuclear debt debacle

Yet this comparison between Ontario and Australia misses a far more important part of the story that O’Brien and Dutton seem to be blissfully ignorant of. 

That is the history of the Ontario’s state owned utility – Ontario Hydro – and the unsustainable level of debt that it racked up over the 1980’s and 1990’s as a result of an ambitious nuclear plant construction program that went wrong. 

While this cost is no longer apparent in current electricity prices, Ontario businesses and households were stuck with paying back CAD$38.1 billion in debt (over $70 billion in Australian current day dollars) for more than 35 years after their public utility committed its last nuclear reactor to construction in 1981. 

So what went wrong?

In anticipation of large growth in electricity demand, over the 1970’s and 1980’s Ontario Hydro committed to construction 12 nuclear reactors with 9,000 MW of generating capacity. To fund the projects the public utility accessed commercial debt markets anticipating that it could comfortably repay this debt from the increased electricity demand it forecast. However, several things went wrong.

– The nuclear power stations took far longer to build and were around twice as expensive to build than had been planned

– Interest rates on debt rose to very high levels by historical standards over the 1980’s in order to contain the high levels of inflation that unfolded over the 1970’s and early 1980’s. With the nuclear power stations taking longer than expected to build, interest was accumulating on this debt with far less output from the plants to offset it.

– Lastly, Ontario Hydro’s estimate of large growth in electricity demand didn’t eventuate. A 1977 forecast projected a system peak of 57,000 MW by 1997. Actual peak demand in 1997 was 22,000 MW. This meant that the very large cost and associated debt of the large nuclear expansion had to be recovered from a much smaller volume of electricity sales than it had anticipated, making it much harder to pay off the debt without substantial increases in electricity prices.

1. By around the mid 1990’s large business consumers of electricity were vigorously complaining about having to pay increasing prices for electricity when their neighbours just across the border in the United States were seeing lower prices. 

By 1998 the Ontario government came to the uncomfortable conclusion that its monopoly utility had monumentally screwed-up and it was time to break the thing up and rely on competition to ensure better outcomes for Ontario residents.

The problem was that the level of debt the utility had racked up was of a level that, if this was transferred to the new broken-up offshoots, it would leave them saddled with such high debts that they were financially unstable and prone to collapse.

This was very clearly explained by Ontario’s Auditor General:

“One of the most critical steps in the restructuring process was to determine the fair market value of the Ontario Hydro assets transferred to the new entities. Both Ontario Hydro and the government, assisted by private-sector investment firms and other experts, recognized that the market value of these assets in a competitive environment would be significantly less than the amounts recorded in Ontario Hydro’s books. It was anticipated that in a competitive market, revenues and profits generated by the successor companies would not be sufficient either to justify the existing recorded asset values or to service Ontario Hydro’s substantial outstanding debt.

“On April 1, 1999, the Ministry of Finance determined that Ontario Hydro’s total debt and other liabilities stood at $38.1 billion, which greatly exceeded the estimated $17.2-billion market value of the assets being transferred to the new entities. The resulting shortfall of $20.9 billion was determined to be “stranded debt,” representing the total debt and other liabilities of Ontario Hydro that could not be serviced in a competitive environment.”

So the CAD$38.1 billion in debt was transferred out of the electricity companies and into a special purpose government entity called the Ontario Electricity Financial Corporation (OEFC). This debt management corporation was given the following revenues to service the debt:

– Both residential and business consumers were required to pay a special “Debt Retirement Charge”. This charge was introduced in 2002 and lasted until 2016 for residential consumers and 2018 for business customers.

– The Ontario government would forgo any corporate income and other taxes owed by the offshoot electricity companies from Ontario Hydro so they could be diverted to the OEFC to pay down debt.

– If the cumulative profits of two of the new state power companies exceeded the $520m annual interest cost on their debts, then this would go towards paying stranded debt rather than dividends to the Ontario government.

None of this is apparent on current bills, but the burden of repaying the nuclear debt left the Ontario government and its taxpayers far poorer than Dutton and O’Brien seem to appreciate.

More things O’Brien doesn’t want to understand about Ontario’s nuclear power program

Dutton and O’Brien like to claim that nuclear power plants last a very long time and so therefore the large upfront cost of these plants isn’t something we should be too worried about.

O’Brien has claimed that CSIRO’s GenCost report –  which put the cost of nuclear power far above that of renewable energy with energy storage firming – was invalid because he said it didn’t recognise, “that nuclear power plants built today have a ‘design life’ of 60 years and an expected life of 80 years, not 30 years as assumed in GenCost.”

It’s not as simple as this. Nuclear power plants involve a range of components which are exposed to severe heat and mechanical stress. These all need to be replaced well before you get to 60 years, and such refurbishment comes at a cost.

Ontario’s experience is that refurbishment comes at a very significant cost. Less than 25 years after the Darlington Nuclear Power Plant construction was completed, it needed to commence refurbishment. The total cost? $12.8 billion in Canadian dollars or $14 billion Australian dollars. 

This is partly why, even though the original nuclear construction cost debt had been largely paid down and nuclear operating costs are lower than coal or gas plant, Ontario still pays more for its electricity than we do.

This is because the current owner of the nuclear power plants – Ontario Power Generation – operates under regulated return model where the regulator grants them the right to recover these refurbishment costs from electricity consumers.

Are O’Brien and Dutton about to commit to another Snowy 2.0 budget blow-out, but on steroids?

If you’ve got this far in this article, you’ve probably worked out that I don’t think too highly of O’Brien and Dutton’s electricity system costing skills.  But I also don’t think that highly of any politician’s skills in costing projects in which they have no practical experience or expertise. 

The problem here is that when you don’t know very much and you’re spending other people’s money, ego can easily cloud your judgement.  Don’t get me wrong, ego will often cloud business leaders’ judgement too. But their ability to spend money to feed their ego can only so far before either competitors or shareholders intervene.

Ontario taxpayers on the other hand realised far too late that their public utility, in cahoots with their politicians, were pursuing a nuclear vanity project built upon a poor understanding of the future, and without any competitor to discipline their ego. 

Australian taxpayers have seen a similar mistake unfold with the Snowy 2.0 pumped hydro plant whose cost now stands at five times greater than the original expectation, and double what was meant to be a fixed price construction contract.

Snowy 2.0 is a parable of what goes wrong when:

– Politicians rush things leading to inadequate planning and preparation;

– Politicians fail to objectively and thoroughly evaluate alternatives; and

– Politicians fail to employ open and competitive markets to deliver end consumer outcomes.

All of this has left taxpayers with a massive budget and timeframe blow-out. This is what happens when we leave it to politicians in a hurry to hand pick power projects.

Unfortunately for us, Dutton and O’Brien are also in a hurry. They think they can deliver nuclear power plants far faster than what many experts believe is sensible and what many countries with far more nuclear experience than ourselves have been able to achieve. Dutton and O’Brien also want to do this via a government-owned utility, instead of via a competitive market.

While the budget blowout of Snowy 2.0 is bad enough, it pales into comparison with the kind of cost blow-outs that can unfold with nuclear power projects. As an example, the budget for completion of UK’s Hinkley Point C nuclear project now stands at $89.7 billion which is three times higher than what was originally budgeted.

We’ve all seen this movie before, including in Ontario, and it doesn’t end well.

Tristan Edis is director of analysis and advisory at Green Energy Markets. Green Energy Markets provides data and analysis on energy and carbon abatement certificate markets to assist clients make informed investment, trading and policy decisions.

APPENDIX – how much do you need to pay retailers for wholesale energy?

The table below provides a full break down on how I derived an apples vs apples comparison for Australian electricity costs versus Ontario kilowatt-hour charges based on real-world electricity market offers from Australian electricity retailers.

Firstly, I checked the Australian Energy Regulator’s www.energymadeeasy.gov.au/ and the Victorian Government’s compare.energy.vic.gov.au/  websites for electricity retailer offers and selected the top four recommended offers for each city. For Sydney I used the Ausgrid network area and for Melbourne I used the United Energy network area. I only used retailer offers that were based on single rate tariffs to simplify things. This gave me a fixed annual change and a usage charge per kilowatt-hour.

To combine the two into an overall cost I multiplied the usage charge by the median electricity consumption the Australian Energy Regulator provides for each network area. At this point I then backed out the network cost, which is provided by the Australian Energy Regulator (AER) and the Essential Services Commission (ESC) calculations from their regulated maximum retail price cap determinations (often called the default market offer). I then also backed out the retailer operating costs that the AER and ESC estimate in their determinations.

This then leaves a residual cost which needs to go towards paying for wholesale energy, environmental scheme costs and a retailer margin. I’ve then reversed out the 10% GST to get the final residual cost which I used to get something closer to an apples with apples comparison with Ontario’s 14.3 cents per kilowatt-hour charge.

Now no doubt there’s some clever cookie reading this who’ll notice that the residual costs I’ve calculated here are lower than the wholesale energy and environmental scheme costs which the AER and ESC estimate in their retail price cap determinations. The reason you shouldn’t use their estimates is because they are a substantial overestimate of what electricity retailers actually pay, and are deliberately generous to electricity retailers. They are deliberately generous because there are serious risks associated with setting the retail price cap below actual retailer costs. 

If prices are set below retailer costs then you run the risk of a retailer exodus from the market as retailers will be financially better off abandoning their customers. We know for sure that retailers’ costs are well below the default offer estimates because the ACCC’s Electricity Market Monitoring Inquiry has been able to collect information from electricity retailers on their underlying costs and what they were charging their customers.

This data indicates customers usually pay around 10% to 15% less than the price cap amount. The one exception to this was during the Russian gas supply crisis period when the wholesale electricity market suffered sustained extreme prices which led retailers to shift prices up to the regulated price cap.  However, this practice has now ceased, and retailers have resumed offering prices that are noticeably lower than the regulated price cap. 

I would have used the ACCC’s breakdown on the individual component costs borne by power retailers, except the last data they’ve published is out of date and only covers up until the 2022/23 year.