Ontario
businesses that are medium to large consumers of electricity have a difficult decision to make. Does it make sense to lock into a long-term contract now or stay on the spot market and hope for the best? While it is impossible to know with certainty where prices will go over the next few years, the general consensus is that they are going up, and the only question is how much?
The current electricity generation infrastructure in
Ontario
is fragile and as it continues to age the risk of capacity shortfalls increases. In addition, the
Ontario
government’s decision to phase out coal-fired generation plants by 2009 will only add to the problem. Coal currently accounts for about 21% of the provinces capacity and is a major component of the flexible generation needs. The major risk to big users of electricity is over the next 4 to 5 years while coal is phased out and new capacity comes on stream. Figure 1.1.2 shows the demand growth and generation retirements of the existing infrastructure over the next 20 years and demonstrates the urgent need for significant investment in various types of generating capacity. The procurement initiatives currently underway cover the expected demand only until 2014. Also, given the lead-times to build additional capacity it can take many years before it comes on-line which limits the utilities ability to plug shortfalls in capacity in the short-term. During peak usage power must be imported from other jurisdictions which can be very costly.
Much of the short-term new capacity that is under development is natural gas fired generation plants. While natural gas is cleaner than coal it is also much more expensive to generate power. Coal generated power costs about 4 cents per kw/h to produce and natural gas power costs about 7 cents per kw/h. Currently, natural gas accounts for 16% of
Ontario
’s capacity and this is expected to increase to 31% by 2015. As a result, the cost of electricity will be become more and more linked to the price of natural gas.
What Can You Do?
As mentioned, the biggest risk to electricity users is over the next 4 to 5 years while the coal generating capacity is phased out and is replaced with higher cost alternatives. This transition must proceed smoothly to ensure stability of supply and pricing. Unfortunately there is little that can be done to ensure the supply beyond forcing our elected officials to provide accurate reports on the state of the transition to new supply.
On the question of price, purchasers of electricity can consider locking into a long-term supply agreement. With the current uncertainty in the market, many companies have stopped offering 4 and 5-year contracts. Unfortunately, the contracts offered by some resellers contain clauses that are heavily skewed in their favour. Here are some examples of clauses to watch out for:
They quote a fixed rate but can make an adjustment for ‘load balancing’. The bottom line is that the fixed rate is not truly fixed and the customer can be charged more than the rate at which they thought they locked in at.
With some contracts the reseller can wait up to one year before implementing the fixed rate. Basically, they can low-ball the fixed rate and then wait for up to a year before implementing in the hope that the commodity price will drop.
Auto renewal clauses can be very onerous with the implication that the contract will renew on very unfavourable terms.
The bottom line is that long-term contracts can be very beneficial in the current
Ontario
electrical market, however, you must do your due diligence before signing any contract. In most cases it may be in your best interest to have an expert negotiate the best deal available on your behalf. Someone who is intimately familiar with the
Ontario
electricity market can advise you about any unreasonable clauses in the contract and in many cases they can obtain a better price through their network than you may obtain on your own.
