The Fraser Institute

The Fraser Institute

September 13, 2007 07:00 ET

The Fraser Institute: Government Subsidies and Rebates Discourage Ontario Industry From Reducing Electricity Demand When Faced With Higher Prices

CALGARY, ALBERTA--(Marketwire - Sept. 13, 2007) - Ontario industrial electricity demand has shown little change in responsiveness to higher prices since the wholesale market was opened in 2002, according to a new study released today by independent research organization The Fraser Institute.

"It's not surprising there's been little improvement in demand responsiveness given that a series of special rebates, the availability of fixed-term contracts, and the rules governing the behaviour of the Independent Market Operator combined to shield market participants from electricity price increases," said Gerry Angevine, senior economist with The Fraser Institute's Centre for Energy Policy Studies and author of the peer-reviewed technical paper, Ontario Industrial Electricity Demand Responsiveness to Price.

"If the Ontario government is serious about improving the efficiency of the electricity market, it needs to improve industrial demand responsiveness through the Ontario Power Authority's Demand Response Program as well as avoiding rebates and special subsidies."

The study updates a 2003 study conducted by the Ontario wholesale electricity Market Surveillance Panel which found that the full benefits of effective competition would not be realized unless a much greater portion of industrial electricity demand was price responsive. Ontario Industrial Electricity Demand Responsiveness to Price looks at whether industrial demand responsiveness has been strengthened and compares such responsiveness in the iron and steel; pulp, paper and board mill; metal ore mining; motor vehicle manufacturing; and oil refining industries, which together represent about 80 per cent of Ontario industrial electricity demand.

The study found that electricity prices appeared to matter most in the pulp and paper industry while the petroleum refining industry appeared to be the least price sensitive.

"The pulp and paper industry appears to be the most price-responsive of the five major industries examined, likely a result of the competitive pressures that industry is facing and the ability of firms to reduce load," Angevine said.

"On the other hand, the relative lack of price sensitivity in the petroleum industry likely reflects the fact that increases in the price of crude oil and other costs can readily be passed on to consumers."

Angevine is also critical of the series of complex rebates and subsidies the Ontario government overlaid on the wholesale market since it was opened in 2002.

"Rebates and subsidies do not contribute to the workings of an efficient electricity market because they blunt price signals," he said.

"If the goal is to encourage industry to reduce demand for electricity when wholesale prices rise, offering rebates and subsidies sends the wrong message and, if anything, discourages any change in behaviour."

Angevine recommends the Ontario government review its existing rebate and subsidy programs with a view to eliminating them if it truly is serious about improving the efficiency of the wholesale market.

Included in that review should be the special assistance programs recently extended to the pulp and paper industry in northern Ontario, unless the program is used as an effective means of enticing firms to minimize their electricity costs.

"Industry is unlikely to find demand response programs attractive as long as they benefit from electricity price subsidies," Angevine said.

The Fraser Institute is an independent research and educational organization based in Canada. Its mission is to measure, study, and communicate the impact of competitive markets and government intervention on the welfare of individuals. To protect the Institute's independence, it does not accept grants from governments or contracts for research.

Contact Information