Understanding how power rates drive demand for electricity
The capital cost of Muskrat Falls increased by 105 per cent from $6.2 billion in 2010 to $12.7 billion.
Last year Nalcor warned us that to pay for those horrendous costs residential rates could more than double. And surely rates for commercial and industrial customers will go by a similar amount as well? But does Nalcor understand just how significantly higher rates will influence electricity use? Does Nalcor measure the price elasticity of demand?
Demand for electricity is driven by a large number of factors. These include demographic factors, including the growth, distribution and age structure of the population. They also include industrial requirements for electricity, particularly by energy intensive industries. Demand is also influenced by the availability of substitutes for electricity, by demand side management and by increased energy efficiency. The installation of heat pumps can play an important role in displacing the use of electricity for space heating.
Rate increases for electricity will play an important role when consumers are given a strong incentive to conserve and to substitute other forms of energy for electricity. Consumers can shift from electric space heating to the use of fuel oil, wood, or propane. They can reduce electricity consumption by using ambient or geo-thermal heat pumps or mini-splits. They can improve insulation or move to a smaller residence.
If certain classes of customers are exempted from higher rates this will increase the burden for other classes. For example, if industrial customers are exempted then residential and commercial customers will face more than a doubling of rates. If the demand for power collapses because of price escalation who will bear the burden when the full cost of our electric utilities on the Island rises from $700 million to $1.5 billion? Will government attempt to shield some industries in order to avoid loss of employment and what will be the impact on residential and commercial customers?
Will government exempt its own agencies, boards, commissions, crown corporations, schools, hospitals, and postsecondary institutions? Will low income people be protected?
Power that is surplus to domestic needs could be exported but wholesale prices in export markets are way below the costs of electricity from Muskrat Falls. Therefore, increased revenues from forcing local customers to pay higher prices and from exporting energy are unlikely to come close to the extra $800 million per year required to pay for Muskrat Falls.
Indeed, revenues may actually decline below the current level of $700 million, as rates rise, because local consumers will be constantly looking for new ways to cut their electricity consumption.
This is why Muskrat Falls will not be self-supporting and will threaten the already precarious financial plight of the province
How will government finance this increased burden? Will social programs be sacrificed in order to meet these costs? As yet undefined proposals for “rate mitigation” rest on the notion that taxpayers will share the increased cost but the stark reality is that the provincial government may have to take full financial responsibility, with little or no revenue contributed by higher rates. Can the province absorb this burden? If not, is there a plan afoot to increase the level of federal participation?
Could this not have been easily predicted? And where’s the plan?
David Vardy St. John’s