December 9, 2013

Ontario residents zapped by sticker shock from price of electricity

According to Statistics Canada, the national inflation rate has become nearly non-existent.

The all-items Consumer Price Index (CPI) in October was only +0.7% year-over-year and the “core” measure, which omits the most volatile sub-components, consisting mainly of food and energy items, was +1.0%.

Inflation’s downward trajectory began in May 2011, when it topped out at +3.7%. It has reached a bottom so far of +0.4% in April of this year, staying in a range of +0.5% to +1.0% since then.

In the U.S., the comparable October figures increased a little faster than in Canada, +1.0% for the “headline” rate and +1.7% for “core”.

This has been despite the fact the value of the Canadian dollar has fallen 6.0% versus the U.S. greenback over the past year, a circumstance which has raised the price of imports.

The higher rate of inflation in the U.S. is surprising on another count. In both countries, energy prices are declining. Canada’s most recent energy sub-index is -1.6% year-over-year, but the U.S. percentage drop is even greater, -4.8%.

The same holds true for gasoline prices: -4.3% in Canada but a more substantial -10.1% south of the border.

In Geneva, a historic accord was recently reached between six world powers — the U.S., U.K., France, Germany, China and Russia — and Iran to ensure the latter nation’s nuclear aspirations don’t take an all-advised leap from power generation to weapons production.

With a term of six months, it’s designed to be the precursor to a more long-lasting arrangement.

Iran has agreed to cease further enrichment of uranium. To assure compliance, it will allow ongoing frequent inspections of its processing facilities.

In return there will be some minor lifting of sanctions. The success of more negotiations aiming to restore normalization of trade relations with Iran will depend on a build-up of trust.

The immediate impact will be to ease one factor contributing to tension in the Middle East, the threat of military conflict between Iran and Israel. (Although it should be noted that Israel has gone on record as thinking the super-powers have signed a “bad deal”.)

That alone is causing a moderate slide in the global oil price. As a corollary, it’s also causing the price of gold — a traditional hedge against uncertainty and potential violence — to fall.

If all eventually goes according to plan, there will be a supply-side effect as well. Among the stiff penalties imposed by the U.S. and Europe on Iran have been prohibitions on oil purchases.

Iran’s return to a more active supplier role in OPEC will add another safety valve to the price.

As a result, motorists should receive further breaks at neighbourhood gas outlets going forward.

In other energy news, Ontario’s Premier Kathleen Wynne recently held a joint news conference with former U.S. Vice-president and clean-air advocate, Al Gore, at which she announced soon-to-be-introduced legislation banning coal-fired power generation in the province.

This is hardly earth-shattering. Ontario has been retreating from coal-fired facilities for years.

The chart that accompanies this Economy at a Glance shows movement in the electric power price index within the overall CPI data for Ontario, Quebec and Canada as a whole.

Each month’s value of the index is compared with October 2003, providing a snapshot of price movements over the past decade.

Quebec has persevered with major expansions of hydroelectric capacity. Versus a decade ago, its electric power prices are 16% higher, an annual rate of increase of only +1.5% compounded.

Over the same time frame, Ontario’s residents have been zapped with a nearly 50% increase in their power charge, the equivalent of a +4.0% per annum growth rate.

As a point of comparison, the all-items CPI for Canada is up less than 20% since October 2003.

The natural gas price index — also within the “shelter costs” sub-heading of the all-items CPI — is -17.4% for total Canada and -25.2% for Ontario.

Due to conservation and lower-than-anticipated demand, Ontario has a surplus of electric power at this time. The offshoots have been the commitment to close all coal-fired stations and to backtrack from further expansion of nuclear capability.

An obvious question is left hanging. If there’s such a surplus, why are rates continuing to escalate?

The governing Liberals are paying heavy subsidies for wind and solar power in order to push a “caring” green agenda.

Also, in the face of vocal community opposition, they moved construction of two natural-gas-fired plants from Oakville and Mississauga to Napanee (near Kingston) and Sarnia respectively.

Auditor General Bonnie Lysyk has estimated those relocations will add an extraordinary additional amount to Ontario’s power generation bill that might rise as high as $1.1 billion.

Often with good reason, the opposition parties in the province will be sure to blame every future business closure on excessive power rates.

The matter of the rapidly rising cost of electricity in Ontario will almost certainly move further into the spotlight — provided, of course, there are no blackouts or brownouts — in the months ahead.

For more articles by Alex Carrick on the Canadian and U.S. economies, please see his market insights. Mr. Carrick also has an economics blog.

Electricity in the Consumer Price Index:
Change Relative to October 2003

All of the price changes are relative to 10 years ago. In other words, October 2003 has been chosen as the starting point.

Data source: Statistics Canada; Chart: Reed Construction Data – CanaData.

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