Drummond on energy

February 17, 2012

The much hyped Don Drummond Report released Wednesday is an appeal for a more sustainable and rational approach to fiscal policy in Ontario.

Energy features prominently in Drummond’s report. Beyond a general emphasis on maximizing efficiencies across the board, there are specific recommendations regarding the FIT review, energy procurement, and the future of Ontario Power Generation (OPG), Hydro One, and local distribution companies (LDCs). The focus is on sending more efficient price signals to the marketplace to encourage more optimal levels of investment in electricity infrastructure and capitalize on export opportunities for domestic goods and services.
 

FIT Review

The Drummond report advocates for the reduction or elimination of various energy subsidies, most notably the Ontario Clean Energy Benefit, and takes aim at the above-market-level rates that have been offered through the feed-in tariff (FIT) program for renewable energy generators. 

Drummond recommends lowering the initial prices offered in the FIT contract and introducing degression rates that reduce the tariff over time. He cites the example of Germany’s equivalent tariff program that builds in an annual nine per cent rate reduction. Beyond mitigating the impact on electricity prices, the purpose is to encourage innovation and discourage reliance on public subsidies.

Energy Procurement

The report suggests procuring larger generation facilities through a request for proposal (RFP) process, and making wholesale electricity prices inclusive of transmission costs as part of a comprehensive restructuring of the wholesale electricity market. Drummond also raises the possibility of locational marginal pricing when he suggests that consumers located nearer to generation stations should have the benefit of lower electricity prices.

OPG and Hydro One

Drummond suggests the province consider the full or partial sale of OPG and Hydro One if net, long-term benefits can be clearly demonstrated through comprehensive analysis. As well, he tells government to stay out of rate setting, a practice that often leads to greater costs down the road. Drummond’s report also recommends public-private partnerships for these government enterprises as a means of promoting efficiency in order to service and retire the debt and liabilities of the old Ontario Hydro as soon as possible.

LDCs

Drummond singled out the inefficiency of Ontario’s 80 LDCs as an area for improvement. His report recommends consolidating LDCs along regional lines to create economies of scale and potentially save $1.35 billion now spent on operations, maintenance and administrative costs.
 

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