July 19, 2011 – After years of looming power shortages, Ontario faces a periodic problem of excess electricity supply. This costly oversupply, which the province must take under fixed-price contracts with generators, leads to higher electricity bills for consumers.
In “Plugging into Savings: A New Incentive-Based Market Can Address Ontario’s Power-Surplus Problem,” authors Benjamin Dachis and Donald N. Dewees recommend a solution: a new market mechanism that would facilitate payments to generators, who operate under fixed-price contracts, to reduce output when doing so would save money for the system as a whole.
“This new market tool would help move Ontario away from the tyranny of long-term, fixed-price contracts that see the province paying top dollar for electricity even when it is not needed,” commented Dachis. “The premise of our recommendation is the creation of market incentives that would make existing producers more flexible, at the least possible cost.”
The long-run solution, as long-term contracts expire, is to ensure that more of producers’ revenue is generated by electricity sales at market prices, say the authors. The short- and long-run solutions increase the share of generation capacity that is responsive to spot market prices, lowering the costs of delivering electricity to Ontario consumers.
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For more information contact:
Benjamin Dachis, Policy Analyst, C.D. Howe Institute; or
Donald N. Dewees, Professor of Law and Economics, University of Toronto.
416-865-1905
email: cdhowe@cdhowe.org