Ken Silverstein EnergyBiz Insider Editor-in-Chief

The government can't afford to subsidize electricity prices. Now, the province of Ontario announced it will have to raise rates 15-25 percent to cover the shortfalls. The hikes began on May 1 and are destined to increase even more in the coming years. Meantime, concerns mount that the city of Toronto risks energy shortages unless 5,000 megawatts of new power generation is built by 2010 and energy conservation is maximized. At the same time, power lines are congested while the government there has vowed to phase out coal generation that makes up a fifth of Ontario's fuel mix.

"Our government is providing leadership and taking decisive action to keep the lights on in Toronto through a combination of conservation and clean electricity supply," says Donna Cansfield, energy minister for the province. Beyond the building of new generation, the government there is working towards the immediate development of 300 megawatts of conservation and demand response, which uses signals to let users know when power is at a premium.

The Ontario Power Authority (OPA) has said that Ontario's stated goal of phasing out its existing coal plants by 2009 would result in massive energy shortages. The province's energy issues are compounded even further because of its aging nuclear fleet, which along with hydro power provides more than half of its energy needs. The power authority has suggested that the province refurbish or replace almost all of its nuclear stock of 12 power plants at a cost of $18-$30 (U.S) billion.

It also recommends that Ontario install wind, solar and biomass projects. Altogether, the use of renewables would rise from 23 percent today -- that includes hydro sources -- to 43 perrcent by 2025. The power authority warns that indecision and complacency when it comes to implementing a holistic solution could amount to 24,000 megawatts by 2025 -- 80 percent of the province's current capacity.

The culmination of short term problems and long term issues is taking form now. Most citizens of the Canadian province pay regulated rates and are largely oblivious to supply and demand curves. But that all changes this month, when customers' rates per kilowatt-hour go up and particularly during the summer. To deal with this, about a quarter of all residents have decided to buy long-term power contracts from alternative suppliers that lock-in rates. If the price of electricity continues to rise, they would have made a good decision. But, if the cost of power falls, then they did not.

Energy Blueprint

In the 1990s, Ontario's then-Conservative government attempted some free market reforms that didn't pan out as expected. A combination of events caused that, although cost overruns at various generating facilities are the primary culprits. In the end, the issue caused the province's former premier, Ernie Eves, to lose to Liberal Premier Dalton McGuinty in an election held in 2003.

McGuinty's government has developed a new energy blueprint. A major thrust of it permits private producers to sell wholesale electrical power at market prices. Consumers, meanwhile, can lock in prices by buying long-term fixed contracts from private suppliers. But, overall rates are not expected to rise as fast because the nuclear and hydro generation plants will remain regulated. Regulators there would "blend" the regulated and an unregulated component to come up with rates -- a solution that some call half-baked.

Nuclear power may be the viable option for Ontario, McGuinty said just recently. He has long argued that nuclear energy is clean, affordable and reliable while acknowledging that there is no perfect solution to fixing the province's energy dilemma. Nuclear waste is an issue, he says, but it can be contained. At the same time, he adds that natural gas is too expensive, wind is too intermittent and coal is too dirty.

"There is nothing that is neat and tidy by way of a solution to our energy challenges," McGuinty said at a press conference. "But I think we should look at our particular history in this country" as it relates to nuclear safety and Ontario's 30 years experience with the fuel source, he adds.

Despite the premier's insistence that coal is filthy, he does recognize that the goal of ditching coal-fired plants by 2008 won't happen. In fact, his critics have said that the very notion of doing away with cheap and plentiful resources when there is a pending energy shortage has worked to push up electricity rates.

In any event, there may ultimately be a meeting of the minds on this issue. That is, at least two of the province's coal plants are considered "clean coal" facilities that have the latest pollution control technologies. New laws could be made that mandate any future development of coal resources would have to be equipped with all the modern gadgetry to minimize emissions.

Meantime, the McGuinty government has introduced a green power standard to require generators there to secure an additional one percent of their electrical needs for eight years from wind, solar, hydro and biomass beginning in 2006. The region has ample land mass and its wind and water sources are also plentiful, all of which will serve to improve air quality and provide the fuel to meet its objectives, the government says. The goal is to boost the use of renewable energy to 5 percent by 2007 and 10 percent by 2010.

"Ontarians need a reliable power system that doesn't leave a legacy of economic or environmental debt," says David Suzuki, who runs an environmental foundation there.

In the heat of political campaigns, it's tempting to advocate simple solutions to complex problems. But, when it comes to fixing Ontario's looming problems, there are no easy answers. The province needs a diversity of fuel mixes to meet its future energy needs. And it needs a system in place to allow new supplies to come to market in an expeditious way. While certain interest groups might begrudge compromise, responsible leadership is about doing the greatest good for the greatest number.

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