Ontario Electricity Market Commentary – Q1 2014
Electricity prices in Ontario in Q1 2014 were the most volatile and expensive we have seen in over a decade. The average weighted Hourly Ontario Electricity Price year to date tops out at an eye popping 7.1cents/kWh, more than double the average weighted electricity price in 2013.
But what led to such expensive electricity market prices in Ontario?
1. Cold Weather + Strong Demand = Expensive Electricity
The winter of 2013/2014 was cold, cold, cold. The polar vortex trapped cold air throughout the northeast, leading to plummeting temperatures and causing homeowners and businesses alike to ramp up their demand for energy. Demand for electricity this winter was on average 5% higher than expected for the period, resulting in upward pressure on electricity rates in the province and across all northeast markets.
2. Natural Gas Prices = $$$$$
Colder than normal temperatures caused not only strong demand for electricity, but for natural gas as well. Strong withdrawals from gas in storage lead to depleting reserves and significantly increased prices. Gas inventories in the northeast hit the lowest levels in 5 years, sending daily prices to hit record highs.
High gas prices translate to expensive electricity as natural gas generators are burning expensive gas to generate electricity.
3. Less Coal, More Imports
Ontario retired all but one small coal generator at the end of 2013. While ending our reliance on dirty coal fired generators is great for the environment and our health, it does leave us increasingly dependent on more expensive forms of generation to make up the difference. Coal generation supplied low cost generation during periods of high demand.
Imports were abundant in Ontario over Q1. Ontario’s electricity prices and demand for electricity were high relative to neighbouring markets; this relationship drove strong imports and high prices. Historically Ontario has been a net exporter but periods of strong imports triggered by local price volatility signaled Ontario had the highest priced electricity in the northeast.
The harsh winter in 2014 and changing Ontario supply mix proved to be the perfect storm – causing dramatic upward pressure on electricity rates in Ontario. Electricity market rates were the highest we have seen in almost 10 years across Q1 of this year, putting budgets at risk and causing businesses to revisit electricity management and purchasing practices.
Next week I will discuss the risks I am currently monitoring which may cause continued upward pressure on electricity rates in Ontario, and how taking advantage of market opportunities can help Ontario businesses control electricity costs and avoid price volatility.