How to pay for new nuclear in Ontario: introducing the “Climate Change Contribution”

In the run up to the Ontario provincial election, I participated in a televised debate the subject of which was the electricity bill. (You can view the video at the bottom of this post.) The Ontario power bill is full of confusing and contentious line items. Few are more confusing and contentious than the “Debt Retirement Charge” or DRC. The DRC is every bill recipient’s contribution to paying off the $7.8 billion “residual stranded debt” that was left over from when Ontario Hydro, the provincial electric utility, was split up in 1999. The actual charge is tied to each customer’s electricity consumption over the billing period. It is set at 0.7 cents—that’s seven-tenths of one cent— per kilowatt-hour.

So if you use 1,000 kWh over a billing period, the DRC line item on your bill will be $7.00.

Very few people know what DRC stands for, let alone understand the precise nature of the debt it is supposed to pay off. Among those who are familiar with it, the DRC is often used as a rhetorical device.

For example, those who oppose nuclear energy claim that the sole purpose of the DRC is to pay off Ontario Hydro’s nuclear debt. That’s wrong, but for the moment let’s assume it is right. Two things stand out:

  1. Compared with the energy sources most anti-nuclear people would prefer to nuclear, nuclear energy is cheap—ranging from 5.5 cents per kWh to over 6 cents. Apply the DRC only to nuclear output, and that range becomes 7.2 to over 7.4. The cheapest wind energy, under the Standard Offer, is 11 cents per kWh. “Renewable” sources go north from there: wind energy under the Feed-In Tariff is 13.5 cents; solar begins at 44.3 cents.
  2. Nuclear represents by far the cheapest route to major pollution emission reductions from electric power generation. Wind and solar, ostensibly emission-free sources, must be backed up with a parallel fleet of fossil-fired generators. That is the only way they can operate on a modern electricity grid. Every kWh of electricity from wind actually comes with at least 368 grams of carbon dioxide (CO2). That’s because wind only produces a third of its rated capacity. Natural gas-fired generators, the least CO2-intensive fossil generation, would produce the actual power 67 percent of the time; gas emits roughly 550 grams per kWh.

Why are we paying at least 11 cents per kWh for wind? Because it is allegedly CO2-free.

Well, nuclear is not allegedly CO2-free. It is actually CO2-free, period.

So here’s the actual choice when it comes to CO2-free power:

  • Wind: Pay at least 11 cents for a source that comes with 368 grams of CO2.
  • Nuclear: Pay at most 7.4 cents for a source that comes with 0 grams of CO2.

It’s pretty clear. If we want cheap, carbon-free electricity we need more nuclear.

How could we finance new nuclear plants? They are, after all, highly capital intensive. You have to put a lot of money down just to build one. And under Ontario’s Power Corporation Act, you cannot pay for the construction of a plant through the current rate base.

But with a guaranteed dedicated revenue stream, you could borrow enough money, at a decent interest rate, to build one.

The Standard Offer and FIT programs provide exactly that kind of guaranteed, dedicated revenue stream for wind and solar generators.

What if we created one for nuclear? Keep the current DRC rate of 0.7 cents per kWh and apply it to nuclear output. The Florida state electricity regulator recently approved a rate increase for precisely this purpose. This would add $1.87 for every 1,000 kWhs that are consumed.

Could that happen in Ontario? Yes, but the Power Corporation Act would need an amendment to permit construction financing from the rate base.

And how could such an amendment pass in the current minority legislature? Frame it as a climate change measure. Then change the “Debt Retirement Charge” item on our power bills to read “Climate Change Contribution,” as I suggested in the televised debate (at around the 26:40 mark).

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11 years ago

“nuclear energy is cheap—ranging from 5.5 cents per kWh to over 6 cents. Apply the DRC only to nuclear output, and that range becomes 7.2 to over 7.4” …
-that should be 6.2-7.4 Steve.

Steve Aplin
11 years ago
Reply to  Scott Luft

Scott, thanks. My arithmetic escaped me. But how do you get 6.2? In my second go-round I figure it should be 6.9 to 7.4. Here’s why:

Nuclear is roughly half our output over a year. So I took the 0.7 cents for each DRC kWh, doubled it (1.4 cents), then added 1.4 cents to each OPG nuclear kWh (which comes to 6.9) and to Bruce’s 6 cents (which is just a ballpark estimate).

Tim Smyth
11 years ago

Being somewhat knowledgable about tax issues regarding energy there are few comments I want to make.

First the DRC is more a sales and use tax on electricity than it is a “charge” for example businesses that wish to generate electricity for internal use have to pay a “use” tax on this consumption to the Ontario Ministry of Revenue which is then forwarded on to the OEFC. The only exemption to the DRC is for residents and businesses of Cornwall which have historically gotten their electricity service from Hydro-Quebec. Given as part of the agreement to receive federal consumption for the HST the province was required to eliminate most single stage sales and use taxes(technically the province eliminated not just the old retail sales tax but also the hotel room tax and the amusement tax which were both charged at seperate rates from the old PST) I am bit surprised the Federal department of finance didnt’t require the province to eliminate the DRC as now you have both the HST and the DRC “tax” placed on electricity. Conceptionally the idea of the GST/HST going back to 1989 Federal Department of Finance Whitepaper during introduction of the GST(still a good reference if you are having a CRA audit) is for it to be generally the “only” consumption tax(outside of road fuel, alcohol, tobacco) applied at a single rate to all products and services. One downside of course is that if your force DRC directly on to the distributors and generators you lose the element imposed on self generators.

As to the GST/HST on electricity I would note that is a value added tax it actually subtantially decreases the cost of building something like a highly capital intensive nuclear over a less capital intensive single cycle gas fired plant. For example when Darlington was being built in the 1980s most of the capital inputs construction materials, actual reactor parts, construction equipment was being taxed at 13% Federal MST and 8% Ontario PST cascading throughout the manufacturing and construction process, today it would all be 0% through GST/HST input tax credits. Now in terms of “eliminating” the HST on electricity as the HST is a federal tax that can only be done by Ottawa and was rejected by the Federal Conservatives after being proposed by the Federal NDP in the runup to spring budget and eventual election. Interestingly Feds would owe Ontario and other HST provinces compensation in perpetuity for lost revenue if the were to reduce the GST base by more than 1% percent which an exemption electricity or all forms of home heating gas, oil, etc would be. Now other HST provinces have in the past(some have rescinded them like New Brunswich) introduced rebates of the provincial HST portion on all residential energy including not just Hydro but also gas, oil, etc doing this doesn’t show up as reducing the actually HST line item but is a partially countervailing rebate. This is basically what the opposition parties proposed in Ontario. The Liberals however not wanting to been seen as giving in to the opposition’s criticism of the HST on overall economic policy ground have choosen essentially just to rebate the HST(actually more than than just the provincial HST in many cases) on electricity through something called the Clean Energy benefit which applies through the regular electricity charging system(people in Cornwall outside of the old Ontario Hydro service area still pay full HST with no Clean Energy benefit). The other thing I’ll note is that NDP in their platform technically only wanted to rebate residential energy from provincial portion of the HST after five years when the Liberals Clean Energy Benefit is scheduled to expire.

Which brings me to my third point. By having now an additional line item called the Clean Energy Benefit it is hard to also have a “Clean Enegy Charge”. Especially as you now now have three forms of electricity taxes and rebates, the HST including both federal and provincial portions administered by the feds, the DRC as technically a provincial tax collected by the ministry of revenue, and the Clean Energy Benefit being imposed by the Ministry of Energy. So at some point the government is going to have untangle this mess.

11 years ago
Reply to  Tim Smyth

Thank you for writing this.
I think it is the most coherent thing I’ve read regarding all the lines added on our bills.

11 years ago

I had just assumed your 7.4 less .7 was around where Bruce A was, and that 7.2 was a typo of 6.2.
I see your point, but …
Personally, I dislike the additional line items of bills, because they soon get distorted. The DRC is being charged to, allegedly, service a portion of a debt that was built developing a fleet of generation assets that are being regulated at prices valuing their output about $2 billion a year below what it is sold to Ontarians for.
I can fight over the accounting – in the end people just want to know if their bill is going up, and if so, why.
The DRC keeps being brought up as the reason bills are raising, the culprit being a fleet of nuclear resources – the youngest of which was completed in 1994 and which are operating at near lifetime highs in annual capacity factors.
Without the DRC people would know their bills are rising because of what has changed.

Steve Aplin
11 years ago

I agree — the DRC is politically convenient since it gives the impression that an unpopular energy source is the cause of the price hikes.

I should be clear — the CCC (Climate Change Contribution) would replace the DRC, so would not add a new item to the bill. The DRC is just about paid off (and I believe would have been paid off by now had it been dedicated solely to the residual stranded debt).

Tim is right that eventually the bill needs to be disentangled.

Dan Kucheran
10 years ago

This is fine and dandy but when one considers nuclear waste disposal, costing become very different.