Green Power and Smart Grid in Ontario - How Is It Being Financed ?

As I have blogged on several occasions Ontario is in several ways leading the charge in the green power/smart grid revolution in North America. Ontario’s roll-out of smart meters together with time-of-use electric power rates is the largest in the world.  By the end of 2010 smart meters will have been installed in all homes and small businesses.  By June 2011, an estimated 3.6 million customers will be  buying their power using time-of-use rates. Secondly, the Ontario Government committed to phasing out coal generation in the province by 2014. Thirdly, the Green Energy and Green Economy Act mandated a feed-in-tariff (FiT) program including both micro and large scale renewable energy generation.  The bill was intended to enable smart grid investments that would better equip the electricity grid to handle distributed generation, make the grid self-healing, collect and send load information enabling demand response programs and help reduce consumption during peak hours.

Traditionally investments in the power grid in Ontario have been financed by borrowing the cost of which was recovered over an extended time after the grid or generation expansion was completed.  For example, this is how nuclear power generation was financed by Ontario Hydro.  In February of this year ago a ruling of the Ontario Energy Board (OEB) permitted electric power utilities in the province, crown-owned and private, to charge consumers for facilities that are under construction, but not yet in service. 

The OEB has changed the formula it uses for setting return on equity (ROE) levels for Cost of Service applications.  The previous formula resulted in an ROE of 8.39% for 2010. The new formula resets the return on equity (ROE) to 9.85% this year. The OEB says that the increase was in order to attract the investment that utilities require to upgrade the grid, because their ROE needs to be competitive with other jurisdictions.  Apparently this ROE is more in line with ROEs in the US.  The ROE directly determines the rates that consumers pay for electric power.  The OEB estimates that the increase due to the new ROE will not exceed $1.27 on a monthly utility bill, but an independent estimate puts the expected increase closer to $5/month.