Much ado about Ontario’s new export charge on electricity

Ontario’s Ford government directed the electricity system operation (IESO) to begin levying a $10/MWh ‘surcharge’ on electricity exports to the United States. The official news release states that, “At this level, the surcharge will generate revenue of $300,000 to $400,000 per day, which will be used to support Ontario workers, families and businesses.” All other factors holding unchanged, that would be true - but there are other factors involved in Ontario’s electricity pricing which make it extremely unlikely that the move will generate revenue.

Ontario’s electricity exports have relatively recently become dominated by supply from natural gas generators, unlike the exports over the previous decade which were driven by an excess of committed, trivial-emission, supply from nuclear, hydro, wind and solar. One way the switch is visible is in the increased average cost of exports. The simplest measure of costs is the Hourly Ontario Energy Price (HOEP). The average HOEP for exports to the US over the past 3 years isn’t quite $40/MWh, but it’s close enough that the government can excused for using a $10/MWh surcharge to carry out a threat of a 25% increase.

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Minnesota is not a significant export destination for Ontario electricity, and the costs on Minnesota ratepayers from this one action, in isolation, would be trivial (maybe $1.5 million Canadian dollars a year). There are numerous reasons for the drop in exports to Michigan, and less so New York, over the past 5 years, but they demonstrate their existence through the most basic of economic principles: as the price of electricity on Ontario’s distinct hybrid market rose, exports dropped. That’s a pretty good hint Ontario exports because traders can bid the power in to foreign markets below more expensive, but available, American supply.

HOEP is not the only relevant cost for traders. Ontario’s HOEP is kept low as the market can be described as designed to recover only the incremental cost of a unit of electricity. In practice this means either the price will be set by, and at, the cost of fuel to generate power with natural gas, or lower (such as water fees/taxes) if no gas supply is needed. This has caused competition on exporting to the USA in the form of Intertie Congestion Pricing (ICP). I estimate congestion pricing would have added approximately $19/MWh over the first 10 weeks of 2025, nearly double the proposed export tariff. The greater the need for supply the higher the congestion, as demonstrated this cold winter and in 2022 (also a cold winter) when price and availability of natural gas were problematic due to the consequences of Russia invading Ukraine. The average congestion cost of exports to the USA since 2021 began is, coincidentally, around $10/MWh.

A few years ago the Ontario Energy Board (OEB) held hearings on prospective Export Transmission Service (ETS) rates, with parties presenting options from $0 to $6.54/MWh. Eventually the rate was essentially held constant at less than $2/MWh, where it remains. This is from an IESO submission supporting Hydro One’s position at the OEB’s hearings:

Corresponding decrease in ICP revenue: The IESO expects that any increase in revenue resulting from a higher [Export Transmission Service (ETS)] would be offset by an equivalent reduction in revenue from the [Intertie Congestion Pricing (ICP)], which in turn will decrease the amount of disbursements from the [Transmission Rights Clearing Account] paid to Ontario consumers. The ICP and ETS are both transaction costs that negatively impact the profit margins of competitive intertie trade. The ICP and ETS have an offsetting relationship such that an increase in the ETS will lead to a proportionate decrease in the ICP. This offsetting relationship means that, assuming the quantity of exports remains constant, the overall value that Ontario ratepayers derive from exports would remain unchanged even if the ETS rate is increased.

The newly introduced export tariff of $10/MWh (or 1 cent per kilowatt-hour) shouldn’t be expected to impact the revenues on exports differently than the IESO suggested a higher transmission charge would. It would surprise me if there was any significant financial benefit of this new policy.

It might be fair to note it’s entirely a political policy and, in that sense, it has achieved some notoriety. Not only did stories run throughout news outlets in Ontario, but also in the Financial Times, the New York Times, The Wall Street Journal, and the BBC. The mad President himself lashed out on his own social network promising punishing retribution for this penny per kilowatt-hour export tariff that’s unlikely to actually alter what Americans pay for electricity from Ontario – despite having threatened a 10% import tariff on Canadian energy himself.