What Should Energy Cost?
by Peter Bursztyn
Oil
Oil is a media favourite. The price of petroleum bobs up and down at the whim of OPEC. But it also depends on demand, largely from North America, Europe and Japan. The price of petroleum is also hostage to volatile Middle East politics, and a recent (January 2003) political strike in Venezuela. A barrel of crude oil now costs around US$35. In recent years it has been as high as $40 and as low as $10. OPEC tries to keep the price between $20 and $30.
Petroleum production costs vary hugely. Saudi Arabia’s vast reserves produce oil at a cost of US$1-$2 per barrel. On the other hand, deep wells in the North Sea yield oil at US$10-$15 a barrel, while squeezing it from tar sands in the Rocky Mountain foothills may cost as much as US$20 and is probably subsidized by our government.
This leaves the Canadian and U.S. governments in a conflict. Clearly, citizens would like low gasoline prices. But, if the petroleum price drops, so do the profit margins of domestic producers. This could push some into bankruptcy. Even at US$10 a barrel, middle-east oil remains highly profitable.
Saudi Arabia – the world’s largest producer – must also balance OPEC’s desire for larger profits against the possibility of damaging Western economies and reducing demand. They certainly don’t want to kill the goose that lays their golden eggs!
Natural Gas
Natural gas is an abundant Canadian resource. As a result, our gas prices for tend to be lower than those in other countries. However, Canada also supplies the U.S. market, and our prices cannot drop much below U.S. rates, or producers would simply refuse to supply us.
Demand for natural gas is growing rapidly in the U.S., spurred by the demand for electricity. Canadian and U.S. regulations require new power plants to ensure that hazardous emissions are under control and low. This brings gas-fired electricity close to being competitive with coal even though gas is a more expensive fuel. Also, gas is easy to use in smaller installations, while coal is not. The demand for natural gas as the fuel of choice for urban domestic and commercial heating is unlikely to slacken.
As demand for natural gas grows, there may be upward pressure on price. Financial gurus believe that future gas prices will be volatile. Unless there are new discoveries in accessible areas, a sustained price reduction for natural gas is unlikely. Again, investments in energy conservation made today are likely to yield an even better future rate of return than they do today.
Electricity
Electricity has been in the news far too often in the past few years. Most of us would prefer it to remain invisible – as it used to be!
The cost of electricity depends on many factors. First, about 40% of Canadian and 85% of U.S. electricity is generated by thermal power stations. Most burn coal (emitting lots of nasty stuff), but some get their heat from disintegrating uranium atoms (polluting differently). The rest of North America’s power comes largely from falling water. Gas turbines (basically stationary aircraft engines burning natural gas) are being installed as low-pollution alternatives to coal, as are wind turbines. Solar energy provides a tiny amount of electricity.
Much of the cost of electricity is bound up in the cost of fuel (coal, oil, gas, uranium) and in maintenance. However, generating equipment must be bought and installed. For old equipment, this initial cost has been written off and the accompanying debt reduced by inflation. Even at today’s low interest rates, the cost of loans to build new power stations to today’s environmental standards would require electricity prices to climb well above what we are paying today!
To reach the customer, electricity must be transported using the high voltage, long distance power grid, and the lower voltage local wires. Their cost of operation must be considered. Finally, the capital borrowed to build any power project must be paid off, and money should be saved towards eventually replacing it.
The cost of electricity varies widely across Canada. Provinces with large hydroelectric resources (B.C. & Quebec) have the lowest prices, while P.E.I. and the Northern Territories with their heavy reliance on quite small power plants are the most costly.
Ontario Hydro was charging too little to finance the billions borrowed to build the nuclear power plants that once produced 60% of Ontario’s electricity. Some nuclear units have now been shut down for safety reasons or for repairs (more $). In addition, several plants are near the end of their service life. So Ontario seriously must consider adding new generating capacity.
Now that government has fixed the retail price of electricity (late 2002) for the next 5 years at $0.043 per kilowatt hour (compared to the earlier $0.039 per kWh), we should ask what it would cost to generate electricity in a new power plant. The Independent Power Producers Society of Ontario (IPPSO, some of the good folk who might build them) have estimated this. Ignoring environmental issues (as all levels of government tend to do), our best bets are “clean” coal at $0.06/kWh and industrial co-generation (waste heat to be used by industry) at $0.055/kWh.
It is therefore not surprising that private electricity generators have not flocked to build new facilities since the recent “deregulation” and break-up of Ontario Hydro. On the other hand, Alberta’s deregulation left the retail price to market forces, and new generation capacity is being built there.
This suggests that the new Ontario-decreed electric power rate is unrealistically low. Ontarians are more likely to see electricity prices rising than falling in near future, when new generating plants will be needed and investments in energy efficiency promise to bring in an even higher rate of return tomorrow than they do today.
What’s in it for Me?
Actually, a great deal! A typical Canadian household uses 12,000-14,000 kWh (kilowatt-hours) of electricity each year. The price varies from about $0.05 per kWh to $0.20 per kWh, depending on where you live (even more in isolated communities). Ontario, with 1/3 of the Canadian population used to pay about $0.09 per kWh. At that price, the average Ontario family spent around $1200 per year on electricity. Although the price has been brought down from the very high values reached in mid-summer 2002, it is likely to cost around $0.10 per kWh next year.
If you could cut $400-“$800 off your annual electric bill, that would ease your family budget very substantially! Just imagine an extra $600 in your pocket, tax free, every year!
My family reckons to save $800 per year on electricity by a careful choice of home appliances. In round figures, our energy efficient purchases originally cost about $1900 more than “ordinary” units a dozen years ago when they were bought. That equates to an annual (tax-free) return on investment of over 40%. Unless you are very lucky, that’s far better than the stock market’s typical, and taxable, return of 10%-15%. And, unless energy prices crash, that rate of return is guaranteed. The only downside is the limit to how much you can invest – there are only so many appliances!
Like the average Canadian, I drive 20,000km per year. I have a VW TDI (turbo-diesel) and save at least $500 each year on fuel over the same car powered by gasoline. I save $1000 over what fuel might cost for a minivan, and nearly $1600 over fuelling a full-size pickup. My wife also drives a VW turbo-diesel a similar distance. Together, we save at least $1000 per year, or as much as $3000 annually than had we chosen the most popular Canadian vehicles – SUVs or minivans.
Our energy savings are not a lottery win. They are a guaranteed part of our cash flow, as dependable as a pension cheque. Once having invested in energy efficiency, we continue to reap dividends, year after year. You too can unleash this hidden resource. By embracing energy efficiency, you can also bask in the thought that you are supporting Canada’s commitment to the Kyoto process, and helping to mitigate global warming.