High Ontario Electricity Prices Hamper Ring of Fire Processing and Other Industry – by Livio Di Matteo

Livio Di Matteo is Professor of Economics at Lakehead University in Thunder Bay, Ontario.  Visit his new Economics Blog “Northern Economist” at http://ldimatte.shawwebspace.ca/

Ontario’s competitiveness has been hampered by its high electricity costs
and any mining development in the Ring of Fire will be purely extractive with
little in the way of value added processing if electricity costs remain high.
(Livio Di Matteo , February, 2011)

The news that Cliffs Natural Resources believes the price of electricity in Ontario is too high to allow for value added mineral processing from the Ring of Fire should not come as a surprise to those who have followed the recent decimation of the forest sector and it’s struggle with higher energy costs.  The impact of high electricity costs goes beyond Ontario’s North and any potential development in the Ring of Fire. 

Ontario’s industrial advantages were historically rooted in the advantages of its proximity to American markets and the Great-Lakes-St. Lawrence waterway, the presence of natural resources and the availability of cheap energy in the form of hydroelectric power. Whereas Ontario once had some of the cheapest electricity in North America, today it has become one of the higher cost producers. 

Just how high Ontario’s electricity costs got relative to adjacent Manitoba and Quebec is illustrated in the accompanying figures for the period 2000 to 2010.  (Please go to Di Matteo’s blog for figures) The data is for the electric Power Selling Price Index (EPSPI) constructed by Statistics Canada to measure the price movements of sales of electricity by distributors to commercial and non-residential users with the year 1997 set equal to 100.  The indices are for two broad industrial categories of sales – less than 5000 kW or 5000 kW and more. 

Both Figures 1 and 2 illustrate a growing divergence between the price of electricity in Ontario and the price in adjacent Manitoba and Quebec starting in 2001 with a peak gap in 2005.  After 2005, prices in Ontario declined and by 2010, they matched those in Manitoba and Quebec for the >5000kW category (they have recently spiked up again) but were still much higher in the <5000kW category – about 30 percent more based on these numbers. 

For example, between 2001 and 2005, electricity prices in for the >5000 kW category rose 5 percent in Manitoba, 5 percent in Quebec and 65 percent in Ontario.  The pattern was similar for the <5000 kW category that saw an increase between 2001 and 2005 of 1.5 percent for Manitoba, 2 percent for Quebec and 65 percent for Ontario.

For Ontario manufacturing, an appreciating Canadian dollar and growing international competition was accompanied by volatile and rising electricity prices and culminated in the collapse of the U.S. export market with the 2008 to 2010 recession period.  For the energy intensive automobile and forest sectors, the result was the loss of thousands of manufacturing jobs.

Manufacturing employment dropped from 1.1 million jobs in 2003 to 797,000 in 2009.  In the forest sector, it is no surprise that about 80 percent of pulp mills in Northern Ontario closed given that electricity costs comprised about one-third of the average pulp mills costs.  While Ontario’s electricity costs came down after 2005, the damage was done. 

Moreover, despite the fact they have come down, they still are higher than nearby provincial competitors.  As a result, as Figures 3 and 4 illustrate, the ratio of employment in Ontario to employment in Manitoba and Quebec (constructed from Statistics Canada employment data) has fallen.  While this can be attributed in part to the recession having hit Ontario harder, the impact of electricity costs for Ontario manufacturing in general cannot have been inconsequential.  Ontario’s competitiveness has been hampered by its high electricity costs and any mining development in the Ring of Fire will be purely extractive with little in the way of value added processing if electricity costs remain high.

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