Wynne government tries (again) to distract Ontarians from electricity woes

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Appeared in the Toronto Sun, October 27, 2017
Wynne government tries to distract Ontarians from electricity woes

The Wynne government continues to offer energy cost-reduction programs that are little more than distractions from what the province would actually have to do to bring down sky-high electricity prices.

In the newest program just announced, the province will put $100 million in an “Affordability Fund” that will help Ontarians “improve the energy efficiency of their homes, while reducing their electricity bills and carbon footprints.”

How will they do that? Why, by subsidizing sales of LED light bulbs, power bars, home insulation and energy-efficient air conditioners, of course. What could go wrong? Well, let’s look at the experience of other jurisdictions that have chased after the ever-elusive “efficiency” improvements.

In the most comprehensive study on home-efficiency programs to date, researchers Meredith Fowlie, Michael Greenstone, and Catherine Wolfram at UC Berkeley looked at 30,000 homes participating in the largest U.S. energy efficiency program, the federal Weatherization Assistance Program (WAP). Each household received an average of US$5,150 worth of home improvements, at no cost to the participants.

The study came to two major findings. First, though the programs were aggressively marketed to the public (via phone calls and home visits), participation rates were low—only 6 per cent of households encouraged to participate actually participated in the program. The researchers also found that consumer savings were below what was projected, and came at higher costs. While the WAP energy efficiency investments lowered monthly energy consumption by 10 to 20 per cent (on average), the upfront investment costs were 2.5 times higher than the savings.

The study concluded that “Across a variety of metrics, the WAP energy efficiency investments appear to be poor performers on average.” While the households involved did not pay for their improvements, Fowlie et al estimate that if they had, their rate of return on the investments would be -2.2 per cent. In other words, they’d have lost money.

Finally, the study calculated that the cost of greenhouse gas reductions under the WAP was approximately US$329 per ton, “an order of magnitude larger than the U.S. government’s estimate of the social cost of carbon of roughly $38/ton [at the time of Fowlie’s study].”

Here’s the reality. The problem with energy efficiency programs comes down to a fundamental bit of economic behaviour—if you really make something cheaper for people, they will most likely use more of it, rather than less. The phenomenon is called “rebound,” and that rebound can negate most or all of the benefits of improving efficiency.

Another problem, from an economic perspective, is that even if the programs work as advertised, they are inherently wasteful since they target energy consumption rather than greenhouse gas emissions, which in many provinces are only weakly related. The way to make policies efficient is to make sure they target directly the desired outcome. Energy efficiency programs fail to do this. What’s worse, ample empirical evidence shows that these programs do not work nearly as well as their promoters argue they will.

As we have written elsewhere, the only sustainable path to lower electricity costs for Ontario is the unwinding of the Green Energy Act price guarantees to renewable power producers, the preservation of low-cost clean-coal and natural gas-base power, and importing low-cost hydro power from Quebec. Programs such as the 25 per cent price cut—or so-called “Affordability Funds”— are costly Band-Aids that only hide the problem, rather than fix it.