Break the cassette | Electricity rates: how long is “never”?

“There is no question of increasing [les tarifs résidentiels d’électricité] more than inflation or 3% [le moindre des deux]. […] The CAQ government will never do that. »
— François Legault, Premier of Quebec

Is it really possible that the Coalition Avenir Québec (CAQ) will “never” increase electricity rates by more than 3% per year?

“It depends on how long never lasts,” replies straight away Professor Pierre-Olivier Pineau, holder of the Chair of Energy Management at HEC Montréal, to whom we asked to help us validate the declaration of Mr. Legault.

Or it depends on the number of years that the CAQ will form the government.

In theory, Quebec has the legislative power to cap residential rate increases at a maximum of 3% per year until the end of time (this is currently the case until 2025, and Mr. Legault wants to extend that) . All he has to do is change his laws.

But that would be a very bad idea.

On the contrary, over the coming years and decades, residential electricity rates will have to increase much more than the rate of inflation (they have been increasing at approximately the rate of inflation since 1963).

Why do we have (by far) the lowest electricity rates in North America? Because Quebec had the audacity, in the 1960s and 1970s, to build dams which today allow us to have electricity at very low prices.

Our social contract for decades has been that Hydro-Québec sells its electricity from old dams (the heritage block) to Quebecers at a very low price, because it produces it for almost nothing (3¢/kWh for the production and transport).

Except that this heritage electricity block, which currently represents 75% of Hydro’s total production (179 TWh out of a total production of 232.6 TWh), will soon no longer suffice for demand. We will need more electricity to decarbonize Quebec and respond to the Legault government’s new industrial projects such as the battery sector. Quebec is openly talking about an additional 150 TWh by 2050.

This additional electricity will cost much more than our current 232.6 TWh, among other things because new dams will have to be built. Hydro-Québec’s latest public estimate: any additional electricity would cost 11¢/kWh (production and transmission). With this assumption, the average production/transportation cost would increase from 3.9¢/kWh (the current average cost of all Hydro production) to 6.7¢/kWh if we add 150 TWh by 2050. C This is an increase of 71%.

That’s not all.

Hydro-Québec will have to invest more to maintain its infrastructure, and these additional expenses will one day be reflected in rates.

Finally, the exceptionally advantageous contract with Churchill Falls (0.2¢/kWh), which supplies 15% of Hydro’s current production, will end in 2041 (or before if it is renegotiated). We will soon pay a much higher price for this electricity.

For all these reasons, residential rates are expected to increase much more than inflation.

Unless Quebec decides to reduce Hydro-Québec’s profit margin (28% in 2022). In 2022, Hydro-Québec paid 6 billion to the government… the equivalent of 30% of the education budget.

In the short term, it is politically profitable to limit rate increases. In the long term, this is irresponsible and unrealistic.

In his outing, Mr. Legault also criticizes the governments of the Parti Québécois and the Liberal Party for having increased prices more than inflation. He is giving them an unfair trial here. From 2004 to 2019, residential rates increased 27%, compared to 26% inflation. During this period, the two parties nevertheless allowed the Régie de l’énergie, an independent administrative tribunal, to set the rates. In 2019, the CAQ put an end to this system which worked well and was fair for everyone.

And now, the Legault government is promising to limit residential rate increases to less than 3% per year beyond 2025. In a Radio-Canada report broadcast last week, we learned that the CEO of Hydro-Québec, Michael Sabia, privately said there will be “a tendency” to increase tariffs^⁠1. During a meeting with Hydro employees, Mr. Sabia recalled two obvious facts that should be repeated more often in Quebec:

1. there is a “trend” towards tariff increases because production costs will increase;
2. Raising prices would be an incentive for Quebecers to consume electricity better.

As consumers, Canadians and Quebecers are big energy wasters, among other things because we have no financial incentive not to be. “No one wants a price shock to hurt Quebecers,” says Professor Pierre-Olivier Pineau. The idea is to lead us towards greater energy efficiency to enrich ourselves. »

When he announced that the CAQ would “never” increase residential rates by more than 3%, François Legault was responding to a question from Gabriel Nadeau-Dubois, who suspects that the contract with Northvolt will increase residential rates. This contract “will be paid for, it will have no impact on residential rates,” assured Mr. Legault.

We will see in 10 years if the contract with Northvolt will pay off. But we already know that Northvolt will pay the industrial rate L (5.44¢/kWh in 2023), which is lower than the cost of the additional electricity that will have to be produced over the coming decades. This is not the end of the world. It may even be a good thing if the economic benefits of Northvolt are significant enough.

But if we want to have a frank and honest conversation about electricity, we cannot pretend that new industrial projects like Northvolt will not have an effect, even minimal, on prices. Or that prices will continue to increase without ever exceeding inflation.