Earlier this year, the Independent Electricity System Operator (IESO), released a planning forecast of a growth in demand for electricity of 75% by 2050. The Government of Ontario has reacted to this with a largely pro-nuclear plan for increasing electricity generation in Ontario. I would like to dive into both of these a little deeper to explore what they may mean.
Growth Forecast
75% by 2050 sounds like a huge increase. However, it sounds bigger than it really is. The following chart shows the IESO forecast (orange line) built upon previous actual demand (blue line). As you can see, the forecast growth is not that much different than what Ontario experienced in the 1960’s, 1970’s and 1980’s. In fact, if I move the IESO forecast to starting in 1989 (green line), it does not look unrealistic. The IESO is forecasting that the growth in electricity demand will return to what it was prior to 1990.
The IESO has built its demand forecast looking at trends in a number of electricity demand sectors. I will look at these below. But there may be another big picture factor at play. 1990 was also around the start of the globalization of trade. This was the beginning of the massive shift of manufacturing to lower cost Asia; especially China. The loss of electricity demand from this shift, as well as onoing efficiency improvements, kept demand flat for 35 years. That era is coming to an end now and the forecast reflects the reshoring of production. I am not saying that the manufacturing of the 1980’s is coming back. It does not work that way. Just like the drivers of electricity demand or technologies in the 1980’s was different than those in the 1960’s, the drivers of electricity demand in the 2020’s and 2030’s will be the technologies of these decades. What has changed is that these technologies driving electricity demand are being used back in North America.
A big technology driving growth in electricity demand is data centres; particularly for artificial intelligence (AI). There is a lot of hype about this right now leading some to wonder how real it all will be. Is there an AI driven market bubble, are the capabilities of AI overstated and is the likely demand for electricity overstated? Likely yes in all three cases. However, that does not mean that AI is still not a valuable tool for which there will be demand which in turn will mean much more electricity. The growth in electricity demand from data centres will still be very real, it is just a question of how much growth.
Another big driver will be the technologies driving the need to address climate change. These include electric vehicles, heat pumps, batteries for storage, hydrogen, carbon storage and a host of others. There are two reasons why the impact of these on driving electricity demand will be very real. The first is that climate change itself is very real and we have to address it. The second is that these technologies are generally better than what they are replacing. For example, automobile executives will tell you that they still expect EVs to be the future. They know this because they can see the reaction of their customers that switch to EVs. What they do not know and what scares them is the timing of the switch as their sales depend on getting that right. This is the case with most of these climate change technologies. The price point may not be there yet (battery storage), or the infrastructure to support the technology (hydrogen) may not be there yet but the technology is compelling.
Industrial demand will also drive electricity demand. How big a driver this will be is hard to estimate. There is no doubt that newer industrial processes require more electricity such as arc furnaces, 3D printing, chemical processing and data management. What is not known is how of this will be located in Canada and Ontario. There is no doubt the talent to manage these technologies is here. The question is more whether the investment capital and the investment climate will make this happen.
Agriculture will also be a driver of growing electricity demand. We see this here in Niagara-on-the-Lake. More and more products are being grown using greenhouses and many of these require light and heat that electricity can best supply. I expect this demand to continue as the technology is improving making greenhouse grown crops very competitive.
Government Reaction
The Government of Ontario has reacted to these forecasts by betting big on nuclear energy. These include the investments in small modular reactors (SMRs) at Darington, the refurbishment of the Pickering Reactor to further extend its life, the continued refurbishments at Darlington and the new Bruce C power plant at the Bruce Power site.
The reasons for the investment in nuclear are clear:
- Nuclear power is baseload power. This is important as many of the new demands for electricity are either 24/7 or have electricity demand requirements that are not very flexible. Baseload power meets these requirements.
- Ontario has the workforce and experience to make nuclear energy viable. Both Bruce Power and Ontario Power Generation are experienced operators and builders of nuclear power sites. This experience is critical.
- Nuclear power creates lots of high paying jobs and requires highly skilled trades.
- Expanded hydro power is not really an option. Unlike our bordering provinces of Quebec and Manitoba, Ontario does not have extensive options for developing new hydro power. Hydro power is also baseload power.
- Nuclear power is emissions free. No matter what one’s views of climate change policies are, the reality is that the need for emissions reductions will only grow.
- Wind and solar power are both intermittent and are not sources of electricity in which Ontario has a competitive advantage. Wind and solar power can become baseload power if they are matched with electricity storage. However, this combination is still not competitive, especially in Ontario.
- The Ontario Government needs to send the signal that it is serious about ensuring there will be sufficient electricity in Ontario. This is required to reassure investors and residents (electors). From the Government perspective, overbuilding and having too much electricity, with its associated costs, is a much lower risk than underbuilding and not having enough.
There are, however, three big risks with this strategy.
- In order for nuclear power to be cost competitive, the new installations must be built at close to budget. The nuclear industry is famous for going over budgets by factors of 2-10 times. This must not be allowed. The Government is relying on the recent experience at Darlington to avoid this but that is only once experience, is not yet finished and involved refurbishing a known technology. The budgets must be rigorously prepared and analyzed before any go-ahead is given and the construction must then stick to the budget. This will not be easy.
- Ontario must hope that the combination of solar power and electricity storage does not become so cost competitive that nuclear power cannot compete. Were this to happen, much of the demand for electricity could move to these more cost competitive locations. There is not much the Government of Ontario can do about this risk.
- A final risk is that this will continue with the electricity sector in Ontario fully controlled by the Government of Ontario. This creates a number of secondary risks. These include:
- The risk that the Government bodies responsible for managing these assets and projects lose sight of basic cost/benefit analysis and their responsibility to the ratepayer. This was one of the factors that led to the dissolution of the old Ontario Hydro.
- The risk of ongoing political interference, the promotion of pet projects and the resulting impacts on costs. I remember a discussion with a former Ontario Hydro President and there was no shortage of these incidents.
- The risk of over-regulation. Governments use regulation to try direct industries in the way they want. If there is little private sector involvement, then there will be little push back. This can be seen currently.
The IESO forecast and the Government of Ontario response has created a calculated risk in the billions of dollars. There are a lot of good reasons for this but there is much that can go wrong. The ongoing political management of this will require both discipline and restraint.