Ontario Power Generation (OPG) submitted their application for rates for their hydroelectric and nuclear generation to the Ontario Energy Board (OEB) in December. OPG, which is 100% owned by the Government of Ontario, has rates set by the OEB for these two types of generation rather than getting a market rate. The idea is to provide OPG a regulated rate of return on these assets and to provide Ontario electricity consumers with this electricity at a stable cost-plus price.
In January, as interested parties worked through the submission, it hit the news that OPG was looking to almost double the price of electricity from their nuclear generation. One MWh equals one thousand kwh so a price of $111.61 per MWh is 11.61¢ per kwh.
Proposed Price for Nuclear Electricity per MWh
| 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | |
| Rate ($/MWh) | 111.61 | 123.76 | 213.95 | 197.56 | 208.56 | 202.45 | 222.87 |
| % change | – | 11% | 73% | -8% | 6% | -3% | 10% |
My first reaction was that this did not make sense. I know that OPG has two big nuclear projects, the Pickering refurbishment and the small modular reactors (SMRs), but the cost of these should not affect rates until they go into service. It would be unfair to ask today’s consumers to pay now for future generation.
I decided to investigate further. I came up with two explanations which are detailed below. This was not easy as the material was both voluminous and dry. I also do not believe that OPG did themselves any favours in their presentation. The material was presented in a very matter-of-fact manner that was very technical and, if am sure, accurate. What it did not do was tell the “story” of why this rate increase is needed and what it means. This then is my interpretation of the “story’ based on my review of the material.
Pickering Refurbishment
The first reason for the increase relates to the Pickering refurbishment.
OPG Output and Operating Expenses (2025-2031)
| 2025 Budget | 2026 Budget | 2027 Plan | 2028 Plan | 2029 Plan | 2030 Plan | 2031 Plan | |
|---|---|---|---|---|---|---|---|
| Output (TWh) | |||||||
| Darlington | 21.1 | 21.1 | 18.7 | 26.7 | 25.1 | 26.8 | 27.1 |
| Pickering | 15.8 | 11.4 | – | – | – | – | 1.9 |
| Total | 36.9 | 32.5 | 18.7 | 26.7 | 25.1 | 26.8 | 29.0 |
| % change | – | -12% | -42% | +30% | -6% | 7% | 8% |
| Expenses ($million) | |||||||
| OM&A | 2,044.5 | 2,118.2 | 1,863.7 | 1,756.0 | 1,917.4 | 1,856.3 | 2,153.5 |
| Fuel | 255.1 | 239.2 | 150.9 | 221.7 | 223.6 | 261.2 | 306.1 |
| Depreciation | 540.3 | 617.7 | 663.3 | 708.5 | 730.3 | 779.8 | 992.6 |
| Property Tax | 12.2 | 13.5 | 14.0 | 14.2 | 14.5 | 14.8 | 15.0 |
| Total | 2,852.1 | 2,988.6 | 2,691.9 | 2,700.5 | 2,885.7 | 2,912.1 | 3,467.2 |
| % change | – | 5% | -10% | – | 7% | 1% | 19% |
| Expenses/MWh | 77.3 | 92.0 | 144.0 | 101.1 | 115.0 | 108.7 | 119.6 |
| Cost of Capital | 1,000 | 1,000 | 1,091.0 | 1,144.9 | 1,150.5 | 1,198.1 | 1,679.0 |
| Cost of Capital /MWh | 27.1 | 30.8 | 58.3 | 42.9 | 45.8 | 44.7 | 57.9 |
In 2027, when the Pickering site is shut down for refurbishment, Ontario loses all its production. This averaged 21 TWh from 2020-2024 or 56% of the total OPG nuclear generation. To put this into perspective, the total demand in Ontario for 2024 was 139.4 TWh so Pickering represented 15% of the total generation needed.
However, the drop in operating expenses in the OPG nuclear operations is only 10%. If Pickering had been closed, I would have expected the drop in operating costs to be in line with the drop in generation. However, because it is being refurbished, most of the costs remain. Fuel costs appear to drop proportionately but depreciation and property tax costs remain the same. OM&A costs drop 12% but that is not proportional. I suspect there are two reasons for this: the plant still has to be maintained so that is a chunk of the OM&A costs that will continue and OPG continues to keep on a large number of staff in temporary roles as that is cheaper in the long run than letting them go and then rehiring and retraining when Pickering is ready to go back online. Only some of these staff can be used in roles that can be capitalized.
I have no expertise in nuclear operations so have no idea if my assumptions are correct and, if so, if this is the best course of action that could be taken by OPG in terms of managing the refurbishment.
The table above shows the net impact of the larger decrease in nuclear generation and the smaller decrease in operating expenses on a per MWh basis. The price required to recover the operating costs goes up considerably. I have done the same calculation with the next biggest cost, the cost of capital required to pay interest on OPG’s debt and provide a return on equity. These also do not decrease when the Pickering plant shuts down for refurbishment. The cost per MWh for capital also then goes up considerably as generation falls.
The good news with this analysis is that the increase in operating costs and cost of capital per kwh is temporary. It will go back to normal levels, adjusted for inflation and cost increases, once the refurbishment is complete and the generation goes back up to previous levels. However, when the refurbishment is complete, the capital costs of the refurbishment will then be added to rates so the overall price of nuclear generation will stay higher. The projected cost of power from the Pickering refurbishment is unknown but is projected to be anywhere up to $200 per MWh; about the same as the proposed rates for 2027-2031.
Capital Carrying Costs
The second reason for the increase in rates relates to the carrying cost of the capital expansion.
These are huge capital projects. The Pickering plant refurbishment is budgeted for $26.8 billion to extend the life of the 2,200 MW units. The first SMR at Darlington is budgeted at $7.7 billion for the first unit and $20.7 billion for all four. Each unit is 300 MW for a total of 1,200 MW.
These capital costs will not start to be recovered until the units are in operation. However, for some reason the OEB does allow the interest costs associated with these projects to be recovered. These are not insignificant and are projected to peak in 2030 at over $1.1 billion for the year. As the revenue from nuclear generation was around $4 billion in 2025, the addition of these costs would be up to a 25% increase in the price.
Concurrent Cost Recovery ($million)
| 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | |
|---|---|---|---|---|---|---|
| Pickering | 120.6 | 297.6 | 479.6 | 667.7 | 832.0 | 646.2 |
| SMRs | 112.0 | 214.9 | 284.8 | 321.2 | 274.2 | 24.6 |
| Total | 232.6 | 512.5 | 764.4 | 988.9 | 1,106.2 | 670.8 |
Conclusions
A few thoughts arise from this:
- The overall logic of the price increase makes sense. I will let others with more expertise than me argue the details over the forecast assumptions and whether OPG could do a better job in reducing costs during the shut-down.
- I do not understand the decision as to why carrying costs of the capital expansion should be paid for by current electricity users but that seems to be based on prior decisions by the OEB. Normal accounting practice would be to capitalize these interest costs. The costs themselves are unavoidable.
- Both projects are huge. Getting them completed without cost overruns will be a huge test for OPG. The province has a lot riding on it. As the shareholder, they must ensure that OPG has all the best project management practices in place while not getting in the way themselves. This would not normally be considered a strength of the provincial government.
- It will be interesting to see how the provincial government manages the impact of this cost increase. The 2026 increase in the cost of power resulted in the provincial subsidy going up to $8.5-9 billion. Will they increase the subsidy dramatically again to keep the cost of electricity only going up by the rate of inflation?