Higher Electricity Costs Disproportionally Hurting Southwestern Ontario

December 14, 2020 Updated: December 15, 2020

Commentary

Ontarians understand the personal costs—namely, higher electricity bills—of increased electricity prices caused largely by their provincial government’s Green Energy Act, which mandated and subsidized renewable energy (wind, solar, etc.) in the province’s power grid. But the effect on Ontario’s competitiveness, particularly the manufacturing sector, has been largely ignored even though the costs have been—and continue to be—substantial.

Simply put, higher electricity prices in Ontario hurt manufacturing since electricity is the second-largest cost after labour. Indeed, Sergio Marchionne, the late former head of Chrysler, said in 2015 that electricity costs in Ontario were making it too expensive to do business.

Unfortunately, Ontario’s performance in the manufacturing sector bears out this warning. Between 2005 and 2016, the province experienced one of the largest declines in manufacturing compared to other Canadian and U.S. jurisdictions, when manufacturing declined (as a share of the provincial economy) by 5.1 percentage points while increasing in many of the Ontario’s competitors. And a 2017 study found that Ontario’s higher electricity prices cost the province almost 75,000 manufacturing jobs—about two-thirds of all lost manufacturing jobs in Ontario.

Crucially, these costs are not evenly distributed across the province since manufacturing is concentrated in the southwestern region. Indeed, the manufacturing sector’s decline can be seen in the incomes of Ontarians in the 519-belt.

For example, of the 36 metropolitan cities covered by Statistics Canada, Windsor, long one of Ontario’s manufacturing hubs, experienced the largest drop in median household income (in 2015 inflation-adjusted dollars) in Canada, from 10th-highest in 2005 to 25th in 2015. In fact, Windsor was the only city tracked by Statistics Canada to experience a decline in median household income (-3.1 percent) during this period—the national average was a 13.0 percent increase. In 2005, Windsor’s median household income was 12.1 percent higher than the national average; by 2015 it had fallen to 4.0 percent below the national average.

London, the other southwestern Ontario city removed from the Greater Toronto-Hamilton area, experienced the second-largest decline, falling from 15th to 27th. Median household income in London only grew by 2.0 percent between 2005 and 2015.

Making any jurisdiction less competitive—whether through higher taxes, more burdensome regulations, or higher electricity prices—will inevitably affect investment, entrepreneurship, and general economic prosperity. Research consistently shows a strong relationship between access to (and use of) affordable energy and economic growth. In other words, when governments make energy costs higher, they indirectly reduce rates of economic growth and prosperity more generally.

When we look at the province as a whole, the prosperity of the Greater Toronto-Hamilton area and the Ottawa region largely masks the hardship across southwestern Ontario. But policymakers everywhere, including in the federal government, should recognize the plight of Ontarians in the southwest and the reasons for their comparative decline, because many of Queen’s Park’s poor policies, which help explain the decline, are now being replicated in Ottawa for the entire country.

The suffering of those in southwestern Ontario should be a cautionary tale, lest Canada suffer a similar fate of higher energy prices, lower competitiveness, and less economic prosperity.

Elmira Aliakbari and Jason Clemens are economists at the Fraser Institute.

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.