Struggling Manufacturers

Struggling Manufacturers

Struggling Manufacturers

Ontario’s energy argue has been raging for decades, but is particularly animated of late, and highly political. Our infrastructure is aged, and much of it needs replacing over the next two decades. The reigning Liberal Party ran some numbers and dared to let in that it will cost money to do this, resulting in perhaps >40% net increases to electricity rates over the substitute period. Of course the opposition parties jumped on this opportunity to blame the Liberals, and the politics is continuing to interfere with good planning.

Ontario’s Progressive Conservative (PC) Party is particularly upset, and ordinarily blames energy prices for the decline of manufacturing in Ontario. PC Monte McNaughton recently received and posted a letter from manufacturer Wescast citing high electricity costs as rationale for closing a manufacturing facility in Ontario.

With help from a few friends, I decided to do a little sanity check on these claims.

Comparing Apples to Apples

So how do you compare energy prices from across North America and Europe? These prices are all posted in public places and are reported upon regularly, so the short answer is that you need to know where to look.

As it turns out, Ontario’s rates for industry are truly very competitive nevertheless. already with a 50% increase, Ontario would nevertheless be much more affordable than Europe, and would nevertheless compare well with many US states. This is not to minimize the importance of having competitively priced energy, but it certainly shows that some of the hype around our increasing rates is exaggerated. Indeed, most US states are facing the same infrastructure challenges as Ontario, so their prices will shortly be increasing in addition. And this is without considering the carbon markets: if the international move to fix a fee on carbon takes root, then Ontario has already closed its coal plants, reducing Ontario’s electricity related carbon emissions by some 75%. Much of the US will be disadvantaged there and will see new fees.

If anything, it puts the ball back in the hands of manufacturers to use their energy more wisely. There aregood incentatives in Ontario right now to help manufacturers save energy, including up to 50% subsidiesfor Energy Audits, and further subsidies for retrofit projects. The Ontario government will literally pay you to hire help to plan how to save energy, and then pay you again to go do

Productivity & Value: The Real Problem

Here’s what Canadian industry (Manufacturing CEO’s and other colleagues) has been telling us is the real problem:

  1. Exchange Rates: Historically low Canadian dollar values vs US dollar meant that Canadian wages were comparatively low, consequently making it attractive to produce in Canada for US companies, with Canadian products being comparatively inexpensive but nevertheless high quality. When the dollars reached parity during the recession, US companies retreated and had no reason to produce in Canada any longer, unless the Canadian plant in question was highly productive, and Canadian plants now ordinarily compete to enhance themselves and their standing within their global organizations. Some Canadian producers suffered more layoffs/closures than others of course, but the exchange rate affects all Canadian exporters.
  2. Culture of Excess: Canada is blessed, and has enjoyed historically low electricity and transportation costs for most of its industrialized history, which has nurtured a culture of relative wastefulness. Efficiency has never been important until recently: there has always been more energy, water, and material to simply use. The World Wars were fought on other soils and forced rebuilds “over there”, and resources were more constrained during those rebuilding efforts, so other jurisdictions have had to conserve where we have not: Canada’s industry was comparatively protected from the wars, and resources were abundant here. If necessity is the mother of invention, then Canada’s need to conserve has been limited until now, and Canadian industry has been proportionately less inventive: other jurisdictions are much more productive with the same energy, where Canadian industry often uses 50-100% more energy per unit GDP than most other nations.
  3. What is Really Leaving? Ontario’s industry in particular is very globally integrated, and has not really been home grown so much as it has grown branch plants for larger globally integrated manufacturers. Global capital is highly fluid, and the global shipping industry delivers goods efficiently and dependably: jobs are comparatively easily relocated now. If large manufacturers are struggling, then consolidation can easily pull jobs away from Ontario that are more competitively placed in developing countries with lower wage employees. This problem is not new to Ontario, but has been exacerbated by the recession.

Indeed, one could argue that it is surprising how many companies are truly surviving in Ontario, and that there may be echoes of delayed effects from the recession: if the Canadian dollar stays strong for the foreseeable future, and our costs of electricity and transportation will not become cheaper any day soon, one can only surprise how many other businesses will move in the coming years. I suppose it’s fortunate that forecasts for the Canadian exchange rate are varied into 2014 (ie: it looks like we’re in for a weaker rate by this summer), but I can’t see that lasting too long: oil sands and natural gas exports have a way of faithfully pulling our dollar back up.

What To Do?

On that cheery observe, let’s understand the problem a little better and then turn our focus to improvement. For example, there are assessable reasons for our increasing energy costs in Ontario, many of which we can affect positively, but not until we understand them better. Let’s start with a bit further exploration of Ontario’s present reality.

Ontario’s energy price increases can be compared with other jurisdictions in Canada and can be trended. observe that the most stable markets are powered mostly by hydro (water), and that the most volatile (AB, ON, NB) have large dependence on coal and nuclear, with modest (<5%) inclusion of renewables (wind, solar). Ontario and New Brunswick have suffered meaningful challenges with nuclear cost over-runs (billions each), while the lower cost provinces have simply stayed with their hydro resources.

In other words, those provinces who invested in replaceable strength (mostly hydro) are now reaping the assistance. Those tied to nuclear have seen the greatest increase in cost. Those most tied to fossil fuels (coal/gas) have seen the greatest price volatility.

Alberta’s rates fluctuate with the fossil fuel markets.

Ontario’s addition of gas plants and infrastructure upgrades did not stabilize rates.

Conservation is King

But of course, this wouldn’t be a Mindscape blog if we didn’t remind ourselves that the cheapest energy is always the energy we don’t use. New Yorkers nevertheless use 50% less energy per capita than Ontarians do, and their culture and industry is not so very different from ours. We can do better. The Ontario strength Authority has many very successful conservation programs already in place, and these tend to conserve energy at no more than 1/10th to 1/7th the cost of new generation. Ontario needs to do a lot more of this, and we have the programs to do it. They just need more political sustain.

instead of continue to squabble about billion dollar gas plant relocations, billion dollar nuclear feasibility studies, or the few hundred million spent on FIT contracts, Ontarians would do well to simply use less, and Ontario’s politicians would save money by increasing investment in their already successful conservation programs.

And that brings us complete course of action back to manufacturers: when the Canadian dollar is strong, it’s a great time for manufacturers to invest in equipment upgrades that will help them reduce their energy use and increase their competitiveness. Exchange rates are always fluctuating, but there is never a bad time to save energy. by this summer, when the dollar is weaker, it will be a great time to invest in simple measures like air tightness and recommissioning: creating some immediate savings that can be leveraged later. by the winter, when the dollar recovers, will be a great time to invest in equipment upgrades, and use the savings from the summer to help fund those upgrades.

New Brunswick has hydro, but also nuclear.

Quebec had nuclear but as a much smaller fraction of total generation. All markets with meaningful dependence on fossil fuels have seen meaningful cost increases over time, and only the large hydro projects have helped to successfully contain rising rates.

From a political view, this should impact discussions about the Long Term Energy Plan (LTEP): history has shown that hydro is the most predictable and reliable source of energy, so it would stand to reason that this should be a dominant focus for future supply. Ontario has the luxury of meaningful hydro resources domestically, and already more by neighbours Quebec and Manitoba, both of whom are looking to export. Ontario can stabilize its rates by working with QC and MB. Ontario’s LTEP should prioritize this over all other forms of new generation, especially expensive nuclear.

Manufacturing Context: Greener Grass

Back to manufacturing jobs. Some of Ontario’s political parties continuously remind the population about the jobs lost during the recession, and continuously blame these losses on energy prices, particularly on replaceable energy. It should be clear by now that Ontario’s energy prices are indeed not unreasonable, and replaceable energy (particularly wind and solar) make up a very minor portion of that price. Indeed, Ontario’s manufacturers assistance from lower corporate income tax rates than many other areas.

Opposition political parties often want us to believe that the grass is greener in other places, but indeed this is not so true for Ontario: Ontario looks pretty good when compared fairly.

Healthy Skepticism

It would seem that energy and jobs are like most other topics: when approached by politicians, we would do well to be careful about what we hear. It can be difficult to dig up the facts to disprove the claims that politicians make, and indeed most of the politicians themselves are not qualified to dig up those facts: they rely on advice from their policy research teams. A little bit of healthy skepticism is never a bad thing.

By Derek Satnik, with thanks for contributions from Chris Young, Christine Koenig and Michel Fortin.

leave your comment