Key Highlights
• Ontario Premier Doug Ford has threatened to cut off electricity supply to the United States if it imposes a blanket 25% tariff on Canadian goods.
• If the tariff or the electricity export ban occurs, we do not expect either to materially affect most power producers with operations in Ontario.
• However, we believe that either scenario would decrease the efficiency of electricity systems in both Ontario and connected U.S. states, which would increase overall electricity system costs for customers in both Ontario and the U.S.
On December 11, 2024, Ontario Premier Doug Ford threatened to cut off electricity supply to the United States if President-elect Donald Trump follows through with his threat to impose a blanket 25% tariff on Canadian goods.
We view neither the implementation of the tariff nor the suspension of electricity exports to the U.S. as having a material immediate effect on most independent power producers (IPPs) with operations in Ontario. However, we note that some IPP-owned power facilities in Ontario that have exposure to wholesale or electricity capacity sales would be more affected. We expect that either the tariff or the export ban would increase wholesale market price volatility, but we do not expect it to have a material effect on merchant electricity prices in either Ontario or the U.S. states that import Ontario electricity.
However, we believe that either scenario would decrease the efficiency of electricity systems in both Ontario and connected U.S. states, which would increase overall electricity system costs for customers in both Ontario and the U.S. We also expect that a less efficient grid would increase both electricity systems’ carbon emission intensity. Moreover, over the long term, tariffs or the retaliatory measures could also reduce investment opportunities for new power generation projects in Ontario, as market uncertainty and price pressure would likely deter new entrants. This could have a positive impact on IPPs with an incumbent position in the Ontario market.
Exports
Ontario has a long history of exporting electricity to and importing electricity from the U.S. The first electricity interconnection between Ontario and New York was completed in the early 20th century. Currently, Ontario has 7,400 megawatts of electricity interties with the U.S. states of New York, Michigan, and Minnesota.
Ontario electricity exports represent approximately 13% of Ontario’s total electricity generation between 2016 and 2022, with imports representing approximately 5% of Ontario’s demand over the same period. The state of New York was the largest importer of Ontario electricity between 2002 and 2022, representing approximately 48% of Ontario’s electricity exports, followed by Michigan at 36% and Minnesota at 2%. Since 2018, Michigan has been the biggest importer of Ontario electricity. Ontario’s exports to the U.S. are significantly higher than its exports to its Canadian neighbours, Québec and Manitoba, at 12% and 2% of exports, respectively.
Why Trade Electricity?
Trading electricity allows for different electricity systems to share assets more effectively. As electricity cannot be cost-effectively stored, it needs to be consumed as soon as it is generated. Trading electricity provides each electricity system with the most cost-effective source of electricity that is available at that moment in time, which decreases costs for customers.
Having access to capacity from a neighbouring electricity system also improves system reliability as it provides another energy source in case of an unexpected loss of power, either from a generating facility having technical issues or from weather events such as high wind speeds requiring a wind farm to be shut down.
Impact of Tariffs or Export Ban
We expect the U.S. imposition of a tariff on electricity imports or Ontario prohibiting exports to the U.S. to potentially alter the price and supply dynamics for electricity on both sides of the border. Furthermore, changes to electricity trade flows could reduce grid stability and reliability. This would likely increase grid operating costs because of congestion and additional costs to maintain grid stability.
All things being equal, this could result in downward pressure on the province’s wholesale electricity prices. We note, however, that Ontario’s grid has a significant amount of energy capacity that is either not dispatchable or cannot be immediately taken off line. This could result in an increase in renewable generation that could simply be curtailed rather than exported, which would result in a deadweight loss.
However, the United States implementing a 25% blanket tariff on Canadian goods, along with retaliatory measures from Canada, would likely result in an economic slowdown in Ontario, which would result in less industrial demand for electricity in Ontario. We expect that this would have a greater effect on Ontario merchant electricity prices than the tariff or export ban would have by themselves. However, if an economic downturn were to occur as a result of the tariffs or retaliatory measures, we expect it would lead to knock-on effects for the wholesale electricity market in terms of price. Overall, we expect that tariffs or export bans would make electricity systems in both
Morningstar DBRS Comments on Impact of Potential U.S. Tariffs or Electricity Export Ban on Ontario Independent Power Producers Canada and the U.S. less economically efficient, which would increase consumers’ electricity costs on both sides of the border.
Credit Implications
We do not expect the potential tariff or export ban to have a material credit impact on IPPs with operations in Ontario because most Ontario IPPs operate under fixed-price power purchase agreements or capacity-based contracts, or are regulated assets, meaning they would not be materially affected by a potential change in merchant prices. The potential tariff or export ban could also make it more difficult for Ontario to implement the plan it announced in October 2024 to become an energy superpower exporting clean energy to the world.
If this dispute continues over the longer term, it could result in less investment in cross-border interties between Ontario and the U.S. and could also reduce reliability within Ontario, which could, over the longer term, increase the importance of natural gas-fired generation facilities in Ontario to provide reliable backup services. This could provide IPPs that have existing dispatchable natural gas and hydroelectric facilities with a better market position to enter new contracts following the expiry of their existing contracts.
About Morningstar DBRS
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