François Legault finds the criticisms against electricity rate rebates for certain energy-intensive companies “unfair”. He considers that these criticisms do not take into account the benefits that the government expects to derive in return.
Allow me to add my two cents? And that I show you that this kind of pricing strategy has been much more costly than profitable for our economy in the past? That such rebates still cost us today between $44,000 and $369,000 per job created, each year?
The Prime Minister made this outing to reporters on Wednesday. He was responding to the many economists and columnists, including myself, who wonder about the appropriateness of selling our electricity at a discount in the context of energy scarcity.
His government is not fooled, he explains. It will ensure that the beneficiary companies bring us more than the rebates granted, for example by creating paying jobs, at $100,000. He took the example of the sector of electric batteries, in full development in Bécancour.
What will it be, exactly? To judge, what better than to compare with the aluminum industry. Like the battery industry today, it was seen as the industry of the future when our governments gave it the same kind of price reductions over the past 50 years.
What is meant by discount? Essentially, it is electricity sold at a lower price than what Hydro-Québec could obtain elsewhere, for other purposes.
Two references can be used as a guide to estimate the rate discount. There is the rate deemed profitable by Hydro-Québec for industrial projects, namely Rate L (4.6 to 5 cents per kilowatt hour).
Or the price that Hydro-Quebec can obtain for exports, for example 13.2 cents for the recent contract with New York (or an estimate of 10 cents by subtracting the part of the partners).
For 8 years, aluminum smelters have paid Hydro-Québec the equivalent of 3.87 cents per kilowatt hour, according to the data provided to me by the Crown corporation. When compared to Rate L of 4.6 cents, this discount is close to 0.7 cent per kilowatthour.
This rebate is equivalent to a subsidy of approximately $180 million for the consumption of 25 terawatt hours (TWh) per year by aluminum smelters.
Knowing that 4,150 of the jobs in this sector are related to Hydro-Québec’s energy, we can estimate that each job costs the State around $44,000 in tariff subsidies… per year. All the same !
Yes, but the employees make big salaries, for example $100,000, you might say. Very good. But in this case, the share of taxes that Quebec recovers amounts to $15,200, which is significantly less than the $44,000 in tariff rebates1.
The comparison with export is worse. The rate discount climbs to more than 6 cents/kWh (10 cents – 3.87 cents), which deprives Hydro-Québec – and the government – of annual revenues of more than 1.5 billion dollars, or some $369,000 per job and per year! Ayoy!
In other words, the government would be a winner, in theory, if it shut down the aluminum smelters and paid its employees’ salaries of $100,000 out of pocket with the greater profits it would obtain with a contract like the one in New York (369 $000 per job).
Of course, the numbers are orders of magnitude. And of course, there are other elements to take into account, such as regional development and economic diversification, among others, and there is no question of closing the aluminum smelters.
However, the exercise demonstrates the enormous costs of these rebates, all the more so in times of full employment and energy scarcity.
The economist Jean-Thomas Bernard, from the University of Ottawa, has already done the exercise in the past and he considers my demonstration “very coherent”. Governments often advertise the impact of their grants, he says, but they fail to say that every expense has an impact.
Thus, with the 180 million to 1.5 billion that the government would have if it did not grant the tariff reductions, our elected officials could choose to repair our roads or our schools or invest in health. The government could also lower taxes further or increase assistance to the most disadvantaged, which would create spin-offs, since taxpayers would spend the funds for their needs, one way or another.
Admittedly, long-term electricity export projects are not easy to complete, as we can clearly see with the Massachusetts project. But there are others in sight at a good price, like the one with the Maritimes, to help them get rid of coal, which is strongly supported by the federal government. And we are not talking about local projects with lower prices than exports, but which have the advantage of greening our economy.
We do not yet know the price that will be offered to manufacturers of electric batteries or the number of paid jobs that will be created. And one can think that Pierre Fitzgibbon’s overall strategy – from mining to manufacturing to recycling – could create synergies and become economically attractive, which could justify certain price reductions.
Personally, I think that the strategy is not insane, given the emergence of this industry of the future, its impact on the decarbonization of the transport sector, and given the strong subsidy competition from other States.
But we still have to see the extent of our public aid and hope that the federal government will also get involved, given the great strategic value of this industry on the North American continent. Why would we be the only ones to pay?
Jean-Thomas Bernard believes that in addition to direct subsidies or tariffs, it will be necessary to take into account the impact on companies that will lose the employees hired by the new industry – as a result of the labor shortage – and the costs of State training of new employees.
So, are the reviews unfair?
1. And again, with full employment, the aluminum workers would have earned a salary elsewhere, possibly less, and paid taxes, which reduces the $15,167 in taxes earned by the government.