As written in my article on the roll-out of "Smart" Meters for electricity in Ontario (which doesn't seem to be a very smart idea in many situations), the cost of electricity generation itself is determined by supply and demand by the "Independent Electricity System Operator".

Of course, there are other costs that make up one's electricity bill, including:

• Transmission: Bringing electricity from the generator to your utility
• Distribution: Bringing electricity from that point to each individual connection
• Debt Retirement Charges: Paying back Ontario Hydro's debts
• Taxes: GST for now, perhaps HST in due time that would cause PST to be charged on electricity

Electricity Generation Prices in Ontario

The price of electricity generation for consumers in Ontario has been at a record low in recent months, at a weighted 1.96 ¢/kWh for April 2009 and 2.91¢/kWh for May 2009. Rates in the recent past have been double or triple the April 2009 price and at least 50% higher than the May prices. 

And how can this happen? Well, these prices are just averages, the truth is that the prices are somtimes negative! That means that there are times when the smart thing to do is to turn on everything you can, or at least that would be the theory. The problem is that, even with smart meters, the price you pay is merely an average of the actual price, so you don't get the realize the savings of consuming electricity when the price is in the negatives. 

Here are the hourly prices for June 2nd, 2009. Keep in mind that the prices are set every 5 minutes, so if the rate is negative, it was on average in the negatives for that whole hour. 

(These prices are in $/Megawatt Hour, just divide by 10 to get the numbers in ¢/kWh.

The Two Truths about Electricity Pricing in Ontario

So, the reality is, even with smart meters, you're still paying a very rough average of the actual cost of electricity. Just imagine, if you were always paying the true cost, you could have your (automated internet-connected) freezer go into deep-chill mode when the prices go very low, everything else turn on when the prices go negative and turn off various appliances when the price goes really high. In other words, smart meters, in their current incarnation, don't accurately charge the right prices for electricity, they're an improvement, but seriously neutered.  Unfortunately in Ontario, the distribution and transmission prices are almost entirely variable and per kwh, which doesn't make much sense at all, their costs are mostly fixed regardless of usage, so it makes it hard to actually receive the benefits of negative pricing. This shouldn't be the case, since when the price of electricity is in the negatives, distribution and transmission costs are practically zero too, since the transmission lines are nowhere near full usage anyway, it's "free capacity". This is not all that unlike driving on the highway at 4AM, it would go unused anyway, you're not contributing to any kind of congestion, you're not the reason the highway is 16 lanes wide (and still gridlocked), so why should 4AM users pay at all?

The second truth is that there is no shortage of electricity of Ontario, at least right now, and consumers will actually gain from it (the average prices are adjusted to cover the actual costs of electricity generation). But it is also true that the few percentage points of savings in electricity usage from smart meters doesn't seem to be necessary at this point in time to stabilize the market. The meters should have been optional, let the people who are willing to change their habits enough to cover its costs, and let the others pay for the electricity they use if they're willing to do so (but save the money on the costs of installing a smart meter). We already have massive systems in place that are able to calculate the actual cost of electricity and charge it to the customer, so there's no real need to replace old meters that were working perfectly.