Ontario’s Hospitality Energy Report

Forward

In this report we have highlighted the various factors driving the current hydro energy conditions in the

accommodations and foodservice sectors of Ontario. The primary objective is to provide knowledge that these

sectors are unique to the overall energy power classes being significantly impacted by hydro decisions and

respect supportive policies.

The report touches upon the Global Adjustment’s escalating costs and provides a list of hydro policies introduced

over the years that have not supported mid-size business while not been effective on the success of small

business.

While the rising hydro costs have been hard felt by both consumers and businesses its Ontario’s hospitality

operators working in the highest intensive industry of all commercial and institutional sectors that have

profoundly been hit. The energy intensity commentary has been supported by Natural Resources data including

comparisons in consumption power mix and business concept usage.

A section on the financial performance climate of the industry illustrates the tough economic environment both

hotels and restaurants have been facing and the impact from hydro expenses. Included are results from a

2016/17 ORHMA study analyzing and comparing the impact of hydro expenses to hospitality operations. The

results are conclusions following a review of 18 restaurants and hotels. We limited the commentary in the

report knowing the data included deliver the clarity of the information presented. .

Global Adjustment

In attempting to modernize Ontario’s antiquated hydro system the solution in the Global Adjustment (GA) might

in theory make sense but it has now been determined to be the ulcer to hydro expenses. In the real world, it is a

model that continues to bring unbearable pressure to consumers and to business. The GA initiated to drive the

Province’s “Green” campaign has been pushed too rapidly without economic considerations.

Don Drummond in his government commissioned report criticized government rules enacted in 2009 that dictate

how the province buys power in order to drive a green plan in forfeiting clean, green, renewable, naturally

occurring hydro power just to pay offshore interests five times more for wind power.

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Reference 1: Ontario’s Global Adjustment Increases

Ontario’s Global Adjustment illustrating an increase by 115.21 per cent from 2005 to 2016

Hydro Policy on Small and Mid-Size Business

The hospitality sectors have seen shocking power rate increases, particularly since 2009 and in reviewing

Ontario’s energy policies we conclude:

Small and Midsize business charged inappropriately in relation to large size – both largest along with smallest

consumers have a greater advantage

Electricity rates for medium-sized businesses in Ontario soaring, up about 8 per cent per year over the last

five years with no end in sight.

Since 2009 mid-size business seen average 18 per cent hydro increases while other classes seen less drastic

10-17 per cent increases

Policies do not support mid-size business –i.e. in the run-up to the recent election the Ontario Clean Energy

Benefit plan transferred 10 per cent of the cost of hydro for households, farms and small businesses to the

provincial deficit without mid-size business consideration.

In 2010 regulations passed and implemented in 2011 allow largest users to shift a large and increasing

portion of the cost burden of the power system to smaller and mid-size businesses to what has been

refereed as the Global Adjustment (GA)

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Businesses continue paying the debt retirement charge

Consistently treated by policies without any agency in Ontario’s power system tracking rate trends for

medium-sized businesses.

Recent announcement of the 8 per cent HST Rebate on hydro bills in not supporting most small businesses

due to the HST input tax credit procedures in place

Recent announcement on the conservation incentive does not include businesses under an annual 1 KW

aimed at reducing peak time energy use. Hospitality businesses do not have control over demand and

cannot alter their peak times and operating practices

Ontario’s Hospitality Industry

Highest Energy Intensive Industry of all Commercial and Institutional Sectors

High energy prices are exerting disproportionate impact on businesses that rely heavily on electricity-intensive

power. Ontario’s hospitality sectors are engulfed and trapped in this operational web having been defined as the

most energy-intensive commercial and institutional activity. The following data provides the size and make-up of

the industry’s energy demand and dependence.

Figure 2: Ontario’s Hospitality Industry -Energy Floor Space million m2

Comparison to British Columbia and Quebec

For the time frame of 1990 to 2013 floor space grew by 44.6 per cent to 12.66 million m2 in Ontario’s

accommodation and foodservice sectors.

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Figure 3: Ontario’s Hospitality Industry - Energy Intensity Comparison by Sector Type

Comparison to Commercial/institutional energy intensity 1990 and 2013

According to Natural Resources Canada, the accommodation and food services sectors combined consumed 1.86

GJ/m² in 2013 the highest in the commercial/institutional sectors attributable to the energy-demanding nature

of activities and services operating with extensive hours.

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Figure 4: Ontario’s Hospitality Industry – Improvement in Intensity by Sector Type

Commercial/ Institutional energy intensity improvement 1990 and 2013

The accommodations and foodservice sectors combined achieved the highest energy intensity improvement in

commercial and institutional at 40% per cent.

The industry’s high energy intensity is to be attributed to the energy-demanding nature of activities (restaurants,

laundry) and services (extensive hours of operation), as well as the use of new technologies, which translates

into the proliferation of the amount of electronic equipment. It is important to note that these hospitality sectors

operate at full throttle during peak demand periods in activities such as guest check in/out, hotel guest

shower/bath use, breakfast and dinner service, high use of banquet facilities and demanding that kitchen

equipment be at full power.

Restaurants Typical Annual Energy Range Intensity are:

• Fast Food 5 to 12 GJ/m2 averaging 7 GJ/m2

• Full Service 3 to 10 GJ/m2 averaging 5 GJ/m2

• All Restaurants 3 to 10 GJ/m2 averaging 6 GJ/m2

• An Ontario Hotel and Restaurants averaging 1.82 GJ/m2

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Figure 5: Ontario’s Hospitality Industry - Hydro & Natural Consumption Mix

Data from 2016 shows Ontario’s Hospitality Industry dependency on hydro power remains double than the consumption of Natural Gas with the remaining being light fuel oil, kerosene, heavy fuel oil and steam.

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Figure 6: Ontario’s Hospitality Industry –Energy Power Use Comparison

Ontario vs. Canada Hydro & Natural Gas Use comparison

Figure 6: Ontario vs. Canada Hydro & Natural Gas Power Use

Comparison

Data from 2016 shows Ontario’s Hospitality Industry consumes 5% more hydro power as a mix to total energy

than the national average.

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Figure 7: Ontario’s Hospitality Industry – Consumption Mix Comparison

Figure 7: Ontario’s Hospitality Industry

Consumption Mix Comparison

Data from 2016 shows Ontario’s Hospitality Industry consumes 5% more hydro power as a mix to total energy

use than the national average.

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Hospitality Industry Climate-Financial Pressures

For over two decades and a half Ontario’s hospitality industry has been struggling. Impediments such as 9/11,

SARS, 2008/09 financial recession and a lengthy strong Canadian dollar crippled international visitation resulting

in record breaking travel deficit performance while the domestic market noted low consumer confidence slowing

down disposable income. These are drivers with direct impact to the accommodation and foodservice sectors.

Recently, the weakening of the Canadian dollar has been favourable to Ontario’s tourism showing positive

growth in most provincial destinations. Accommodation and foodservice businesses are showing revenue growth

and beginning in 2015, performance data are finally equaling the 2000 numbers but without inflation conversion

while the pre-tax profit margins have yet to make up time.

Over the years the accommodation sector profit dipped by 50 per cent and its only crawling to recovery. Both

sectors continually perform less than the national average. Ontario’s foodservice pre-tax profit margin at 3.5 per

cent in 2013 is a far cry from 1990’s industry performance in the 6 to 10 per cent range. The independent small

businesses operate near the 1 per cent profit range and with 25 per cent of new restaurants closing in the first

year and 50 per cent in the second year the sector is struggling primarily being pressured by high expenses.

Drivers for expenditures are attributed to the minimum wage increases (39 per cent of minimum wage earners

work in the hospitality sectors), food commodity pricing (influenced from severe weather conditions, global

urbanization and fuel and energy fee increases passed on by processors and transportation of goods) and direct

costs from energy utilities including hydro.

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Figure 8: Accommodations Pre Tax Profit Margins Trends

Ontario Comparisons with the National Average

In the 1990’s Ontario performed higher than the national average pre-tax profit margin but since 2003 the sector

has been under-performing the rest of the country with a slow recovery pace.

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Figure 9: Foodservice Pre Tax Profit Margins Trends

Ontario Comparisons with the National Average

Historically the Canadian restaurant industry was much healthier.

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Figure 10: Foodservice Pre Tax Profit Margin Trends

Ontario Comparisons with the National Average

The Ontario restaurant sector has continually been under-performing the national average and every province in

pre-tax profit margin for a lengthy period with the gap widened in 2013 as compared to 2001.

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The Impact of Hydro Expenses to the Hospitality Industry

The primary issue in Ontario’s hospitality industry is the Global Adjustment which represents around 70 per cent

of a total hydro invoice.

Case Study 1: Ontario’s Hospitality Industry - Comparison with Other Provinces

Hydro Invoices Breakdown

In comparison to other provinces, Ontario’s hydro invoices contain more items than the hydro charge itself. On

top on the list is the Global Adjustment making up 69 per cent of a typical hydro invoice allocating only 9 per

cent to the true hydro charge. Delivery Charges a cost that varies throughout the province congruently stands

out at 6 per cent of the total hydro cost.

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Case Study 2: Ontario’s Foodservice Sector- Comparison with Other Provinces

Hydro Cost by Square Foot

Ontario’s hydro cost in 2012 by sq. ft. amounted to $0.68. The cost increased by 76.1 per cent to $1.20 by 2016.

The other provinces included in the study operate with costs well under Ontario’s.

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Case Study 3: Ontario’s Foodservice Sector -Pre-Tax Profit Margin Impact

Hydro Impact by Square Foot

Over the years Ontario’s Hydro expenses grown to impact the foodservice sector profit margin from 0.24 per

cent in 2008 to 0 .64 per cent in 2016 resulting in a cost increase variance of 171 per cent.

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Case Study 4: Ontario’s Accommodation Sector- Comparison with Other Provinces

Variance of Hydro Consumption vs. Cost per Available Room

ON AB BC NB NF NS NT

Ontario’s accommodation sector’s dropped hydro consumption by 1.3 per cent from 2015 to 2016 yet the hydro

cost per available room increased by 9.1 per cent over the same time frame. The sector in the province reduced

its consumption but pays a higher hydro cost. Ontario’s disturbing variance in this comparison far exceeds the

other provinces and territories.

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Case Study 5: Ontario’s Accommodation Sector- Conservation Impact on Cost

Conservation Programs Reducing Consumption however Expenses Continue to Increase

Capital expenditures of $409,319 in energy conservation projects, spend on ten sample Ontario

accommodation properties were successful in dropping the hydro kWh consumption by 14.3 per cent however

the cost per available room increased by 3.6 per cent.

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Case Study 6: Major City Accommodation Sector – Comparison with Other Cities

Total Energy Expense Comparisons per Occupied Room (POR)

A 2015 study on Per Occupied Room (POR) cost showing the City of Toronto at $3,450 being a very high energy

cost destination as compared to other Canadian business competing cities,

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Case Study 7: Ontario Foodservice Sector – Total Expense Comparison

Hydro Expense comparison of restaurants located in the provinces of Ontario and Quebec

The November/December 2016 monthly hydro expense of a restaurant located in Ontario is $3,055. The

expense of a similar size restaurant with equal consumption located in Quebec in the same time frame is $1,503

representing a variance between the two locations by 103.23 per cent. If the Ontario restaurant was located in

Quebec it would reduce annual business costs by $18,621.

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Case Study 8: Ontario Foodservice Sector – Per KWH increase comparisons

Hydro Expense per kwh comparison of restaurants

From 2008 to 2016 the per KWH total hydro expense of an Ontario Restaurant increased by 114.13 per cent.

2600 Skymark Avenue, Suite 8-201, Mississauga, ON L4W 5B2 (905) 361-0268 (800) 668-8906

Ontario Restaurant Hotel & Motel Association

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