Friday, June 28, 2013

Ontario's Electricity System Plan: Designed Uncompetitiveness

In a recent Google search I accidentally stumbled upon the original news release from the ministry on signing the Greenfield South project, which is the now famous Mississauaga project to be relocated hundreds of kilometers from Mississauga, in the Sarnia-Lambton area.  The 2005 release, combined with information provided in a presentation by the Ontario Power Authority's Amir Shalaby last year, can be used to communicate why Ontario's planned supply mix cannot produce electricity at costs competitive with most other jurisdictions.

Here's how the 2005 press release described the capacity payment mechanism of Ontario's natural gas contracts:
The contract winners are assured that they will have sufficient ongoing revenue to meet their fixed project costs, such as capital and financing, if they operate efficiently according to the pre-agreed standards. When market revenues exceed these fixed-cost requirements, the contracts stipulate that 95 per cent of the surplus will flow back to ratepayers. The proponents that submitted proposals under this RFP each bid a "Net Revenue Requirement" (NRR), which includes all fixed project costs. The weighted average NRR that was bid by the six selected proponents is about $7,900 per megawatt-month. This is the average amount required on a per-megawatt basis to cover the monthly fixed costs of these projects.
The actual cost of power from the five generation facilities will vary with the price of natural gas, which fluctuates from season to season and year to year. However, using historical market data from the last two years as an example, the average price of power from the five generation projects would have been less than 7.8 cents per kilowatt-hour.
This provides much of the information to needed to calculate the levelized unit energy cost (LUEC): 
(capacity * capacity factor * hours * Heat Rate * Gas Cost/MMBtu) + NRR / (capacity * capacity factor * hours)
Bringing the figures up-to-date, the last average NRR provided for natural gas generators was $13,187/MWmonth, but gas prices have fallen considerably: at $5/MMBtu (higher than it's been for some time now), and the 45% capacity factor noted in 2005's price release, the LUEC today would be roughly the same as the 7.8 cents/kWh projected in 2005.

Slide 8 of  Amir Shalaby APPrO 2012 Conference Presentation
But that is not the situation as the capacity factor is far below 45% in Ontario.

Ontario has approximately 10,000MW of natural gas-fired generating capacity (10GW), and in 2012 it produced approximately 22.2 TWh of electricity with that: which is a capacity factor of 25%.
That pushes the LUEC up to ~$110/MWh (11 cents/MWh).

By 2015, one OPA projection has the output falling to 9TWh, coinciding with a capacity factor down near 10%, which will push the LUEC to ~$218/MWh even if gas remains in the $5/MMBtu range.

South of the border, the United States has experienced declining emissions and stable pricing as it's electricity sector swung to increased gas-fired generation, likely driving up capacity factors.

Ontario is expected to see a decline in the utilization of natural gas facilities because its expected to continue adding wind and solar capacity.  These have often been presented (here and elsewhere) as requiring back-up from natural gas, but really it's better to think of them as lacking capacity value (an expectation of production when demanded).  The NRR reflects natural gas' capacity value.

If renewables can't replace the generating capacity to produce with fossil fuels, the value in the production is only the value of the fuel displaced.

In Ontario, renewable generation already probably displaces hydro (domestic and imported from Quebec), causes nuclear units to be curtailed, and is dumped on US markets at rates often far below even the fuel costs of generation with natural gas.

But let's assume it doesn't - let's assume every MWh generated displaces a MWh generated with natural gas.  We know industrial wind turbines coming online have feed-in tariff contracts pricing their output at $135/MWh, and my estimated average for the solar contracts is $500/MWh.  Considering these variable renewable energy sources displace only the $35-$40 fuel component of natural gas generation, that's pricey.

But what about carbon?

The administration of U.S. President Barack Obama recently upped "the so-called social cost of carbon, to $38 a metric ton in 2015 from $23.80" - and the Environmental Commissioner of Ontario (ECO) recently advocated for the use of a "shadow carbon cost" in our government.

Assuming emissions of 400kg/MWh from generation with natural gas, the cost of carbon would need to be 7-27 times higher than the new higher U.S. estimate to make renewables an intelligent addition to Ontario's energy mix (math is not the ECO's strong suit)

The Ontario government just announced a healthy curtailment of an agreement with the Korean Consortium - aka Samsung.  The revised agreement sets a floor price for future solar projects by the consortium of 295/MWh (29.5 cents/kWh).  The social cost of carbon to justify that price is over $600 per ton.

With neighbours costing carbon at $38/ton, even the improved contract terms demonstrate Ontario's government is designing an electricity sector to be uncompetitive.

Related original content articles:
Determinants of electricity pricing in Ontario: Beyond the Global Adjustment

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