Sunday, October 23, 2016

Fixed: Ontario's electricity relationship with Quebec

Ontario's government, keen to appear responsive to public anger at electricity pricing, has announced an agreement to fix one aspect of the supply system currently working well.

Ontario and Quebec announced an electricity agreement guaranteeing Ontario 14 million megawatts-hours of imports from Quebec over the next 7 years. Compared to Ontario's other electricity contracts, this deal looks attractive at first glance. Looking closer the deal is less attractive,and putting the deal in the context of Ontario's move away from public power, at cost, to what was intended to be a competitive market system, it may be the most ridiculous contract of all.

The agreement, according to Ontario's press release, is for:
  1. energy capacity,
  2. trading electricity, and
  3. energy storage.
All 3 aspects of the agreement exist already, due to the realities of electricity supply and demand in the two provinces, and previous initiatives connecting the systems.

The capacity arrangement, securing rights to supply for peak demand hours, is technically convenient. Quebec has a very high winter peak demand, due to electric heating. They have a system designed to do that - but more capacity on the coldest days is desirable. Ontario's demand peak is usually in summer - and more capacity for that is desirable. Since April 2011 I've captured hourly intertie movements - and looking at each subsequent season's top 10 daily peak hours, its evident Ontario is a net importer from Quebec during the highest demand summer days, and usually an exporter during the highest demand winter days. While this relationship has existed, and would continue to exist, without an agreement, there are capacity reserve tests requirements enforced by the North American Electric Reliability Corporation (NERC), and this formal agreement should be useful in meeting those requirements.


Increased electricity ties with Quebec have long been recognized as having benefits. Significantly, late in 2006 an agreement was made to expand the connections between the two provinces by 1,250 megawatts, and the completion of the work allowed for greater trade by 2009.

The desire to increase trade, the second element of the agreement, has also previously been acted upon in more constructive ways. The IESO shows imports from Quebec rising all but 1 years since the 1,250 megawatt intertie entered service. My calculations show 2016 is already an all-time record.
It is notable that 2008, the year prior to the increased intertie capacity, was the last year Ontario doesn't show imports of over the 2 terawatt-hours (TWh - or 1,000 GWh) implied in the government's news release on the agreement. It's unlikely the announced agreement will have any meaning in altering the scope of trade. 

Ontario's electricity system organizations reported on the state of interties not long ago. Of relevance:
Just east of Ottawa, two 230 KV lines use a High Voltage Direct Current (HVDC) converter to transfer up to 1,250 MW of supply into or out of Ontario. This interconnection is relatively new and came into service in 2009. At other points along the Ottawa River, east of Cornwall, and in the Abitibi region, generation resources from either province are connected, or segregated, onto one system or the other depending on system and market conditions.
"Segregated" meaning the output from these Ontario generators can be sent to Ontario's grid, or physically switched to directly feed Quebec's. The R.H. Saunders hydro dam, along with a counterpart on the U.S. side, regulates the height of Lake Ontario. Output from turbines within Saunders can be switched, or segregated, to feed Hydro Quebec's system directed. The same situation exists at Chats Falls (which I believe is half owned by Hydro Quebec). The generation sent to Quebec's grid is not captured in the IESO's export data, and the generation is not shown in their data summaries either - presumably because it didn't occur on Ontario's grid.1

The third element of the new agreement, storage (of 500 GWh), is another that already exists. Quebec has reservoirs storing significant hydroelectric potential, and Ontario does not. My limited understanding is hidden past agreements existed to incent the ability to segregate Saunders onto Quebec's grid. Regardless, what "storage" means here is not lowering Quebec's reservoirs to create electricity when Ontario has excess. Using a negative (or $0) hourly Ontario energy price (HOEP) as a proxy for when Ontario has excess, a steady increase is apparent in recent years. 


When Ontario power is free - which it has been over 20% of all hours so far in 2016 - Quebec needn't drain its reservoirs. This could be called storage. The new agreement seems to be Ontario can take back 500 GWh at some point, but since 2014 we've exported more than that to Quebec when prices were not positive, plus redirected output from Saunders (and possibly Chats Falls)- and Ontario's market participants have bought that much, and more, back, at attractive rates.  For storage, as for over trading and capacity, the new agreement doesn't offer anything the status quo didn't already deliver.

Details of the agreement are lacking, and the history of agreements is hidden, so it's difficult to quantity costs and benefits. What is fair is to note that in the current environment, which is expected to persist for years, Quebec would use free Ontario supply when available, and that would lead to higher reservoirs and therefore greater availability of Quebec supply for import.

Data analysis shows the agreement is unlikely to be a positive change. Psychoanalysis might show greater reasons for concern.

The most recent procurement status report from Ontario's system operator (IESO) showed it held 24,294 contracts for 23,217 megawatts of capacity.
None of those contracts provided value to Ontario's consumers near the value provided by the non-contracted imports from Quebec.

Imports have almost certainly been our cheapest supply, yet only gas-fired generators have been valued more highly by the market.

Ontario's electricity apparatchiks looked at a system with almost all supply contracted in a fashion that has driven rates relentlessly upwards, and then focused on the one element they hadn't meddled with - the one providing the best value to the end consumer - the one with the least risk to consumers.

Prior to the new agreement, imports from Quebec probably provided the best value because the government, and its IESO, hadn't yet devalued them.

Now they have.

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The accomplishments the government claims will come from the deal are further evidence professional/psychological help is required at the sector's higher levels. The government makes two claims in their press release that demonstrate a poor understanding of its own electricity contracting, and the greenhouse gas emission reduction challenge in general:
  1. Ontario will reduce electricity system costs for consumers by about $70 million from previous forecasts by importing up to 2 terawatt hours annually of clean hydro power from Qu├ębec at targeted times when natural gas would otherwise be used. ...
  2. and will reduce electricity sector GHG emissions by approximately 1 million tonnes per year.
On the first point, the recent Ontario Planning Outlook advised, "The [total cost of electricity service] is now approximately $20 billion per year in current dollars." So $10 million a year is 0.05% of costs. If true, still small.
It's only stated as true related to "previous forecasts". In Ontario, due to the Net Revenue Requirement contracting of natural gas-fired generators, the incremental cost of generation is rarely higher than the cost of fueling the units. Even with the cap and trade costs that may come to Ontario, it's unlikely the cost of the next megawatt-hour of gas-fired generation will exceed the $50/MWh cited for this agreement in Quebec's La Presse. The agreement takes a supply (Quebec imports) that was expanding because it was bidding in below the costs of gas-fired generators, and contracts that supply above the incremental cost of the gas generators while also adding a requirement to purchase a certain amount.

It saves something only in a bad model world.

The second point the press release makes is that approximately 1 million tonnes per year will be avoided, in the "electricity sector", each year. That's not simply questionable, it is ridiculous. 2 TWh of electricity per year will save 1 tonne of CO2 equivalent (t CO2e) emissions if the rate averages 500 kgCO2e/MWh. Ontario's rate is not only lower than that, it has very few generators that exceed 500 kgCO2e/MWh - a peaker plant north of Toronto, and the seldom used emergency reserve at Lennox (where a lower emissions plant is scheduled to open in 2018).

Not only is it impossible for the government's 1 million tCO2w claim to be realized, it's also likely the agreement could add to global emissions. If the agreement is to secure Quebec supply to displace relatively clean natural gas-fired power plants already contracted in Ontario, it's only useful if that now-contracted power has to service Ontario instead of being transmitted south into the United States, where it would displace either similar natural gas-fired power plant output (emissions neutral) or much higher coal and oil-fired generators, making the deal a net negative for global emissions.

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Many years ago there was a crash from a room where my children were playing, and after a short pause I heard:
nothing broke.
but I can fix it.
This agreement is a solution in search of a problem, fixing a thing that isn't broken within a system of myriad problems.

Ontario has seen rate increases far beyond any other North American jurisdiction, so it is understandable the government wants to show initiatives providing value, but this meddling with one aspect of the market that was healthy only shows new people are needed if Ontario's electricity sector is to deliver value at a level comparable to that realized elsewhere.




Endnotes:

1. I stumbled upon the first of these in 2011 (when I knew the sector far more poorly than today): The R.H. Saunders hydro dam, along with a counterpart on the U.S. side, regulates the height of Lake Ontario. Turbines within it can be switched, or segregated, to feed Hydro Quebec's system directed. The same situation exists at Chats Falls (which I believe is half owned by Hydro Quebec). These figures are omitted from all Ontario exports. I started estimating the electricity sent to Quebec this was in April 2011: 708 GWh, 463 GWh, 661 GWh, 682 GWh, 520 GWh and 244 GWh (thus far in 2016).
The idea that we will be storing 500 gigawatt-hours in Quebec is, in one sense, a restatement of something that had always been happening.Generators are hard-wired to do this.

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