The $60 Million Symptom

A release from Ontario’s PC party began; “Following media reports that confirmed Ontario families were forced to pay $60 million for our excess energy…”

That release, dated January 12, ^th didn’t note what media reports, but I wrote on January 3^rd:

“December 2010 saw Ontario export 1.6 TWh more electricity than it imported, which was a third more than the previous high from August 2008. This would be a much greater accomplishment if the IESO HOEP price wasn't approximately $35/MWh in December, and we didn't contract supply at around $70/MWh. This net export accomplishment cost us about $60 million.”

The other media report I’ll note is a Kitchener talk show hosted by Jeff Allan, where he interviewed Tom Adams, Peter Tabuns (NDP Energy Critic), and Energy Minister Brad Duguid , separately, on the topic of surplus generation.  There is some interesting discussion with Mr. Adams and Mr. Tabuns.  I do not believe Mr. Tabuns proposes solutions that could maintain pricing, or be able to keep emissions as low as they’ve been for several years now, but he does summarize the issue of overproduction very well.

Minister Duguid, by contrast, struck me as silly.
It would be impossible for all jurisdictions to produce too much output (as he implies) – output needs to match demand at some point – and he also blows off the figure as due to New Year’s Day (which was also a record, but separate from the figure being discussed), and states this is how it works – sometimes we overproduce and export, and sometimes we import.

So one more time, I'll argue a method to quantify what supply policies cost us  - and this time I’ll try to make the estimates easier for all to comprehend – especially Progressive Conservative leaders and the current government on the off-chance they, foolishly, believe anything they say.

The $60 million figure I gave was an estimate of the cost of the ‘net’ exports in December 2010.   I think Mr. Adams pointed out somewhere we needed to get rid of that surplus and thankfully there were export markets to take it.  The terminology is very tricky here – whether this amounts to a subsidy, or could become considered dumping by generation companies in adjacent jurisdictions, are questions that might become pertinent.

What is pertinent, in estimating the cost of our current electricity supply environment, is defining the cost of electricity, then defining how that cost is recovered, and then estimating what a policy of over-production does.    The cost recovery method includes the global adjustment, and the global adjustment can’t be applied to exports.  The cost definition should be the average weighted wholesale market price [HOEP], plus the average Global Adjustment charge (from the 2^nd last paragraph here).  This is exactly the cost to wholesale market customers, but it is also, approximately, the price paid by consumers on the Regulated Price Plan (RPP), or on the Time-Of-Use (TOU) plan.   So the figure we can easily estimate, which is how much less importers of Ontario’s output pay compared to Ontario’s internal consumers, is simply the export amount multiplied by the Global Adjustment.

For instance, from the IESO 2010 summary exports are shown as 15.2TWh, and the preliminary average Global Adjustment figure is 2.73 cents/kWh.  That math shows the other market participants paid around $414.5 million less than Ontario market participants paid for the same amount of electricity.

Which is an improvement over the 2009 figures, which are 15.1TWh of exports, and a Global Adjustment of 3.06 cents/kWh – or $462 million dollars.

I appreciate that politicians need to be better at communicating things briefly, and more coherently, than I.  But if Mr. Hudak’s PC party is really concerned about the $60 million dollar figure for what I’ll, incorrectly, refer to as an export subsidy, in December 2010, they should also be concerned with, not only the other $815 million dollars in 2009 and 2010, but the root cause of it.

The root cause, which I’ve been braying about since starting this blog, is the inability to match supply and demand, coupled with too much contracted supply.  This graph shows a 12 month moving average for supply and local, Ontario, demand, on the left axis, and for the ‘subsidy’ – which are exports multiplied by the global adjustment rate – on the right axis.  2005 was our record year for consumption, and the contracted supply actually did bring Ontario rebates that year via the global adjustment, and then we see our system unable to adjust to the declining demand (which we are expanding government to encourage).

The figures Mr. Duguid fails to address are caused by his government, and the bureaucracy he oversees.  During the radio interview I noted earlier, Mr. Duguid implied sometimes we export, and sometimes we import, as he deflected the question.

During the final 3 months of 2010, we were net importers in the 18^th hour of November 25^th.

The rest of the time we were net exporters.

The records punctuate the problems, but don’t let Minister Duguid deceive you into thinking they were the problems – especially if you lead the opposition party.