Thursday, November 17, 2011

Reviewing Ontario's Feed-In Tariff: Part 2

The current feed-in tariff (FiT) review in Ontario provides an excuse to explore some larger topics - like markets, efficiency, climate change and polices intended to lower emissions. FiT programs will drive up the price of electricity which threatens to reduce the movement of energy consumption towards increased use of electricity - a necessity in the eyes of many if overall carbon emissions are to be meaningfully reduced. FiTs, especially those offered with protectionist requirements, discourage trade in electricity, and that, in turn, further reduces efficiency and, therefore, affordability.

The premise that increased electricity is necessary for a low-carbon world has been repeatedly emphasized this year, including in reports on reducing greenhouse gas (GHG) emissions in California, and even more recently in a report, “Scottish Energy 2020?”, put out by the Institution of Mechanical Engineers.  That report noted, “Electricity is actually projected to be the smallest component of Scotland’s energy demand (heat and transport energy being greater)...”  

That sent me to the figures at the back of Part 3 of Canada’s latest (2009) National Inventory Report, to calculate per capita emissions for 3 categories with large residential components.   The resulting graphic shows per capita emissions in Ontario and Quebec (‘Electricity and Heat’ is almost entirely electricity in both provinces, as the ‘heat’ referred to here is primarily the H in CHP - which is essentially absent in these provinces).  I’ve shown emissions from light vehicles, including light trucks.   Most are aware of Quebec’s hydroelectric capacity, but I’m not sure many understand the implications of heating with electricity.  In Ontario, 2011 is likely to see more emissions from heating than from all electricity generation (and both will be dwarfed by the use of light vehicles).

The use of electricity for heat has enormous implications for electricity planning.   One important characteristic in planning electricity systems is peak demand.  I’ve taken information available on projected 2012 monthly peaks in Quebec, and graphed it with the result of queries on data taken from Ontario’s Independent Electricity System Operator (IESO).

There’s a couple of immediate implications.  Quebec could have capacity available to help Ontario meet peak demand, in the summer, and Ontario will have excess capacity quite often, even before the addition of intermittent supply due to the FIT program.  Additional intertie capability came online late in 2010, and the relationship during Ontario’s peak demand, summer, period, showed the expected relationship.  Ontario sends excess generation to Quebec overnight, and Quebec’s hydro reservoirs reciprocate in meeting the morning surge in demand (and also can be rapidly cut back as demand drops as people go to bed).  While Ontario demand was peaking, on the afternoon of July 21st, Ontario was importing over 2000MW an hour from Quebec.  This doesn’t address why Quebec would want to commit to maintaining this relationship, which is a point I’ll return to.

Most days the relationship makes sense primarily in ramping up with Quebec hydro to meet the morning jump in demand, and quick removal of imported Quebec supply at night.  During the bulk of the daytime hours Ontario generally just moves the Quebec supply along to other jurisdictions - where the export curve dwarfs the imports from Quebec.  In the end, the current relationship between Ontario and Quebec’s electricity systems reflects both are large exporters.

It has been reported that Ontario’s FiT program is a direct result of Dr. Hermann Scheer advocating Ontario’s Premier copy the German FIT program.  Germany’s experience with their FiT program, over the first 7 years of the previous decade, did indicate the problems Ontario would see - including increased periods of negative pricing, and escalating exports at depressed prices.  Dr. Scheer (political science) was, reportedly ,introduced to Ontario’s Premier, in June 2008, by Dr. David Suzuki (zoology).  Nine months prior to the meeting in Ontario, the 12-month rolling total of Germany’s generation from Industrial wind turbines (IWT’s) had peaked at a level it has not since returned to.   

Ontario’s most popular newspaper is the Liberal party friendly Toronto Star.  Three days before Ontarians headed to the polls, the Star brazenly provided Jürgen Trittin, formerly Germany’s Federal Minister of the Environment, Nature Conservation and Nuclear Safety 91998-2005), editorial space to intervene in Ontario’s election.  Tritten’s lecture ended with “Ontario is on the right path. Now it must stay the course.”    According to Der Speigel, that course involves politicians enriching allies: “Few people in the hinterlands are familiar with the name Aloys Wobben, but the founder of the wind power company Enercon is now a multibillionaire and one of Germany's richest people. Thanks to former Environment Minister Jürgen Trittin, companies that got their start in garages were able to earn millions upon millions during the years when Germany was run by a Social Democratic Party (SPD) and Green Party coalition government.....” .  Germany’s experience indicate they understood that increased contributions from wind must displace baseload (constant output) sources.  I’ve explored the reasons for that previously, but it’s important to note Germany; having found wind production was primarily driving exports, is now finding the same limitations are true of of the solar capacity which has seen enormous growth since wind output started dropping. Bavaria now has periods where solar output can meet all demand, and yet on average solar produces only 8% of their supply.

Electricity systems have a minimum, average and maximum - and without heating those approximate a 1:1.5:2 relationship.  So 1000MW of solar could supply 1000MW of demand, but is likely to average only 150MW out of an average of 1500MW.  Of course, it could also produce no output when demand calls for it. During winter peak demand periods in northern jurisdictions, it doesn’t.  Regardless, solar, at an annual capacity factor of 15%, could only provide 10% of all generation before output would, at times, require curtailment, or storage.  The same issues exist for wind.  If you have 1000MW of baseload (ie. nuclear), the system is immediately inefficient.  
France/Germany trends Similar to Quebec/Ontario's
It appears the FIT regime lobbyist brought to Ontario is designed to encourage capacity that discourages nuclear baseload.

The cost of the actual FIT contracts are noticeable, but the additional costs borne by the system, due to the introduction of intermittent sources, are also large components of price increases/efficiency decreases.  Two issues deserve special attention.  The first deals with  the most efficient way to reduce emissions from generation, and the second is ensuring generation capacity can meet demand at all times.

I demonstrated, with US data, two known ways to reduce emissions from electricity are to reduce the use of electricity, or to generate more energy with nuclear power.  Recently, PwC (PricewaterhouseCoopers LLP), released a “Counting the cost of carbon; Low carbon economy index 2011,” showing the lack of action in lowering the carbon intensities of the world’s nations.  That report noted two extended periods of time where jurisdiction did have some success in lowering the carbon intensity of their economies: “France decarbonised at 4.2% during the 1980s by increasing the share of nuclear in the energy mix from 7% to 33%” and; “The UK decarbonised at 3.0% in the 1990s during a ‘dash’ for gas power generation that replaced coal generation...”  The second of these solutions seems like it might run up against a supply issue, and just last week Greenpeace was responding to a BBC program indicating the coming price hikes, due to offshore wind programs, with a release noting natural gas pricing was increasing the UK’s energy bills far more than electricity.  Regardless, the presumption that intermittent, renewable, supply, will reduce emissions remains a promise for the future - one which the PwC report indicates will never arrive.  

If it does, it seems increasingly likely renewables will need to be better integrated into supply, either with advancements in energy storage technologies, or better integration with existing resources.  Specifically, new gas turbines, made for balancing the output of intermittent sources, are being developed, and grid interties with load-balancing capable hydroelectric rich jurisdictions. For subsidy programs, the indication is that subsidizing intermittent sources can only lead to subsidizing technologies to support them - some of which, such as natural gas-fired generation, will produce carbon emissions.

Estimated from IESO Data (Years Start Nov. 1)
Wind and solar generators have no expectations of being productive during peak demand (solar does for the summer peak, but as we’ve seen, summer peaking is true only if a system heats with gas).   In a self-contained market, this generally means natural gas will be used to provide peaking, unless the market is blessed with variable hydroelectric potential (requiring larger reservoirs for storing energy for longer periods of time).  What Ontario has done, in part due to the desire to eliminate coal, is to contract Combined Cycle Gas Turbine (CCGT) capacity in order to get natural gas generation built.  Coupled with essentially writing off the coal plants, this has helped to keep the Hourly Ontario Energy Price (HOEP) depressed.  Because the ‘plant’ is already paid for through the Net Revenue Requirement agreements, and because coal and/or natural gas are the marginal producers, the price is set just above the cost of the fuel (see Figure 1-25 on page 84 of this .pdf)  Because the marginal source is impacted this way, we’ve also seen a contraction of the price variance between peak, and off-peak, periods, while spending billions to meter supply to charge based on variable pricing between peak, and off-peak, periods. Our generation policies are the opposite of our demand management policies.

A more market-oriented approach to ensuring capacity is through the development of capacity markets, where suppliers bid on having capacity available (see here).  Germany, having decided to solve the oversupply issues during windy and/or sunny periods by axing nuclear baseload supply, is considering capacity markets (see here).  Market forces in Germany, and market/political forces elsewhere, argue powerfully against the introduction of capacity markets.  These people argue the market is best suited to find the most efficient solution to demand issues.  Ontario would seem to be the perfect example of how not to operate a market, in that peak periods are increasingly cheaper, procurement policies are unrelated to demand management policies, and the resulting excess production is dumped on export markets at less than half the price Ontarians pay for the same commodity.  
A persuasive argument against capacity markets is made by Norway’s primarily hydroelectric powerhouse, Statkraft, in “Position of Capacity markets for the German Power Market.” The submission should be required reading at Hydro-Quebec (as should this study, from Poyry,).  Quebec, like Norway, stands to benefit enormously from expanded generation from renewables - which from the business standpoint of owners of hydro and gas would be better described as ‘unreliables.’   Unfortunately Quebec seems unwilling to thrust itself into championing the market it could dominate (if low carbon production was widely valued). Ironically, both Statkraft and Hydro-Quebec are controlled by their respective governments (as are most major hydroelectric generators)

American markets are being held at low levels by the low price of natural gas, which is making the marginal supply for electricity cheap (although the New England markets offer much higher rates than Ontario does).  The natural gas revolution is an outcome of the development of hydraulic fracturing (fracking), but economic theory had already predicted there would be energy supply developed.  In 1974, at the height of the Oil Crisis, the Economist magazine printed an editorial titled, “The Coming Glut of Energy.”  The basic premise is that, for energy, the elasticity of substitution is greater than the elasticity of demand.  Vaclav Smil’s lecture at the Equinox Summit touches on a similar theme, in discussing the term “running out” in terms of energy transitions (around the 12:45 mark).    Running out is generally a poor description of diminishing returns on extracting a resource using existing methods.  That is likely to lead to substitution of either the method (to extract previously inaccessible supply), or the resource.  Unfortunately, economic theory lacks the simplicity politically established icons, such as a wind turbine, provide.

Cranking up production of natural gas is a questionable solution to reducing carbon emissions. It is likely that replacement technologies would emerge, and offer greater value, in a scenario encouraging the removal of an incumbent technology instead of by choosing replacement technologies to subsidize. Both carbon trading, and carbon taxation are likely far superior to feed-in tariffs.

Feed-in tariffs reduce a large number of possibilities to a select group of chosen futures.  There is little reason to believe FiT designers will prove more accurate prognosticators than any other fortune teller.  


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