Record Low Hourly Ontario Energy Prices Causing Record Export Subsidies

The past 5 weeks comprise 5 of the 10 lowest weeks for the average Hourly Ontario Energy Price (HOEP) rates since the IESO data starts 10 years ago.  I've noted the decline while updating my weekly shadow reports, and this post will put the trends within the context of broader markets, and longer trends (including those Parker Gallant and I wrote about, in the Financial Post, last July).

The price of electricity on wholesale markets is very low.  While negative prices catch attention, there is only a very slight difference, in the cost to Ontario ratepayers, of -$1 and +$1.  The last time I worked out an estimate, the average price paid to Ontario's suppliers, due to contracts and regulated rates, was $68.23/MWh. With the HOEP averaging around $13.50 over the past 35 days, that means a big revenue shortfall.



The wholesale market price, or HOEP, in Ontario is artificially low because of the over-commitments to supply, but in most North American markets the price will be very low as natural gas fired generation generally sets the market price, and natural gas prices are at 10 year lows.  Adjacent markets have been paying rates slightly above the HOEP rates, but not by much.   The market structure in Ontario can be seen as containing a pot that pays all the suppliers once a month; revenue from the HOEP sales fills the pot, and if it isn't full enough to pay the commitments, then the difference is gathered from Ontario ratepayers via the Global Adjustment mechanism (GA).  March's estimated $62.23/MWh was nearly 25% above the previous high of $50.62/MWh, and the estimate for April, $74.68, adds 20% to March's high.

The Global Adjustment is a subsidy in that it recovers the production costs of exported generation from provincial ratepayers.  Last July, in the Financial Post article, we estimated the amount of the subsidy as the cost of all the net exports (GA + HOEP priced for exports plus the HOEP priced on imports) minus the revenues (GA+HOEP applied on imports, and only GA on exports).  The current weekly chart uses the same formula, with the area portion of the chart showing 52-week running totals:

Unfortunately exports aren't driving the global adjustment up even higher ... which is to say that the global adjustment increasingly includes charges for periods where suppliers are paid to cut production, as there is no market for the power at any price.  We had shown, using the forecasts from a couple of sources, that as contracted nuclear, wind and solar came online Ontario's net exports would soar to over 20TWh in the coming years.  The gas supply glut, accompanied by widespread moribund, and in Ontario's case declining, demand, now make that unlikely to be possible.  The average hourly net export required for 20TWh is nearly 2300MWh; thus far in 2012 we've managed only a little over 1200MW on average (at a price of just over 2 cents/kWh).

The Global adjustment was 25% above the previous record in March, and another 20% higher in April.  The escalation is largely because exports have hit a ceiling and our oversupply problems are increasingly more expensive.