Determinants of electricity pricing in Ontario: Beyond the Global Adjustment

The Global Adjustment (GA) is the difference between the total payments made to certain contracted or regulated generators/demand management projects, and market revenues. - IESO

The battle for the future of Ontario energy continues to be fought over many irrelevant numbers, such as how many billions nuclear added to the global adjustment pot over the past number of years.  It seems obvious to me that if the Global Adjustment plus market revenues equals the contracted price of power, what would raise prices is not the size of the global adjustment alone, but the size of the contracts.  In Ontario there is a lot of noise from forces communicating that $135-$800/MWh contracts aren't inflating rates, but $58/MWh contracts are.
Perhaps I'm a bad judge of obvious.

A breakdown of 'theoretical' figures will put the issue in a perspective on the performance of a contract-heavy electricity sector that may be of use somewhere beyond Ontario's borders.

The assumptions in the scenario (spreadsheet here)

The mix I've mocked up is based on Ontario's 2012 generation, and elements of the current supply mix.  There is nuclear production with guaranteed rates for output, others with a guaranteed base rate (Bruce B), set rates for solar and wind generators, fixed regulated rates for some hydroelectric generators, but not for others, and natural gas generators all have some assurance of revenues. [1]

Increasing the market rate (in Ontario the HOEP - Hourly Ontario Energy Price) therefore impacts only the unregulated hydro, and the natural gas production, until the HOEP exceeds the base rate for Bruce B.

In 2012's Ontario the HOEP averaged under $25/MWh, largely due to the natural gas price being depressed across North America.  Theoretically the market price should be just above the cost of fuel for a natural gas plant.[2]

Stranded Debt - Abandoned Responsibility

On April Fools' Day, 1999, Ontario Hydro was broken up into five separate companies, including "the Ontario Electricity Financial Corporation (OEFC) to manage the legacy debt and other liabilities not transferred from the old Ontario Hydro to successor companies." [1]   

Each year that followed, from 2000 to 2011, the OEFC produced an annual report.
Then they stopped.
As I write this 612 days have passed since the OEFC last produced an annual report.

2012 Budget graphic (forecast removed)

During the summer of 2011 the Progressive Conservative (PC) were attempting to make the elimination of a debt retirement charge (DRC), introduced by the same legislation that divided up Ontario Hydro into 5 successor entities, an issue in the pending fall election in which they hoped to displace the governing Liberal party.  My review at the time indicated the PC's had a plausible argument.  Subsequently:

• the OEFC responded with the seemingly early release of a highly politicized 2010/2011 annual report.[2]; 
• post-election, in December of 2011, the Auditor General of Ontario's 2011 annual report included a section on the electricity sector's stranded debt;
• the 2012 Ontario Budget, delivered late in March, 2012, did, at long last, contain a graphic illustrating an annual figure for the "residual stranded debt" as well as the "unfunded liability."

The budget graphic, upon reflection, is a reminder of how misunderstood the "stranded debt" (aka "Unfunded Liability") is.  The Electricity Act defines the stranded debt as "the amount of the debts and other liabilities [that] .. cannot reasonably be serviced and retired in a competitive electricity market".

The "residual stranded debt" is the share of the stranded debt that is not expected to be repaid by other "dedicated revenue streams" defined in the Electricity Act.
The Debt Retirement Charge (DRC) exists in order to service the residual stranded debt.

The concept of a stranded debt is now farcical to the point where the alleged financing authority, one that simply carries the credit credentials of a greater financing authority, cannot even produce a simple annual report.

Stupidity at the Toronto Star: the renewed campaign of deception

This is a brief entry, with lots of pictures, in an attempt to correct the head-twisting impressions spread in The Toronto Star's Mad about your hydro bill? Blame nuclear and gas plants.

The Star article is a rehash of the nonsense spread by ENGO's last year, instigated by The Star's Liberal masters as part of a renewed campaign to re-ignite the dishonest campaign that preceded the relatively decent period when Chris Bentley was the Minister of Energy.

The material to construct the article is apparently something delivered to the IESO by Navigant consulting: Navigant designed the global adjustment mechanism in response to Dwight Duncan's desire, back in 2005, to force down rates of public generation in order to fund private projects (explained here).  The IESO is currently holding stakeholder initiatives built around the musings of consultant Navigant on how to further steal from residential ratepayers and their public generator in order to enrich the participants at the circle-jerk. stakeholder initiative.

Billion Dollar Implications from AG Report on Gas Plant Cancellation Costs

Yesterday Ontario's Auditor General released a "Special report" titled "Mississauga Power Plant Cancellation Costs."
Sections grabbed my attention as I scanned the document, and are, I think, worthy of commentary.  A couple of points reflect on the competency of the Ontario Power Authority (OPA) in contracting electricity supply; others point to enormous costs ratepayers will incur due to the many, many contracts not investigated.

First, and most petty:

The OPA paid Eastern Power about $41 million in labour costs that Greenfield said it had incurred between 2004 and 2012 (we advised the OPA that $5 million of this amount is HST and can probably be claimed back from the federal government by the OPA) [pg 9]

OK.
Good to know - though I'm surprised the OPA (Ontario Power Authority) was not previously aware of how that whole tax thing worked.

In a previous column on another gas plant cancellation I noted the saying, "your first loss is your best loss" - another portion of the AG's report that got my attention was the timeline, particularly:

March 2009 | OPA amends contract with Greenfield, extending completion date and providing a significantly higher monthly payment for the electricity produced once the plant is operational [pg 6]

Electricity Sector Lessons from Ontario and Germany

Germany's electricity sector performance during 2012, the first full year of its Energiewende, provides warning signs to Ontario; Ontario's bloated Global Adjustment mechanism provides a warning to Germany - both provide warning signs to other countries experimenting with their electricity sectors.

Ontario's electricity policy has been linked to Germany's since David Suzuki introduced the anti-nuclear crusader Hermann Scheer to Dalton McGuinty in 2008.  The meeting was reportedly instrumental in Ontario developing it's Green Energy Act (GEA) and feed-in tariff (FIT) programs  When the Liberals fought for re-election the main Liberal propaganda paper, the Toronto Star, provided space to German "Green" Politician Jürgen Trittin to advocate for continuing down the garden path with the Liberal Party of Ontario.

Trittin and Scheer are considered founding fathers of 2000's German Renewable Energy Act, which effectively connected feed-in tariff (FIT) contracts with the mechanism to recover the costs of those contracts from consumers.  The mechanism, a per kilowatt charge on bills, is known as the EEG umlage, or simply as the EEG after the act itself (Erneuerbare-Energien-Gesetz).   Industry is broadly exempted from the EEG umlage, leaving households and smaller commercial enterprises to bear the full difference between the contract FIT expenses and the recovery of those costs on the markets.

The return of the Ministry of Lies, and other weekly electricity sector news from Ontario

This week a series of reports related to Ontario's electricity sector were released

The most prominent of these was probably a report written by Economics Professor Ross McKitrick released by The Fraser Institute, titled Environmental and Economic Consequences of Ontario's Green Energy Act.  The Canadian Wind Industry (CanWEA), the Environmental Commissioner of Ontario, and Ontario's Minister of Energy Bob Chiarelli all provided responses to McKitrick's study.   
I've already written much of what I'd like to communicate on these topics, but I'll revisit some old posts due to alarm that Chiarelli's comments indicate the grandfatherly figure is installed to return to the structured campaign of lies that his predecessor, Minister Bentley, had the courage to curtail.

McKitrick's report claims 3 main finding:

1. It is unlikely the Green Energy Act will yield any environmental improvements other than those that would have happened anyway under policy and technology trends established since the 1970s. Indeed, it is plausible that adding more wind power to the grid will end up increasing overall air emissions from the power generation sector.
2. The plan implemented under the Green Energy Act is not cost effective.  It is currently 10 times more costly than an alternative outlined in a confidential report to the government in 2005 that would have achieved the same environmental goals as closing the coal-fired power plants.
3. The Green Energy Act will not create jobs or improve economic growth in Ontario. Its overall effect will be to increase unit production costs, diminish competitiveness, cut the rate of return to capital in key sectors, reduce employment, and make households worse off.

These are all plausible claims.  Problematically, the Green Energy Act (GEA) has accomplished very little in the 4 years since it passed, and McKitrick confuses the cost of similar policies introduced starting in 2003 with the GEA.
We do have a data history to support McKitrick's claims, but that data history isn't a result of the GEA.

Killing Time: Ontario's Feed In Tariff

An industry, of sorts, is gathering in Toronto today and tomorrow for a "feed-in tariff forum".  It's a good time to reflect on the procurement mechanism's history in Ontario; doing so will shed some light on what type of industry holds a forum around a power purchase agreement (PPA) tool.

The feed-in tariff mechanism was imported from Germany during George Smitherman's passage through the Minister of Energy's office in 2009.  Early in 2010 there was an attempt to kick-start the industry with a massive 2500MW contract awarded to a Korean Syndicate.  The earliest FIT contracts we had details on came on April 8th, 2010, when Ontario awarded it's first large batch of feed-in tariff (FIT) contracts (also ~2500MW).

The subsequent passage of three years is relevant according to the template FIT contract the Ontario Power Authority (OPA) shows as being in effect during April 2010 (version 1.3)

2.5 Milestone Date for Commercial Operation
The Supplier acknowledges that time is of the essence to the OPA with respect to attaining Commercial Operation of the Contract Facility by the Milestone Date for Commercial Operation set out in Exhibit A 

...

Exhibit A ...1.2 Technology-Specific Values(a) The Milestone Date for Commercial Operation is the date that is three years following the Contract Date

So how has the industry done 3 years later, realizing the "time is of the essence"?

Lousy.