Tuesday, April 16, 2013

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]

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]
I've created the graph to illustrate the demand and pricing situation in March 2005, when the contract was signed, through to early 2009, when it was renegotiated at much higher rates: in 2009 prices were declining after a couple of years of stability at prices below 2005's rates; demand was continuing a drop started over a year earlier, net exports had soared and "surplus baseload generation" was entering our vocabulary.
That's when they enriched a contract that had already had years of controversy.

The larger concern is the implications the report presents for the remainder of the, "about 22,500 megawatts of electricity supply under contract at the end of 2012." [OPA 2012 annual report]

As a result of the relocation to Lambton, power will have to travel a considerable distance through transmission lines to reach its destination. Some energy will be lost along the way, mostly as heat. The OPA has estimated the cost of these losses to be about $40 million over the 20-year term
 So .... let's assume the OCGT plant reported on  is expected to have a capacity factor of 10%, which would make the annual output of the 280-300MW capacity plant roughly equivalent to a 100MW industrial wind factory, such as the one about to start outputting power at East Lake St. Clair.
That must also add about $40 million to the stated cost over the life of that one contract, which would then be in addition to $800 million for line losses from the existing 2000MW of distantly located turbine capacity ... and in expectation of another $1.5 billion if the remainder of the 5800MW of contracts reported by the OPA in its last quarterly update (Q3 2012) are executed.

$2.3 billion starts to sound like real money, even spread over 20 years.

But that number pales in comparison to the cost of generation about to be built to meet no needs whatsoever.
From the AG's report:

The OPA contends that none of the power that the Mississauga plant would have produced (presumably starting in July 2014) would have been needed until at least 2018.
Not having to make payments for power that is not needed is a 100% saving in the OPA’s view because there are no offsetting costs to replace the lost Mississauga power.... We do nevertheless acknowledge that there will be savings relating to the fact that no payments for electricity from a Greenfield plant will likely be made until at least 2017 and have included estimated savings of $56 million, about three-quarters of the OPA’s estimate. [pg 8 - OPA estimate of $75 million]
Some context for Ontario's supply situation can be drawn from the 2012 Annual Report of the Independent Electricity System Operator (IESO), which describes a recent OCGT plant addition to Ontario's generation system - the York Energy Centre:

...the York Energy Centre has been called into action twice as many times as originally envisioned, totalling more than 60 dispatches in 2012. As a ‘peaker plant’, the facility can play a number of different roles, such as responding to sudden changes in demand, backing up renewable generation, serving load under extreme weather conditions, or even replacing hydroelectric production when water levels are low.
That's the closest comparison to the planned Greenfield generating facility.
The OPA doesn't feel we need flexible and reliable generation until "at least 2018"

We cannot need inflexible and intermittent generation while not needing flexible and reliable generation, yet the OPA has contracted another 3700MW of wind capacity, and another 1400MW of solar capacity.  The cost of the output from that contracted capacity would be approximately $2.1 billion a year (wind CF of 28.5%, rate @ $135/MWh, solar CF of 14%, rate @ $500/MWh).  Most of that output will be dumped or curtailed - if it did, inconceivably, all displace gas-fired generation, the cost to ratepayers would only be reduced by about $410 million

$2 billion a year for the next 5 years, plus the line loss, might provide a fair estimate of the cost of implementing the remaining FIT contracts based on the logic presented in the AG's "Mississauga Power Plant Cancellation Costs."  That $10-12.5 billion.estimate is simply the cost of generation, before the additional economic spin-off damages Ross McKitrick recently reported on.

I noted in January that Ontario's ratepayers had saved hundreds of millions of dollars already, and Tom Adams later reported a "$11 billion cost reduction."
The reduction is plausible.

The first paragraph of the IESO's page for their "Renewable Integation (SE-91)" initiative includes:
...5,800 MW of variable generation projects, primarily wind, are underway and are expected to be in commercial operation by the end of 2012, with 10,700 MW targeted for 2018.
The OPA last reported a little over 2000MW of wind and another ~600MW of solar, or roughly half the capacity predicted on that IESO page (screencapture here).
The difference is a savings to Ontario's ratepayers of over a billion dollars a year.
That is roughly equivalent to the annual cost of one Korean Consortium contract.
2nd slide of "OPA FOI response re. RevReq to 2015" referenced in post at Tom Adams Energy


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