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.

Germany's production from all renewables has increased 265% since the introduction of the EEG; in 2012 'renewables' are credited with growing to ~23% of German generation; 8% wind, 5% solar pv, 6% biomass, 3% hydro, and 1% waste.

Living in Ontario, I'll note that the infrequently noted 6% from biomass means the comparatively smaller (geographically) and more densely populated Germany generates more electricity from biomass than Ontario generates with coal and natural gas combined.

The omission of noting biomass in discussing Germany's renewables might be explained by two factors:

1. A traditional "nature conservation" concern for forests threatened by the harvesting of increased biomass stocks [see "Is GermanyKilling the Environment to Save It"], and;
2. The emissions in producing and distributing biomass feedstocks into generator fuel are not negligible, but estimated at 200kg of CO2/MWh - additional CO2 emissions could easily come from poor land use/management decisions increasingly pressured to produce more fuel  [see The fuel of the future]

In Ontario, production from renewables is little changed since 2000.  The quality of the reporting is not good [1], but it is unlikely both biomass and solar provided a total over 1 TWh of production in 2012, while the increased production from wind turbines is occurring as hydroelectric production declines.

Conversely, Ontario's production of electricity from burning fossil fuels has dropped in half since the year 2000, while Germany's has increased, rising rapidly at the start of the period, when the country was governed by an alliance inclusive of the Greens, then dropping under Merkel and the recession, and rising again with recovery and the idling of nuclear power plants.

The production of electricity from renewable sources is often presented as a policy to reduce the use of fossil fuels along with emissions of pollutants and greenhouse gases, but these are not apparent as accomplishments in Germany's growth of intermittent energy sources.  The U.S. Energy Information Administration recently confirmed what I had written 2 years ago in noting reasons for the decline in certain pollutants there are primarily from improved control of emission controls in fossil fuel plants; in Europe, Germany continues to exceed ceilings set on a number of air pollutants [2]

Graphic from Renewable International

Cost has become an enormous issue in Germany.
In dollar terms, consumers had to pay 20 billion due to the EEG charges in 2012.

The EEG surged to 5.277 euro ct/kWh in 2013, up ~47% from 2012 (source).  Value added tax (VAT) make the price closer to 6.3 ct/kWh; in Canadian currency that pushes the price above  ~8 Canadian cents/kWh.
There are a number of factors in the EEG rise, including lower market rates (due to growing supply), and the dwindling share of consumers allotted a portion of the overall EEG, as exemptions are granted to an increasing number of industrial users [3].

The rate increases in recent years coincide with a rapid growth in solar pv installations (wind turbine output was down in 2012).  The Fraunhofer Institute reports 32.44GW of solar capacity installed at the end of 2012 (up 34% from 2011), surpassing wind's 29.9GW (up only 4%).  Peak demand in Germany in 2012 (according to ENTSO-E data), at hour 19 on February 8th, was 74,475MW [4].

Page 259 of  2012 Fraunhofer Summary

Germany's solar capacity alone now exceeds its annual minimum load; wind and solar together exceed average load.

Wind and solar generated 13% of annual production, but during the peak load at hour 19 of February 8th, they provided closer to 1% of production.  The reliable production that could be reasonably expected during peak demand can be called the "capacity value" of a generation source.

Renewables, in most locations, have little capacity value; wind at all times, but more so as related to summer peak demand periods (in Ontario), and solar particularly for winter peak demand periods.

2013 is an election year in Germany, and the increased EEG has met with political bluster; the government promises to limit future increases, and has further cut-back feed-in tariff (IT) rates, after struggling for years to find a balance between adding capacity and controlling consumer costs.  The opposition parties (the parties that introduced the German Renewable Energy Act when governing in 2000) appear set to focus on reducing taxes and the number of exemptions to EEG payments, which force fewer consumers to shoulder the full burden of the total EEG.
The business sector, having benefited from the glut of procured capacity dropping market prices, while being exempt from EEG payments, seems increasingly anxious about the Energiewende experiment (see endnote [3]).

Ontario's recent history suggests the next price increases in Germany will not be directly associated with adding more renewable capacity, but the complimentary production capacity required because the wind and solar generation lacks capacity value.

Ontario's Global Adjustment Mechanism (GA) is similar to Germany's EEG, but includes a much broader basket of charges, including a capacity payment basket that Germans should be cognizant of.

The total value of Ontario's electricity market (roughly 1/4 the size of Germany's) is approximately $10 billion dollars.  In 2012, ~$6.5 billion dollars of that was recovered from consumers by the Global Adjustment Mechanism (GA).   Proportionally, there is therefore a greater share of the commodity charge for electricity recovered through the global adjustment in Ontario than there is via the EEG in Germany.

A very significant difference with the Global Adjustment (GA) is that it recovers the cost of all contracts (and regulated rates for some hydro and all nuclear assets).  Whereas the EEG appears to recover costs for less than the quarter of Germany's generation, the GA recovers costs for over 90% of Ontario production, as most generators have some flavour of power purchase agreement.

New capacity builds in Germany become increasingly uncertain as perspective generators await a market framework that will make profitability possible (here) - a situation which is not unique to one country in Europe and which has seen the undertaking of a "EUROPEAN COMMISSION CONSULTATION ON GENERATION ADEQUACY, CAPACITY MECHANISMS AND THE INTERNAL MARKET IN ELECTRICITY" [5] 

As Europe looks to get capacity procurement strategies to work within a functioning market, they should review the damage done to the Ontario market by stumbling into capacity payments.

Ontario's market opened in May 2002.  The goals prior to the market opening saw the share of total generation supplied by the public, and previously essentially the monopoly, generator shrinking.  Concurrent with the market opening, an all party committee was recommending the disposal of all coal units in the province by 2015.  Ideally, public coal generation would be replaced by private natural gas-fired generation (or wind ... or hydro).

As the market opened the price did rise, and system capacity was threatened during hot summer days.  The ensuring uproar saw the Premier, cognizant of a pending election in 2003, freeze rates.  Consequently, only a smattering of merchant plants were constructed.

The 2003 election saw the election of a new government elected on a platform of phasing out coal generation by 2007 while strengthening the system.  Shortly thereafter the first contract calls went out for what would become the earliest "net revenue requirement (NRR)" deals - the few merchant plants that had opened earlier were also given comparable contracts.  No natural gas plants have been built without a revenue guarantee since that time.

By 2006 the declining use of Ontario Power Generation's (OPG) Lennox generating station, combined with the system operator's requirement to have the capacity available, resulted in payments to keep Lennox available; by 2009 the remaining coal units also had capacity payments (contingency support payments).

Thus, by 2010, essentially the only generation exposed to market pricing was the unregulated hydroelectric assets of public OPG - all private generation owners are protected from market pricing.
With the ability to procure generation (through the global adjustment mechanism), bureaucrats and politicians have done so.  From 2002 to 2012, as demand dropped ~12,600MW of new/refurbished generation capacity replaced ~4300MW of coal capacity.

A combination of over-capacity, capacity payments allowing the coal and gas generators to bid into markets at the cost of fuel, and depressed pricing levels for natural gas and coal commodities, has seen the market rate collapse, with the impact that by 2012 OPG's unregulated hydro business segment reported a loss - only 4 years after ending it's run as OPG's most profitable business segment with an annual profit of over $500 million.

The end of profitability for the only generation exposed to the market price in Ontario serves as a warning to tread very carefully in introducing capacity payments, just as the explosion of costs in Germany due to procuring only ~8% of all generation from wind, and even less, ~5%, from solar, is a warning to tread very carefully in instigating the FIT mechanism.

Both, it seems to me, should be avoided.

Notes

[1]  I have graphed using Statistics Canada data as it is contiguous (back to 1977), but it's clearly incomplete for wind, and probably biomass.  I say clearly as the Independent Electricity System Operator has data for wind turbines located on it's grid that show more production - however the IESO data is incomplete too, as it does not show embedded generation.  A 3rd source is the National Inventory reports - which is no more reliable, but, once again, different.

[2] Seven EU Members Faulted for Breaching NOx, SO2 Emissions Ceilings

[3]  Exemptions are not necessarily granted lightly, as large generators have options in acquiring the electricity they need - and the jurisdictions they choose to operate in.
In Germany, Bloomberg noted companies increasingly generating their own power in "BMW Adds Wind Power to Sidestip Merkel's Power Bill"  The article headlines "wind" but also notes Volkwagen's coal and newer natural gas-fired generators.
In Ontario the IESO's Stakeholder Summit Report included:

A participant asked if high demand prices and the low price of gas ... are leading to more generation being installed behind the meter...In Ontario, the effect is present and visible on high-peak days, but it can’t be fully quantified by the IESO.

The exchange implies that private generators are used to avoid high peak pricing - in reality they are probably used to take advantage of the Class A global adjustment rules.

[4] "Load" is used as it is the term used by ENTSO-E, the "european network of transmission system operators for electricity."  The load figures are roughly 3 times what the Ontario's system operator, the IESO, notes for Ontario - yet the generation ENTSO-E reports is much greater.  This isn't unexpected as much of the solar output, and some of the wind production, is likely embedded and not visible to the transmission system operator.  However, the ENTSOE data is the only hourly data I have accessed.


[5] The ENTSO-E RESPONSE PAPER answering the European Commissions' consultation request is an important read as it notes pitfalls assorted with a range of capacity procurement options.