The Capacity Trap: Ontario's Electricity Costs Soar as Emissions Drop

Ontario's market has inflation of over 20% each of the past 3 months.  The price drivers are now well known: adding supply to an already oversupplied market; exporting more electricity at rates well below the prices paid to suppliers, and capacity payments to natural gas and coal-fired generators. Nonetheless, when driving down into the data, I am astonished by the punishing reality of Ontario's electricity design: the cleaner our supply, the higher the price.

If limiting greenhouse gas emissions is the goal, the system is increasingly designed to fail.

Ontario fell into paying capacity payments over time.  The key moments were a 2004/05 decision to offer "net revenue requirement contracts" to natural gas-fired generators - primarily to encourage market entrants to displace coal-fired generators.  The enormous Lennox Generating station became less utilized and uneconomical - but the system operator felt it was necessary to the system and it started to receive contingency support payments soon after.  In 2008/09 demand dropped with the recession, and the coal-fired generators (also felt necessary by system operators) also began receiving contingency support payments.

Graphic from Behind the Switch .... | The Pembina Institute

Other types of contracted supply exist: non-utility generators have managed to have secret contracts for 2 decades, but it's generally understood most have must-run contracts to take all supply at a fixed price, which is also true of contracts for variable renewable energy sources (vRES - wind and solar), private hydro supply, and private nuclear (Bruce Power).  The largest public hydro, and nuclear, generators have rates set by the regulator.

Traditionally, all numbers related to producing electricity are thrown into a calculation and out pops a levelized unit cost.  The graphic displays some estimated ranges for these costs (they aren't reflective of costs in Ontario for legacy hydro and existing wind contracts)

Looking at the data from May-July 2013, and the same months in 2012, reveals the magic impact of capacity payments as replacing high cost generation with low-cost generation drives up Ontario's electricity rates.

Putting lights on the blackout of August 2003

Some thoughts, and data, on the blackout of 2003, influenced by the perspective of my recent work on long-term energy planning issues.

August 14, 2003 had the 3rd highest daily peak of the summer of 2003 - peaks were higher in the winter back in 2003 and 2004 - unlike today.  Many of the articles written a decade after the blackout pretend it was primarily an Ontario event largely driven by a supply shortage, despite widespread acknowledgement it was a cascading failure starting in Ohio.

It's important, for future planning, to address some of the issues being raised, generally by lobbyists, about that blackout.

We were importing at the time of the blackout - importing about 2130MW.

Is that a bad thing?

Wynne should right Duguid's wrong NUG directive

Premier Kathleen Wynne's first 6 months in office was characterized by an acceleration in the activities she feigns concern over so well - more wind turbine projects than ever before are being approved and another suburban seat has been bought (this one with a subway - they'd already cancelled the possibility of the wind turbines off the bluffs to protect their Scarborough seats prior to the last election).
Meanwhile, the cancelled/relocated gas plant scandals continue.

The government response has been to force the energy bureaucracy into a summer of assigned 'conversation' with the small subset of Ontarians deigning to converse with it.

The Premier would find more conversational partners, if she cares to find them, by actually doing something to halt an expensive, backroom-born, opaque, emission generating, electricity ratepayer-punishing, decision from the McGuinty era.

Here's one:

To support the objective of clean and efficient electricity generation and to help ensure electricity system adequacy, the Ministry of Energy (the “Ministry”) has determined that it is advisable to pursue the initiative of seeking new contracts (the “New Contracts“) for the non-utility generators ...    -Nov. 23, 2010 Directive to OPA from Mister of Energy Brad Duguid

• Brad Duguid (pronounced "do good") was the minister that announced the Samsung deal.
• Brad Duguid was the minister in office for every industrial wind turbine contract ever offered under the feed-in tariff (FIT) program
• Brad Duguid was also the minister when a moratorium on offshore wind was announced
• Brad Duguid was the minister when the Oakville Generating Station was cancelled
• Brad Duguid was the Minister when the Liberal campaign promised to cancel the Mississauga gas plant 

Duguid was a central figure in many of the poor decisions that have the current government in constant crisis control mode, but the worst directive of his stint as Minister of Energy may be the direction to extend the NUG's.

LTEP Tools: Calculating deception

Ontario's government is currently presenting an appearance of consulting on another iteration of a long-term energy plan (LTEP).

Ontario's Ministry of Energy now has a web page with a graphical tool for designing a portion of Ontario's 2025 Energy Mix: Power Play: Make Your Electricity Mix.

Ministry of Energy Power Play tool

It's understandable the Ministry would not wish to get stuck in debates over numbers, so a simple, entirely graphical, presentation is prudent in avoiding complicating contributions to a legitimate conversation.

The Power Play tool caught my interest as I have been designing an energy mix calculator to assist me - and anybody who cares to download it - on a separate site.

Neither 2003 nor 2005's supply mix met reserve requirements

In order to meet NERC requirements for comparison purposes,

natural gas generation was added in the "+" models

A dishonesty in the Ministry of Energy's tool is the choice of meeting demand requirements with supply that cannot meet demand requirements. Specifically wind and solar generation (or vRES, for variable renewable energy sources).

The reason vRES cannot independently fulfill needed generation is contained in Table 4.1 of each forecast from the Independent Electricity System Operator (IESO), where each type of energy supply has a "Forecast Capability at [seasonal] Peak."

The IESO forecasts peak demand and that peak demand forecast is reported to the North American Electric Reliability Corporation which has a "Reference Margin Level" of 20.2% for the IESO's region (page 21).

There is a number a supply mix needs to hit that is not for total generation (such as the 155TWh imagined in the Ministry's Power Play tool), or for total generating capacity, but is instead the figure for the "capability at peak" - a figure sometimes referred to as a sources capacity value.

15% Up: First look at July's electricity figures.

It's by-election day in Ontario.

It's also the first day of August - meaning I've been running July's numbers for Ontario's electricity sector (preliminary monthly report and supply cost estimates) .

Demand down ~5.5% from July 2012, and price up ~14.5%, based on the IESO's low second estimate of the global adjustment rate (low meaning the millions divided by the demand in Ontario is higher than the rate projected).
The 14.5% is essentially the year-to-date increase over the first 7 months of 2012.  Most Ontarians will not yet realize the increase, but they'll become suddenly aware when new regulated pricing plans are set for November.

Inexplicable price hikes peaking in June
followed by inexplicable drop in July

Here's a striking monthly change:  If you value the Ontario portion of the market as the hourly demand at the Hourly Ontario Energy Price plus the overall total for the global adjustment, you'll find, based on the IESO's estimate of a $593.7 million, that July's total Ontario market value rose $10.2 million from June, while the total electricity demand rose 1.7 million MWh.

That makes the incremental cost of the additional supply required in July less that 7/10ths of a single cent/kWh.