Ontario Energy Minister Previews Long-Term Energy Plan Themes

"I've really come to respect the enormous complexity of the energy and electricity system in Ontario."

Ontario's rookie Minister of Energy, Glenn Thibeault, is now confident enough of his grasp of the province's energy system that he unveiled themes for an upcoming Long-Term Energy Plan in a speech to the Empire Club:

1. Nature and style of procurement should be technology agnostic
2. Ontario's electricity market renewal/reform to provide better value
3. Empowerment of consumers

These are ambitious themes. Unfortunately Minister Thibeault didn't display an understanding of the institutional barriers to change, and he's going to need to confront the demons of the sector before meaningfully advancing any of these goals.

He seems to expect the barriers to deliver change.

"It is clear to me that the nature and style of our procurement model needs review."

It is clear to even rocks in Thibeault's Sudbury riding that we have a ridiculous procurement model.

Perhaps the rocks there realize it was not reviews that brought us to today, but the abandonment of professional planning on September 18th, 2008. The end of professionalism in procurement cleared the way for the passage of the Green Energy Act which gave preference to certain "green" generators in contracting, grid access, and immunity from local government interference. [1]

After September 18th, 2008 there have been only 2 new-build projects contracted that were not shaded green (wind or solar or biomass or waste or combined heat-and-power):

• The York Energy Centre was contracted 3 months later, in December 2009, following a "a three-year collaboration between industry, technical and community participants to identify solutions that best address the regional need," and
• an Oakville power plant contact was announced in September 2009, one year after professional planning was abandoned. It was intended to "maintain local supply reliability," but became a political football and punted hundreds of kilometers away.

The novice Minister notes a desire to move away from technology-specific to technology-agnostic procurement of electricity. He doesn't note for the past 7 years the necessary contracting done was almost exclusively re-contracting of existing units which provided obviously better value than new-build generators could.

The intermittent wind and solar generators that dominated new procurement have a capacity value close to nil - they can never be necessary to provide reliable electricity to consumers. If Ontario moves to fossil fuels to provide a greater share of electricity, wind and solar could become useful to displace fuel consumption, but they cannot replace generators.

"How will distributed generation, net metering, increased electrification, storage technologies, and enhanced intergovernmental co-ordination on carbon pricing come to impact the electricity system in the coming decades? Those are the questions this industry will be challenged with on the road ahead."

Before becoming Minister of Energy, Glenn Thibeault was the Parliamentary Assistant to the Minister of the Environment and Climate Change, Glen Murray. Murray was reported battling for power with the former Minister of Energy Bob Chiarelli prior to Thibeault displacing Chiarelli. Murray champions the micro-manager's dream cap-and-trade carbon scheme - a poor option to a carbon tax.

The Green Energy Act was not intended to build anything - it was intended to destroy the viability of nuclear power in Ontario. The Minister has to decide whether he'll allow that to succeed, and reduce nuclear capacity - but if he does so he needs to get new firm capacity built, and his constituents need to be aware that the increase in electricity sector emissions will add costs to everything else too - if the "cap" in Murray's carbon scheme is maintained.

The other issue in moving away from nuclear is demonstrated by the last firm generator the province procured in an open bid to fulfill and particular purpose: the Oakville Power Plant.
It is nice to dream of a technology-agnostic call for supply, but this province became incapable of building traditional generation near major load centres.

Minister Thibeault seems blissfully unaware of the political constraints for procurement.


Market Renewable/Capacity Market

The freshman Minister has bought the idea that electricity pricing can be separated into energy (of which Ontario needs about 142 billion kilowatt-hours a year) and capacity (Ontario needs ~28 million kilowatts to meet capacity requirements during peak -summer- demand periods). Capacity markets are appearing in tandem with variable renewable energy systems (vRES) - generation technologies that can contribute energy (which displaces fuel), but not capacity (which would displace the power plant).

"We must unleash the electricity system and our system operator, to find the appropriate mix to fulfill a capacity auction that would ensure ratepayers would receive the best possible prices.
Adopting this kind of approach will allow government policy-makers to set high-level principles and priorities such as carbon neutrality and avoid forcing specific supply-mix choices."
"...allocating the precise mix of technology types has largely been arbitrary and led to sub-optimal sitings, uncompetitive prices and heightened community concern."

This sounds catchy, but most of the results are due to the Green Energy Act - not the procurement process.

The capacity pricing providing a savings to ratepayers is a flimsy claim. Pricing capacity - meaning paying for resources simply to be available - is one method of ensuring sufficient capacity; others include:

1. a pure market (requires allowing very high maximum spot market rate to incent peaking plants)
2. contracting capacity when it is perceived as necessary
3. a strategic reserve [2]

Sometimes these approaches conflict. Recently the state of Maryland attempted to get a natural gas-fired power plant built to ensure it had significant capacity (approach #2), but it was subsequently sued by the PJM market - including capacity market - operator (approach #1) and subsequently scolded by the the Supreme Court. 

How would an Ontario Energy Minister react to being sued, by an independent operator, for contracting generators?

Minister Thibeault claimed an 8% savings from capacity markets, but the impact is not easily quantifiable. A couple of years ago I walked into a bar (true story), and a familiar face introduced me to some people and said something like,"we were talking about capacity markets - are you an expert," to which I responded, "Nobody is an expert in capacity markets" ... and everybody had a good laugh. Most modern electricity markets are only a couple of decades old, and capacity markets far younger than that.

Capacity pricing has a demonstrated ability to keep older, less efficient generators available if needed, and they have an ability to collect demand response commitments. The argument has been made that Capacity Markets Do NOT Incent New Electric Generation. PJM itself had a capacity scare during the polar vortex, and subsequently wrote rules with firmer guidelines for capacity providers; the U.K. has introduced a capacity market that I understand introduced diesel generators to be at the ready if needed - an action which caused quite a stir in Ontario back in 2002-03.
There is not a template capacity market, and there is no easy measure of efficacy of these markets.

In discussing freeing up the system operator to run a capacity market, I think it is important to note the IESO is in sorry shape. The last available Monthly Market Report, for October, shows year-to-date the market recovered 14% of the cost to Class B consumers, with the remaining 86% was recovered with the Global Adjustment mechanism. In 2012 I wrote, "The GA is a measurement of the dysfunction of Ontario's market - meaning the inability of market price signals to coordinate supply and demand." This is a uniquely dysfunctional market.

Starting from the point of bad in terms of market performance, the IESO's head of operationss is retiring, as is its President. Neither is likely to leave much team strength behind, and the board overseeing the search for their replacement is the same one that oversaw the fall of the IESO to be "probably the worst electricity market in the world".

I don't mean to dump on all at the IESO because the system runs, and our lights stay on. Clearly there are competent people there. However, here's an example of an organization uninterested in providing value to end consumers:

The demand response (DR) procured through the first DR auction held in December 2015 will start being available in May 2016. The DR capacity procured for the 2016 summer period (May to October) is 391.5 MW, and for the 2016-17 winter (November to April) is 403.7 MW. The IESO will hold the next DR auction in December 2016 to procure DR capacity for 2017 summer and 2017-18 winter seasons. 

As part of the IESO – Hydro Quebec seasonal capacity sharing agreement, Ontario will make available 500 MW of capacity to Quebec in the winter of 2016-17, similar to this past winter. Depending on the availability of resources in Ontario, up to 500 MW of capacity may be provided in the subsequent two winter seasons. While the IESO has the option to call on up to 500 MW of capacity from Quebec for summer seasons at least one year in advance of the delivery period, no request has been made at this time for the summer of 2016 or 2017.

The IESO turned down the 500 MW of capacity it could have from Quebec while paying for capacity in a Demand Response auction in Ontario.

Sorry, scared ratepayer, but this market operator isn't likely to save you.


Empowerment of consumers

"our smart grid, our regulators and our utilities should work together to enable alternative pricing plans for customers of various circumstances...We need to work together to get things right." 

We?
That is an issue.

Here's what I hope my readers will understand (hopefully that includes the Minister):

• rates are to recover the full cost of electricity;
• giving a rate plan that is attractive to a young working couple living in a Mississauga condo different from a rate plan for a retired couple in Sudbury will only help those people if it hurts others - unless system costs are reduced; 
• Ontario did have more rate plans, but the growth of the global adjustment drove independent retailers out of the province (many having been vilified by the government).

I mentioned a "pure market" before as one approach to acquiring sufficient capacity. Texas is closest to such a market, and there they also separated the wires service from the purchase of electricity. A staggering number of rate plans is available in the state (ie.). Texans, collectively, can save money by conserving, and their costs can vary if the consume when it's cheaper (such as when demand is low and it's windy).
Ontarians usually can't, collectively, save money by consuming less. Our system is now committed to almost all costs in advance. Charging for consumption is one of the ways costs are allocated to different ratepayers, but it's a zero-sum game: when one consumer group gains, another loses.

Thibeault opined electricity plans should be as diverse as cell phone plans - but there are multiple cell phone service providers, and they are marketing their service to different types of consumers. In Ontario we haven't forced the separation of distribution (wires) and energy sales (kWh).

There are a few electricity retailers still operating in Ontario, but as Bruce Sharp explained, in the first guest post I put on my main blog, the profit margins required to make retailing electricity worthwhile, "virtually guarantee a homeowner will incur an added cost."

The Minister of Energy desiring an option for his constituents prior to an election doesn't strike me as a good reason for a new price plan, nor do Toronto's suburbs being key to the party remaining in power justify a special rate for young couples in condo towers.

It's unclear to me how more rate plans will get costs out of the system.[3] An increase in retailers offering differentiated rate plans would be a welcome sign of competition in a market, but if it's forced it will add costs.
Forcing incumbent distributors to offer various price plans will reduce public anger, but without substantial changes in both the procurement of supply and markets, this isn't going to be the source of lower system costs.

Summary

The themes the Minister of Energy covered in the speech were fine, but tackling the structural problems this Minister inherited should be far greater priorities - those fixes are required for technology-agnostic procurement, functioning markets and consumer choice in pricing structures.

Minister Thibeault says he has "respect the enormous complexity of the energy and electricity system in Ontario."  His level of respect for that complexity is such that he's dictating the basis of a Long-Term Energy Plan after just 5 months in his position.

This is the basis of a short-lived energy plan.



End-notes

1. From the the Green Energy Act:

Permissive designation of renewable energy projects, etc.
5. (1) The Lieutenant Governor in Council may, by regulation, designate renewable energy projects, renewable energy sources or renewable energy testing projects for the following purposes:
1. To assist in the removal of barriers to and to promote opportunities for the use of renewable energy sources.
2. To promote access to transmission systems and distribution systems for proponents of renewable energy projects. 2009, c. 12, Sched. A, s. 5 (1). 

Effect of designation
(2) A person is permitted to engage in activities with respect to a designated renewable energy project, a designated renewable energy source or a designated renewable energy testing project in such circumstances as may be prescribed, despite any restriction imposed at law that would otherwise prevent or restrict the activity, including a restriction established by a municipal by-law, a condominium by-law, an encumbrance on real property or an agreement. 2009, c. 12, Sched. A, s. 5 (2).

2. My favorite capacity mechanism has long been strategic reserves - paid for by market participants/generators, and restricted to serving the market to periods of pre-defined circumstances. Here's a presentation slide presenting a brief overview of strategic capacity reserves in Finland and Sweden:

3. I believe the gold standard for pricing is Real-Time Pricing (RTP) - with critical peak pricing perhaps a more practical second. Both of these link demand and supply; time-of-use pricing does not.