Sunday, February 9, 2020

An outlook against lower electricity costs

Can anything be done to reduce the costs of electricity in Ontario?

I get the question more frequently lately.The answer is “yes". Something, theoretically, could be done. 

In reviewing 2019’s electricity figures I estimated the average cost of procuring one megawatt-hour (MWh) of supply was $94, and showed how that became $126/MWh for most Ontario consumers. That is an indication there’s plenty of room to find savings, so much room that there’s a more important question than how to reduce costs.

It's also possible to prevent costs from falling. Having written on excess supply, cost shifting away from unimportant consumers to influential "stakeholders", high contract costs, and may other issues for nearly a decade, I'm not inspired to address the question of what could be done - the more interesting question I will address is, "What is being done to prevent costs from falling? 

The current government was elected on a platform that included the claim they’d, “Cut hydro rates by 12% for families, farmers, and small businesses.” Over their first year and a half in office there’s been little to inspire confidence they’re capable of delivering on that promise. A recently released provincial finance report noted the cost of electricity programs ballooning another $1.5 billion as they head towards $5.6 billion for 2019-20 (ending March 31). The hit on the provincial treasury is largely due to subsidies preventing consumers on regulated price plans (RPP) from seeing rates increase on their electricity bills.

The 12% cut in the Progressive Conservative’s platform was in addition to the [un]Fair Hydro Plan (FHP) of the previous Liberal government - which promised (and did) reduce bills 25% in the present by deferring costs to the future. I developed a great contempt for that plan, but I could also view it as an unpleasant distraction. The Liberal government did deliver a long term energy plan (LTEP) that promised cost controls through improving what is whimsically referred to as Ontario’s electricity market.
Market Renewal will ensure the province has appropriate sources of electricity at the lowest possible price. This initiative could save Ontarians up to $5.2 billion over a 10-year period. -Glenn Thibeault, Minister’s message introducing 2017 Long-Term Energy Plan, October 2017
The plan - the long-term energy plan - was to improve the market for consumers.

Then, the nominally Independent Electricity System Operator (IESO) consulted stakeholders/insiders. In 2 short years they’ve reduced potential savings to consumers - which might be considered costs to the IESO’s stakeholders/insiders- by over 80%.
The Market Renewal Program is an important piece of the equation for us. With the approval of the high-level designs of the energy work stream, and a business case that estimates we can achieve $800 million in net benefits over the first 10 years alone, we’ve built a very strong foundation for change. - Peter Gregg, IESO President and CEO, November 2019
A $4.4 billion drop in the promised decadal value of market renewal, in under 2 years, is only one way the IESO is maneuvering to prevent a reduction in spending on electricity supply in Ontario. Others include inflating demand forecasts, lowering performance expectations from existing generators, raising capacity reserve desires, and exaggerating the threat of rising emissions.

The first IESO Annual Planning Outlook (APO) was published last month. It is the latest in a regression of Ontario electricity system outlooks/forecasts/plans. The IESO sprang from the IMO (Independent Market Operator), which was a creature of the sector’s biggest bang when public Ontario Hydro was exploded into multiple entities. The IMO was, in 2002, to operate a market where pricing would signal when new entrants (generators) should enter the market. That went badly as governments shuddered at early price spikes, and by 2005 Ontario’s distinct global adjustment mechanism was introduced to facilitate full cost recovery, from consumers, on whatever new supply the government wished to procure. At that time there was a desire to have independent experts run the process for determining supply requirements, so a supply mix directive from the government served as the basis for an Integrated Power System Plan (IPSP). That process was abandoned in 2008 for the Green Energy Act, which was developed by lobbyists. In 2010 the government attempted to recover, creating a new supply mix directive followed by a Long-Term Energy Plan (LTEP). An IPSP was done, but the only portions ever seen are the result of Freedom to Information requests. By 2013 the LTEP was the final plan. In 2016 the IESO produced an Ontario Planning Outlook (OPO) which provided information for the government’s production of another LTEP. The new APO seems like a successor to the OPO and therefore might be intended to serve as a basis for some activity.

The IESO’s APO sees a return to growth in annual electricity demand. The past decade-and-a-half aren’t considered indicative of what’s to come. “Why would a downward trend turn up?” I asked in 2010, during the early stages of the 2011 IPSP’s development.
explained at Ontario Electricity Demands - An Appendix

Surprisingly, and perhaps inexplicably to our professionals, demand didn’t turn up over the past decade. Since I brashly suggested planning based on a trend continuing it became increasingly more difficult to define “demand”, and therefore to compare one set of forecasts to another. While there have been shifting measures, whatever demand was defined as has trended flat to down.

The IESO doesn’t show a drop in demand over the past decade and a half so much as an increase in what’s been serviced by “conservation.”

The IESO explains their APO’s increase is, “due primarily to electrification of transportation, a booming agricultural sector, and modest growth in the residential and commercial sectors.” I suspect previous, and incorrect, forecasts of increasing consumption were based on similar claims.

APO Demand Forecasting Process
I tend to discuss supply when talking about demand while forgetting to remind readers these should be similar, but not equal: supply has to be greater than end-user demand as systems have losses in transmission and distribution. The IESO’s methodology for its demand outlook claims to be built from forecast by zone and economic sector. That’s a good method for meeting people to and display rigour, but it’s not necessarily a good way to estimate the total. We have big measures - the supply from generators and local distribution networks - and small measures (the demand from millions of consumers). I won’t discuss cumulative error, but reconciling macro and micro measurements is a skill I am not unfamiliar with. I would treat the macro trend as my friend - more so than the many voicing expectations of big things from their sector.

In fairness my graphic of "Annual Demand Forecast" from many plans is a little deceptive in that the Y-axis range is tight (120-170 TWh), and the IESO’s outlook isn’t claiming a deficit in annual “energy”:
The APO forecasts that Ontario is generally expected to have enough energy to supply demand over the next 20 years.
The Outlook presents the main issue as ensuring sufficient supply to meet demand at all times while satisfying requirements for capacity reserves.

The difficulty in determining what the IESO means by “demand” is particularly annoying in their discussion of peak demands:
Summer peak demand is projected to be approximately 23,970 megawatts (MW) in 2020, increasing to 27,640 MW in 2040, while winter peak demand is projected to be 21,810 MW in 2020, and 24,610 MW in 2040.
Summer peak for the IESO’s “Ontario Demand” was 21,791 MW last year, and it hasn’t exceeded the 2020 projection since 2013. The projected winter peak for 2020 hasn’t been exceeded since 2015. It turns out there’s a different definition of “demand” than the IESO is using in the outlook. “Ontario Demand” has been used by the IESO to define supply from the participants on the IESO-controlled grid (ICG), whereas any non-participant might confuse it with electricity demand (load) in Ontario. The major difference between the the APO’s peak demand and the IESO’s traditional “Ontario Demand” is embedded generation - meaning supply embedded within the local distribution networks (LDC’s) and not on the IESO’s ICG.

As with annual total demand the trend in peaks, whether as “Ontario Demand” or including estimated embedded supply, is down (in this case since 2011), while the APO forecast is up.

One problem for the IESO forecasting peaks based on anything other than its ICG-confined “Ontario Demand” is it hasn’t previously provided any indication it knows what embedded generators produce from one hour to the next. As far as I know the IESO collects embedded generation data from local distribution companies for only 5 hours every 12 months, while acknowledging those 5 hours fall later in the day due to the impact of embedded solar generators on supply from the IESO's grid-connected generators.

One reason we can tell this peak isn’t net of distributed supply (as with “Ontario Demand”) is because of the “effective capacity” they claim will be available to meet the peak. The 890 MW calculated for solar is far more than the solar capacity on the ICG, but only a third of overall solar capacity. My analysis shows that’s far too low an “effective value” for existing solar. The documents accompanying the APO include a Resource Adequacy Methodology. If I understand this correctly the method estimates the average hourly solar production, and it estimates hourly demand, and then it runs a model fitting the two together randomly to determine the share of solar’s capacity that can be relied upon to eliminate loss-of-load expectations (LOLE).

“Solar generation is aggregated by zone. In the Monte Carlo analysis, in each iteration the model randomly shuffles the order of the days within each month for solar production.”
Sounds impressive - but what if solar output isn’t randomly correlated with demand? Think of a scenario where bright summer days are hot summer days - the scenario sometimes referred to as reality. It appears to me the IESO’s modeling is proving to be a very poor substitute for the diligence that would have demanded better reporting of embedded generators over the past decade.

Underestimating capacity, or effective, value is another way of exaggerating the need for additional supply. The figures published in the APO, inclusive of distributed generation, differ from the numbers, excluding distributed generation, that appear of Ontario in the North American Electric Reliability Corporation (NERC) 2019 Long-Term Reliability Assessment published only a month earlier. They don’t, however, differ in an understandable way. The IESO has lowered the capacity value, or firm supply, in the APO despite adding distributed resources in the APO calculations.

The differences in the graphic comparing the two recent reports of what can be called capacity values is deceptive. Much of the discrepancy is due to the difference in “Petroleum” and “Natural Gas”, which is simply due to the treatment of the dual-fuel Lennox Generating Station. The APO has a lower expectation from fossil fuels cancelling out its increase in solar (due to embedded) - and it drops expectations from nuclear. The total net difference is essentially equal to a reduction in the capacity value of nuclear.

Neither presentation of capacity value includes imports. This might be understandable in the NERC assessment, depending on the rules for that filing, but those rules needn’t apply to the Ontario-only outlook, and during summer heat the data shows Ontario does regularly import around what might be described as the functional 1800 megawatt limit from Quebec.

The APO doesn’t simply consider less nuclear capacity as available to reduce loss-of-load expectations, it also chooses to increase the reserve requirements based on a gut feel about nuclear. The computer model for other sources is abandoned for a “spreadsheet-based” tool. As with the low expectations of capacity value from embedded solar, these are discretionary decisions with little basis in history: there have been major refurbishments that were delayed in Ontario, but there was far more capacity provided from other life extensions of reactors.

To summarize:
  • the demand forecast is for increases against the trend of the past 15 years;
  • the peak demands look high because they include embedded, but the most significant type of embedded generation isn’t considered to have a high capacity value;
  • Nuclear capacity values are lowered due to the risk of extended outages (ignoring the equally plausible scenario of life-extensions), and,
  • The capacity buffer/requirement is also enlarged due to worries about nuclear refurbishment schedules.
There’s a great deal of caution in the IESO’s planning - all of it serving to inflate the need for supply from the IESO's so-called stakeholders. The Outlook presents both a "Reference" case and an “Energy Efficiency” case in which the claimed capacity deficit during summer periods is lowered. The IESO considers efficiency to be their thing, and it shows: the word “efficiency” appears in the forecast 89 times, which is more than gas (69), nuclear (59), hydro (27), wind (23) and solar (16). I’ve been critical of “efficiency”, but perhaps not critical enough of the stupidity of it being housed at what was supposed to be a market operator.

There isn’t a metric I can think of where the IESO’s isn’t the worst electricity market. It recovers a tiny fraction of supply cost with extraordinarily low pricing at almost all times - the exceptions generally being when the IESO blows an hourly forecast. There are external, legislated, and political reasons for the IESO’s focus on efficiency, which seem to corrupt all analysis coming from it. The IESO's year-end data for 2019 claimed "interest in available energy-efficiency programs remains high with the IESO forecasting to meet energy and demand savings targets - as well as address future capacity needs – at less than 3 cents/kWh.” That is not the proper metric for pricing capacity. The proper metric can be delivered since the APO acknowledges, “Ontario’s energy requirements can largely be met with existing and available resources.” It’s over $190,000/MW-year, which isn’t going to be competitive in a genuine capacity market.

But what about climate change?

Both of the scenarios in the APO forecast higher emissions than previous plans did, particularly after 2024.

The reason for higher emissions is obviously the output from generators fueled by natural gas. Perhaps the most ludicrous line in the APO is, “Gas production is higher on average as these generators take advantage of export opportunities.” Most gas-fueled suppliers in Ontario are on “net revenue requirements” which pay them to be available to generate, and whatever profits they’d make if they sell above their fuel costs is to be clawed back under those contracts. Rumour has it that power plant owners would prefer to operate their power plants as they operate their potted plants - artificial potted plants. Those contracts will expire, but they’re output will only remain attractive to exporters if it continues to be priced well below supply in export markets (as has been the case for well over a decade). So there’s 2 points to make about the new outlook for emissions:
  • Increased emissions in Ontario would simply be displacing emissions in the United States, and
  • The IESO’s outlook doesn’t include fixing the Ontario market characteristics that make it attractive to import gas from the United States to generate electricity for export to the United States.
The APO cannot be about everything, but the variants of “flexible” should have appeared more than once. The outlook may promote higher gas consumption because the system operator’s life is easier with more gas on their grid.

Since the introduction of the global adjustment 15 years ago the IESO’s so-called market was reduced from a mechanism to signal generators to enter, or exit, Ontario’s electricity system to one that serves only the IESO’s operators as a dispatch tool. The last long-term energy plan was based on a signal from the IESO that they could improve their market: a new plan would apparently be based on the APO's signal that it will not.

A decade ago, when I started writing, we were in the procurement orgy of the Green Energy Act. I hoped to support the people working in the sector fighting those profiting from what was - in a time of rapidly dropping demand and surging surplus supply - a scam. The government subsidy to hide the costs of the bad decisions of the past decade and a half is set to exceed $5 billion in the current fiscal year, yet in recent months prominent figures from that scamming period are being given industry awards and elevated to the most prominent positions in the industry’s lobbies. It’s as if weak stewardship in the halls of power has led to the re-emergence of Ontario’s electricity Nazgul.

Stewards of the public interests need to replace the protectors of stakeholder interests before specific advice on reducing costs can be useful.

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