taxation and market dysfunction in Ontario's electricity system

I wrote in 2014 that a carbon tax could be introduced in Ontario's electricity sector without raising rates. that would prevent the sale, basically at the cost of fuel, from gas-fired generator which Ontarians pay the full cost of running (through the global adjustment).

Last week was the highest net export week Ontario has experienced, averaging 2,865 megawatts each fetching around $20, which is 2 cents/kWh (weeks start on Wednesdays - presumably because the market opened May 1, 2002 - a Wednesday).

The record replaced the previous week's record hourly average of 2,827 megawatts, which was essentially given away at no cost. One difference between the two weeks is that the natural gas generators Ontario contracted with Net Revenue Requirement contracts over the past decade were used much more in the recent week - which brings me back to taxing them.

I realize this is difficult to follow, but I offer this incentive to try: if you are paying electricity rates in Ontario you are paying high rates while providing Americans cheap power.

Electricity in Ontario as 2014 ends: high prices, demand destruction, and governance in decline

I ran my numbers earlier today to update my weekly shadow reporting page.  I expected the figures to be bad (they are), and this week I contributed to making them worse.

On average, each hour of the past week Ontario was exporting 2,827 megawatts more than it was importing.
That's a record for any week since the alleged market opened in 2002.

The weighted average Hourly Ontario Energy Price (HOEP) was $5.66/megawatt-hour (MWh), which is slightly over half a cent a kilowatt-hour and slightly under the charge Ontario's consumers pay to allegedly pay down an allegedly stranded debt.

The HOEP is calculated only on Ontario Demand. Weighting the hourly price to net exports indicates an average rate under $4/MWh over the just past week. The best price an Ontario electricity hostage rates is $77/MWh (7.7 cents/kWh). So the most optimistic presentation on the pricing of exports is that every hour Ontario's supply was sold outside the province for $206,000 less than captives of Ontario's regulated price plans paid for the same quantity of product.


One of the year's disappointments for me was the Ontario Energy Board's Market Surveillance Panel's rebuttal of statements from Parker Gallant. I can only assume the resolute imbecile willing to continue to numbers such as those from last week actually indicate a profit of $4/MWh on exports is first up for the next needless, yet lucrative, position.

November 2014 Sets another record—wind blows harder than ever!

By Parker Gallant and Scott Luft
[first appeared at Wind Concerns Ontario]

It was another “wow” month for the electricity sector in Ontario for November: power generation from wind set a new record of 879,000 megawatt hours (MWh). The cost for that production alone1 added over $108 million to ratepayer bills and coupled with curtailed wind production of over 70 thousand MWh cost ratepayers about $116 million dollars in a month that valued all generation at about $1.1 billion.2 

Wind made up 6.6% of total supply and represented 10.7% of what the market valued all generation at, but it also drives down the market rates which transfers costs to the smaller Ontario ratepayer. No small wonder why our electricity rates are continuing their relentless march upwards!

The Global Adjustment didn't set a new record as it did in October, but at $870.2 million it is the second highest on record, as is the $82.32/MWh class B rate. Coupled with the $16.49 HOEP (Hourly Ontario Energy Price), the “bare bones” price for the commodity will be 9.9 cents/kWh for most Ontario ratepayers. That price is before inclusion of all other nickel-and-dime charges such as regulatory, debt retirement, delivery, HST, etc.

The Market for Lemons

Breaking a long-standing rule, this is the first guest post published on my Cold Air blog

Bruce Sharp has "worked in the Ontario energy industry for twenty-seven years and have a background in power generation, energy management, industrial natural gas utilization, energy marketing and energy consulting."

I have nothing against energy retailers, but I think Sharp's work makes a compelling case they are inappropriate in today's residential electricity sector in Ontario.

_____

Introduction

The Ontario Energy Board has invited comments on the Effectivenss of Part II of the Energy Consumer Protection Act (ECPA). The problem is that optimizing this section of the Act is like perfecting a life jacket made of cement – the process may make sense in a very narrow quality sense but the product is ultimately very bad for the consumer. The prime question is “Why do we have at all an electricity retailing market for Ontario’s smaller consumers ?”

Summary

1. The Ontario retail electricity market suffers from an asymmetry of information and so is dominated by unsavoury sellers and gullible buyers. 
2. The Global Adjustment or GA – paid for by customers on regulated rates and those on retail contracts – already provides protection against varying spot prices. 
3. Ontario retail electricity contracts duplicate what is already being done by the GA, causing consumers to effectively speculate on the spot market price of electricity. These contracts are therefore very unnecessary. 
4. The extreme profit margins embedded in retail electricity contracts virtually guarantee a homeowner will incur an added cost. This cost can be $ 200 or more per year. 
5. If we must improve the cement life jacket, side-by-side bill comparisons should be proactively audited and verification scripts should be modified such that the retailer clearly identifies for the customer the option costs, the higher cost option and magnitude of the differential. 

What Goes Up is your price - as wind blows market rates down

The Fraser Institute recently released an analysis prepared by Tom Adams and Ross McKitrick that is particularly critical of wind energy as it impacts Ontario's electricity pricing, "What Goes Up: Ontario’s Soaring Electricity Prices and How to Get Them Down" (.pdf). Soon after the Canadian Wind Energy Association (CanWEA) issued a response (.pdf). Lorrie Goldstein wrote, in the Toronto Sun, that a paper Parker Gallant and I issued delivered the same message as the McKitrick/Adams study ("the study") . I suppose that's fair, and this post will show why criticisms leveled don't invalidate the study's conclusions, but do discredit the critics hired by CanWEA.[1]

McKitrick and Adams worked together to collect data and build an econometric model of the global adjustment (GA). I would consider myself as talented as almost anyone in data collection, formatting, storing, and querying, but certainly not statistical modelling, as McKitrick has done. I expect to complement the report in demonstrating some multipliers that do exist, but I won't comment on the model, Analysing at too detailed a level would reveal a myriad of problems with historical data, and cost shifting between months, and even years, incorporated into the global adjustment. None of which would be relevant to the implications and recommendations of the study.

One element of the study that I noted with pleasure was their model indicating wind acted as a capacity cost (and not an energy cost).

Many jurisdictions looking for the best way to keep the lights on are evaluating the best way to ensure reliable capacity exists to constantly meet demand. It's not uncommon to see a separation, at least theoretically, of "energy" value, or the worth of a unit generated, and capacity value - the value to be capable of generating "energy". The study claims wind shows to be a capacity purchase more than an energy purchase:

Wind capacity has massive explanatory power, effectively dwarfing every other variable except hydro capacity. This strongly suggests that ... the GA has evolved in a manner highly consistent with a system in which wind farm operators are contracted for capacity rather than merely generation.

Health Canada Wind and Health study unhelpful

It's been a tough week for some fighting Ontario's wind whimsy: part two

On Thursday Health Canada released Wind Turbine Noise and Health Study: Summary of Results. Media headlines in reporting on the release were largely along the lines of CBC's ignorant Wind turbine noise not linked to health problems, Health Canada finds, with some exceptions, including the Toronto Star's No definitive link between wind turbines and poor health, says Health Canada study, It seems to me the discussion now will be whether it is industrial wind turbines making people unwell, or people like me arguing that's possible that harms people.

The Star's introductory paragraphs do, I think, introduce the topic well:

Living near towering wind turbines can be extremely annoying but there is no connection between exposure to the wind turbine noise and health effects, says a new comprehensive Health Canada study.

Noise from wind turbines did not have any measurable effect on illness and chronic disease, stress and quality of sleep, the study found. But the louder the noise from the turbines, the more people got annoyed by different aspects — from the noise to the aircraft warning lights atop the turbines to the way they caused shadows to flicker.

But Health Canada said the study on its own cannot provide definitive answers and more research may be needed. It also pointed out that annoyance isn’t trivial — those who were annoyed were more likely to report other health issues.

From Health Canada's release:

Annoyance is defined as a long-term response (approximately 12 months) of being "very or extremely annoyed" as determined by means of surveys. Reference to the last year or so is intended to distinguish a long term response from one's annoyance on any given day. The relationship between noise and community annoyance is stronger than any other self-reported measure, including complaints and reported sleep disturbance.

Wynne government approval of Niagara Region Wind worst energy decision in years

It's been a tough week for some fighting Ontario's wind whimsy: part one

I co-wrote a piece with Parker Gallant that was put out by Wind Concerns Ontario on Wednesday, which received some attention before Health Canada released conclusions from a study regarding people and wind turbines the next day as Ontario's government approved the Niagara Region Wind Corporation (NRWC) project to erect 77 of the "largest turbines in North America" in West Lincoln. I hope to cover all these things today, but I must start with the NRWC decision, because I had planned to communicate why this rose to be the worst planned wind project after the contract for Big Thunder was eliminated - which was after I'd written that it was a big mistake.

The NRWC project is poor because of the environment it occurs within. The project was offered a feed-in tariff (FIT) contract on February 24th, 2011. At that time there was speculation this was a petulant award, placing industrial wind turbines in the opposition leader's riding shortly after suspending the possibility of turbines off the coast of the energy minister's riding. Said that minister at the time:

"Ontario could have taken the easy route and we could have not have made these critical investments - that was the advice of, frankly, both opposition leaders here in Ontario who have demonstrated a remarkable lack of leadership, fortitude and commitment when it comes to building a clean, reliable and modern energy system,"

From Hydro One's 2005 Annual Report

Let's talk about leadership, fortitude and commitment again - as I did in wasted on the traditional territory of the Mississaugas.

The NRDC project is located to the north of a transmission line the government has avoided entering into service for many years. That line was seen critical to increased trade, and growing the ability to "deliver 8000 MW more power ... from the Nagara Falls area to where it needs to be."

I'll try to show, with 2 maps, how the non-completed transmission project and the NRWC project relate.

A Carbon Tax for Ontario, today

There are lots of opinions about how to reduce global emissions of greenhouse gases. A carbon tax is frequently presented as the preferred choice of most economists, and it is a carbon tax that Ontario is ideally suited to introduce to its electricity sector. There need be no immediate costs to most consumers in introducing a tax which promises significant benefits.

A carbon tax could fulfil a political need, both domestically and internationally, to do something that is perceived as being about reducing greenhouse gas emissions. Every government wishes to present itself as active in reducing emissions. For the incumbent  Ontario government that will be important as the province is planned to enter a period of increasing emissions in its electricity sector. More significantly, Ontario could exert an influence beyond it's borders by introducing a very significant carbon tax in its electricity sector, and it could do so painlessly.

Figure 1: historical and forecast electricity costs

Since 2005 Ontario has recovered the cost of its electricity supply not simply through market rates, but through an additional "global adjustment" charge calculated to capture supply costs the market does not. That charge has been above $5 billion a year since 2010 and is anticipated to remain so for the next decade. Currently the global adjustment consists primarily of the costs of procuring supply less the money recovered from the sale of the supply to consumers.

One very contentious aspect of carbon taxation is what should be done with revenues. That should not be debatable in Ontario's electricity sector, because the revenues could simply be used to decrease the global adjustment charges currently payable by Ontario's consumers.