The threat/promise of more electricity from natural gas in Ontario

A presentation during the planning period of the IESO’s recently released Annual Planning Outlook (APO) included this line:

“Over time, production from [Ontario’s gas-fueled generator fleet] could exceed the utilization levels expected from those facilities (generally 40-60% capacity factor for [combined-cycle gas turbines]).“

The low utilization of generators contracted on capacity terms is something I tried to report on when writing of Available low-cost electricity not utilized in Ontario. We have been very far from 40-60% capacity factors over the past decade, and a breakdown of cost should demonstrate why that’s relevant to controlling expenses.

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.

Ontario electricity demands - an appendix.

Last week Ontario's Independent Electricity System Operator (IESO) released its first Annual Planning Outlook (APO), which is pertinent to the next article I wanted to write. This isn't that article - it's an explanation of graphics I created for the article I want to write.

While the APO the first of the new thing, it's just the latest in a line of forecasts intended to guide electricity planning in the province. This graphic shows 5 previous forecasts, but I felt I should explain their origins, and note they may not be strictly comparable. "Demand" is, in Ontario, a word that is, by itself, not very definitive.

Review of Annual Ontario Electricity Data

It's that time of year. This will be the tenth time I've produced a post on year-end electricity data. In my first such post I quoted the IESO's release on data for 2010:

"The cost of power in 2010 was 6.52 cents per kilowatt hour (kWh), as compared to 6.22 cents/kWh in 2009. This cost includes the average weighted wholesale market price of 3.79 cents/kWh and the average Global Adjustment of 2.73 cents/kWh (preliminary)."

It's a little higher than that this year. A similar sentence for 2019:

The [class B] cost of power in 2019 was 12.63 cents per kilowatt hour (kWh), as compared to 11.51 cents/kWh in 2018. This cost includes the average weighted wholesale market price of 1.8 cents/kWh and the average Global Adjustment of 10.8 cents/kWh (preliminary).

The prices aren't strictly comparable for two reasons, but for most consumers the difference will still be significant.
The numbers are nominal, but there was little inflation in Ontario over the decade (approx. 18%, and 1.85% in 2019) so the real "cost of power increase" for most consumers was still 65% over the decade, and 7.8% last year, which means last year was worse than average!
The "class B" distinction is necessary as two - or three - distinct consumer classes were created over the past 10 years.

I'll look at three distinct areas of supply: the reported generation figures on the IESO-controlled grid (ICG), distributed generation, and curtailed generation (which is supply Ontarians will pay for but was not accepted onto the ICG). I'll look at costs by the fuel, or supply type, as the IESO reports for generation. I'll look at "the cost of power" by consumer groupings, and provide an average cost of power. Most of these figures are estimated, and even figures produced by the IESO will often differ from one another due to minor differences in the origin of the data.
I will not generally try to reconcile my estimates to figures reported by the IESO due to limiting my time - and not agreeing with the IESO on discrepancies I've found in the past. Please interpret numbers as illustrative, and not gospel. This should be particularly obvious for cost break-downs which are not available anywhere else: most contracts are private and rates are estimated as best I can. I will briefly discuss the IESO's monthly global adjustment component cost file, which is one place you could find some confidence in the quality of my estimates, and/or their accounting.

I'll try to maintain a focus on providing a basis for analyzing opportunities to reducing the cost of electricity in Ontario in preparation on a future post on impediments to cutting costs.

A first metric for those who see little opportunity for cost cuts:

The average price paid to a supplier for a single megawatt-hour (MWh) was less than $94 (or 9.4 cents per kilowatt-hour), 35% below the average rate paid by Class B ratepayers. 

Now for the many numbers needed to make that conclusion.

View these estimates with Google Sheets

a little nonsense: Ontario’s Demand Response auction

The Independent Electricity System Operator (IESO) recently announced the results of its latest Demand Response Auction. They communicated the pricing trend this way:

The average annual clearing price of this year’s auction was $58,725/MW, a 36% decrease since the first auction in 2015.

Sound good? How about in comparison to the similar message from the previous year’s news release:

The average annual clearing price for availability payments of $52,810/MW represents a 30% decrease from last year, and a 42% decrease since the first auction in 2015.

Context changes things: the price of capacity in the IESO's demand response auction rate rose this year, for the very first time. There are two main reasons prices would rise: the IESO, and the OEB.

The Ontario Energy Board (OEB) regulates the province's energy sectors to ensure maximum harm to consumers and minimum efficiency- or at least some days it seems like that’s what they’re doing. Late in November the OEB ruled to suspend changes to the IESO's auction procuring capacity which were intended to expand participants. The changes were objected to by, primarily, the Association of Major Power Consumers in Ontario (AMPCO). The objection seems to be that AMPCO's membership would lose the benefits of what they've stolen fair and square in the past, although they didn't use precisely that language in their appeal of the change to market rules that would transition the Demand Response Auction (DRA) to a broader transitional capacity auction (TCA).

3. Generators receive payments for energy services provided to the [IESO Administered Market]. [Demand Response] resources do not...
4. The effect of implementing the Amendments to broaden the DRA to a TCA without first addressing the inequity in treatment between generation resources and DR resources in the IAM energy market is to unjustly discriminate against DR resources, and in favour of generation resources. This is because the Amendments would allow the latter to effectively and unfairly displace the former in the capacity auction platform which was developed for DR resources and through which such resources have been successfully and competitively participating in the IAM since 2015.

"Successfully" is a funny term. The OEB includes a Market Surviellance Panel which produces some excellent reporting, unlike the organization's multiple Hamlets endlessly stringing out decisions on things like rule changes and rate applications. the panel's most recent report shared this:

Ratepayers will pay $161 million to resources procured under the first four Demand Response auctions. The Panel continues to question the value of this program for ratepayers, given that none of the hourly demand response resources have been activated to provide DR and reduce their consumption.

The just-completed auction was the 5th. So what the OEB is solemnly hearing now is the argument that changes to a mechanism that has never produced any value to ratepayers in the province are unjust - to the largest power consumers in the province. We could call this group, just for the sake of bucketing, Class A consumers.

Henvey Inlet provides opportunity for RIckford to address declining performance in Ontario's electricity sector

It's shaping up to be the worst year in some time for Ontario's electricity sector.

• electricity prices soared in the second quarter;
• OPG fell behind schedule on it's Darlington refurbishment - and started morphing back into a fossil fuel generator;
• the IESO removed the incremental capacity auction leg from its wobbly market renewal stool.

The useful structures planned during the previous government are falling apart during the implementation stage, and the current Minister of Energy, et cetera, has appeared - well, infrequently. It's still early in the sophomore year for the Honourable Greg Rickford, but he's shaping up to be the worst energy minister since Brad Duguid.

Duguid could have saved Ontarians billions if he'd stuck to his druthers and implemented the solar rate cut the Ontario Power Authority decided on in 2010, but he didn't. He succumbed to lobbying from an industry not to reduce rates, and eventually, as those high-priced contracts entered service, Ontario became a global laughingstock for contracting solar capacity at an average price well above $400/megawatt-hour (MWh).

A feed-in tariff (FIT) contract for the 300 MW Henvey Inlet wind project was announced eight-and-a-half years ago on February 24, 2011. From the standard FIT contract during February 2011 (version 1.4):

2.5 Milestone Date for Commercial Operation

The Supplier acknowledges that time is of the essence to the OPA with respect to attaining Commercial Operation of the Contract Facility by the Milestone Date for Commercial Operation set out in Exhibit A. The Parties agree that Commercial Operation shall be achieved in a timely manner and by the Milestone Date for Commercial Operation.

The date for commercial operation was generally 3 years from the contract date. Later it was extended to 4 years for many contracts.

Henvey Inlet, at some point, received extra special consideration and it's date for commercial operation was extended to February 25, 2018 (according to IESO contract list). Today being August 26, 2019, is more than 1 and half years from the date for commercial operation.

Section (9.1), "Events of Default by the Supplier", includes:

(j) The Commercial Operation Date has not occurred on or before the date which is 18 months after the Milestone Date for Commercial Operation, or otherwise as may be set out in Exhibit A.

In defense of Ohio's bailout of nuclear, and other, generating stations

July ended with Ohio passing an energy bill :

to facilitate and continue the development, production, and use of electricity from nuclear, coal, and renewable energy resources in this state, to modify the existing mandates for renewable energy and energy efficiency savings...

I noticed American pundits hating it.
The bill prevents Ohio's only nuclear generating stations from closing, as previously announced, so I thought it worth my time to investigate it. Unfortunately it's one more subject that demonstrated the shallowness of most energy commentary.

Ohio just passed the worst energy bill of the 21st century announced David Roberts at Vox. Self-described "energy Ronin," Jesse Jenkins responded to the claim the legislation, saving 2 nuclear plants in Ohio, was better than "passing nothing and letting them close," with a flat: "No. Not really." It's a claim that should be revisited in the not too distant future - when Ohio can be compared to Pennsylvania, where no bill was passed to save two nuclear facilities soon to exit operations. I'll plant the seed for that future comparison with some background on what did happen in Ohio - and very briefly at the approach that failed to sway lawmakers in Pennsylvania.

Roberts' article has these bullet points on the Ohio legislative action:

• Bail out two nuclear plants
• Bail out two coal plants
• Gut renewable energy standards
• Gut energy efficiency standards

Nuclear

If I skimmed the legislation correctly nuclear (and some other generators) will receive up to $9/MWh in credits for their output - with the amount being reduced if the market price is above $46/MWh and disappearing at $55USD/MWh (currently equates to about $73 CAD/MWh).

A fact-based commentary on that price might note most pricing is now set by natural gas so the $9USD/MWh stipend equates to a $22/tCO2e implied cost of emissions (tonne of CO2 equivalent emissions) - which is a little under $30 Canadian dollars per tCO2e.

It's a sad commentary on the state of American commentary that those who claim to support positions on reducing emissions fail to mention implied emissions' costs in their comments.

Regardless, that's the nuclear bailout: it can be perceived as compensating trivial-emission generation for the unpriced negative externality of currently cheap and abundant natural gas-fueled generation. Previous actions by New York and Illinois legislators have tied their funding of threatened nuclear plants directly to a social cost of carbon.

So why the coal bail-out?

OPG's nuclear facilities are now the major cause of increasing electricity costs

Ontario rates are on the rise again, after going largely unchanged for the final two years of the previous, Liberal, government. Many consumers won't realize the 7% increase during the first half of 2019 as the impact is hidden by subsidies, which have grown to about $4 billion a year in the recent provincial budget. In stark contrast to past years, this year it is publicly owned Ontario Power Generation (OPG) nuclear units driving the increase. I estimate all supply costs up a little over $400 million (nominal) during the first half of 2019, while the cost of OPG's nuclear output is up a little under $500 million.

This article is going to be about electricity rates - promised and realized. It will touch on too many complex areas I've spent too little time on to understand fully, but enough to understand Ontario’s rate-setting process cannot deliver reliable pricing on regulated nuclear supply.

Ontario's government announced it was "moving forward with nuclear refurbishment at Darlington Generating Station," in January 2016. That station has 4 reactors - the last 4 new-builds in the province, with the last of those entering commercial operation 25 years ago.

The average cost of power from Darlington nuclear units post-refurbishment is estimated to range between $72/MWh and $81 MWh, or 7 and 8 cents per kilowatt hour.

The low end of the estimate, $72/MWh, is what Ontario's consumers were paying for supply from OPG's nuclear power plants at the time of the announcement in 2016. Today we are paying $89.70, which could generously be considered as just above the high end of the estimate (adjusted to real 2015 dollars). This is somewhat explained by the inability of the regulator, the Ontario Energy Board to set a rate in 2017, but another 6% rate hike is already baked in for 2020, so we will be back at the high end of the estimated range in 2020 regardless.

It is not, however, accurate to blame the recent rate escalation on the refurbishment project.