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.

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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.

Another rebuttal to an Ontario Energy Board panel's decree of subsidy-free exports

“A wizard is never late ... nor is he early, he arrives precisely when he means to.”

Spoken by Gandalf in The Fellowship of the Ring -followed by laughter

The Ontario Energy Board (OEB) Market Surveillance Panel (MSP) last week released its Monitoring Report on the IESO-Administered Electricity Markets for the period from May 2013-October 2013. For the most part, the report is painfully boring and treats the irrelevant as if it's important, but it was interesting, to me, that for whatever reasons they spend time attempting to discredit claims that exports are subsidized, particularly as they site an example of those claims as an article by my friend, Parker Gallant.

Over the past year, the role of electricity exports in the Ontario market has been the subject of considerable commentary. Questions have arisen about the value that export transactions provide to Ontario consumers, and more specifically around the question of whether and the extent to which Ontario ratepayers are subsidizing export transactions (in other words, paying costs that are incurred as a result of export transactions). Two recent press reports have claimed that Ontarians paid over $1 billion to subsidize export transactions to neighbouring jurisdictions in 2013. The Panel considered the methodology that was used in arriving at this estimate, and examined in greater detail the costs that are triggered by exports to determine the extent to which those costs are not fully covered by the market price or by other charges paid by exporters.

I've added some emphasis to explain the premises required to fulfill the OEB MSP fantasy.

Over the past year professional sycophants may have taken direction from their government master to make something up to counter the reporting of Parker Gallant, and the NDP, but it is closing in on 4 years since I wrote McGuinty Thinks This is Fun?
Re-reading that post now makes me hesitant to continue here - I rebutted this drivel 44 months ago.

September 20th: Ontario electricity's cleanest day in my lifetime

Today is The People's Climate March day. Not being much for marching up and down the square, I thought I'd be better to write about the accomplishments and challenges in my province of Ontario, where this weekend may well be experiencing the lowest emissions from electricity generation in over half a century.

It's certainly the lowest emissions since I started capturing hourly data, which I have from September 1st, 2010. The reason is the scheduling off of non-utility generators, many of which are fueled by natural gas. Prior to yesterday the lowest value I'd seen for generation fueled by natural-gas was 291 megawatts; yesterday it dropped below that level in hour 3 and just rose above it as I write this (hour 8 of the 21st). I'm not certain the now closed Hearn and Lakeview generating stations would have operated at less than 200MW combined, so this really might be as low emission a day as Ontario saw in the past half a century.

The system operator (IESO) schedules curtailments of non-utility generators when Ontario is expected to have surplus supply for an extended period of time [2]. That is the case this weekend. Yesterday the IESO also required the curtailment of supply from Bruce Power's nuclear units after exporting as much as possible. [2]

My estimates of the supply Ontario ratepayers will pay for - including the curtailed supply

Midway into 2014, a lull in Ontario's electricity price hikes

There are a lot of lessons that might be learned from Ontario electricity system data for the first half of 2014. This post will show what I suspect are the most surprising numbers from the period.

Pricing

The Independent Electricity System Operator (IESO) June Monthly Market report that the year-to-date (YTD) weighted average Hourly Ontario Energy Price (HOEP) was $53.24/megawatt-hour (MWh).

That is up 89% from the $28.15/MWh in the June 2013 report.

The increase in the HOEP sounds expensive, but most Ontario ratepayers will see little inflation in the rate they pay for the commodity portion of their electricity bill. This is because Ontario applies another charge in addition to the HOEP, currently called the Global Adjustment (GA) charge. The GA exists to ensure the full cost of procuring supply is recovered by electricity consumers.

The GA is collected by different rates for different classes of customers and, for some classes, depending on where their billing cycle dates falls into the dates of the global adjustment process, but the most relevant rate is the "Class B" Rate: that rate averaged $32.65 for the first half of 2014, down 42.5% from the $56.86/MWh in 2013.

The Class B total "Commodity Charge" (the HOEP plus the GA) thus averaged $85.89 over the first half of 2014, up only 1% from the $85.01 for the first half of 2013.

The explanation for how an 89% rise in market pricing occurred concurrent with the lowest inflation in the actual commodity price in many years is not an easy one.