Part 2:   Pricing in Ontario’s Electricity Market – How Generators Get Paid

Sir Adam Beck Hydroelectric Power Stations

Previously, I discussed subsidies and argued that almost all electricity generators are subsidized because they are paid more than the price that they competitively bid into Ontario’s wholesale electricity market.  What are the details of the prices that generators receive? Some – Ontario Power Generation’s (OPG) nuclear plants and large hydro stations like those at Niagara Falls – are assets deemed to be “heritage power”, and receive a price that is regulated by the OEB using a method quite similar to how it regulates delivery rates.  The price reflects OPG’s operating (e.g., maintenance of stations) and capital costs (e.g., digging the tunnel for the Beck station or refurbishing nuclear plants), the expected amount of generation, plus a rate of return on equity that the Board allows OPG to earn.  This information is available from OEB hearings.

Others, natural gas-fired plants for example, are paid prices contained in contracts negotiated with the OPA through a competitive bidding process, and the specific details are confidential. Since the gas plants operate infrequently at times of peak demand, the contracts recognize that a payment is needed in excess of the wholesale electricity market price that the gas-fired generators receive. An additional payment, in the form of a guaranteed monthly minimum revenue requirement, is made through the global adjustment – the smoothing mechanism that I mentioned in my previous blog. Essentially, these generators are paid for the capacity to be there when called upon, even though most of the time the call isn’t made.  Without such guaranteed payment, these generators would not set up business in Ontario.  The subsidy they receive reflects the difference between the wholesale market price and the revenue requirement stipulated in the contracts.

Still other generators (some bioenergy, most solar and wind) are paid prices set out in the Feed-in Tariff or FIT. A key difference from the gas contracts discussed above is that FIT contracts are not awarded based on competitively determined prices. The prices paid are instead established by the OPA in a manner roughly analogous to the heritage power prices set by the OEB, i.e., capital and operating costs are used to determine the cost of generation of the various types of renewable technologies, an allowable rate of return is incorporated, prices are set and remain in effect for the term of the FIT contract (usually 20 years). The FIT is reviewed every two years.  Any contracts signed after the review will receive the new price, if it changes, that results from the review. The wind and solar generators are only paid when, respectively, the wind blows and the sun shines and they generate power that is sent into the grid.

As with almost all electricity generated in Ontario, the price paid to FIT generators is added into the blended price of power.  There are also several other contractual prices that make up the blend that come from an alphabet soup of payment arrangements with acronyms like CES, RES, RESOP, CHP, HCI and NUG.  I won’t go into the details for fear that we are approaching information overload.

At the risk of having most eyes gIaze over, I think the enhanced communications strategy promised in response to the Auditor General’s report has to start explaining this information – especially the key point of subsidization of all types of generation. Otherwise, Ontarians will continue to be at the mercy of misinformation and spin-doctors.  Also germane in my view are the indirect subsidies paid to generators: just consider the break they get from low water rental rates, limits to insurance liability, or not factoring the costs of respiratory illnesses and environmental damage into the price of electricity.

Unless we intend to eliminate subsidies to all generators, we should frankly admit they are a widespread reality in electricity pricing and tell this unambiguously to consumers.  Otherwise, we will continue the sort of unproductive bike shed argument that we have engaged in for the past two years over FIT prices.  And where does this type of argument, turning on subsidies, lead us? Could OPG object to the higher price that Bruce Power receives for its nuclear power?  Could consumers demand the elimination of support payments to peaking plants that maintain generating capacity used only infrequently?  Could the debt retirement charge be applied only to electricity supplied by nuclear reactors since most of the residual stranded debt results from construction of the Darlington nuclear station? The answer in all these cases is no.  There are reliability, equity and legacy issues at play.

Without subsidizing and spreading these costs across all consumption of power, we wouldn’t have an electricity system. The centrality of these subsidies to our electrical grid was made evident during Ontario’s ill-fated attempt to create a competitive electricity market.  Despite the belief that new generators could be attracted to enter the market and compete with established companies, investors were unwilling to assume the full risk of their investment. Consumers were promised a competitive electricity system would attract new entrants, provide market efficiencies and lower prices but new generation mainly came later with the provision of contracts containing subsidies to minimize investor risk.  The invisible hand of the market offered up a sobering slap in the face that subsidies were necessary.

The Australian Senate passed its carbon tax legislation this past Tuesday as a key component of its Clean Energy Legislation Package. It’s the first stage in the country’s plan to reduce carbon emissions to five per cent below 2000 levels by 2020 and 80 per cent below 2000 levels by 2050. It will fix a tax of A$23 ($24 CDN) per tonne on the country’s top 500 emitters starting in July 2012 with a plan to transition to a cap-and-trade system from July 2015 onward. Industries including mining, airlines, steel and power generation are covered. After July 2015, companies in these industries will need a permit for each tonne of carbon dioxide they emit.

As the title of the legislative package suggests, the Australian government has linked the emergence of a clean energy economy with the establishment of a price on carbon. I’ve taken a similar position in my most recent Greenhouse Gas Progress Report as well as in a recent blog. For one thing, pricing pollution is one surefire way to ensure a more level playing field so that renewable energy can compete in the marketplace.

South Africa is also considering legislation to place a tax on carbon emissions. Meanwhile, the Ontario government has indicated it won’t move on pricing carbon until at least 2013. While Ontario continues to delay, other jurisdictions are taking a leadership role while kick-starting their green economies. If Ontario wants to accelerate the growth in green energy and a low-carbon economy, putting a price on carbon will need to happen sooner rather than later.

As reported recently in the media, John Podesta from the Center for American Progress in Washington DC visited the MaRS Centre in Toronto and presented a compelling case for continued public policy support for and political commitment to green energy in Ontario.

In his presentation, Podesta praised the Green Energy and Green Economy Act (GEGEA) and its pivotal Feed-in Tariff (FIT) program as being the key drivers responsible for $21 billion in investment in Ontario and the creation of about 20,000 jobs since 2009. He credited the program for creating the kind of stable investment climate that manufacturers, financial institutions and entrepreneurs must have to hasten the transition to a low-carbon economy.

Podesta also referred to a recent Brookings Institute report in his presentation. The report indicated that the growing “clean economy” in the US is manufacturing- and export-intensive, with over 25 per cent of its 2.7 million workers in “green” jobs originating in the manufacturing sector. Median “green collar” wages in the US are 13 per cent higher than median wages in general. Between 2003 and 2010, the US clean economy outperformed the overall economy by a factor of two. He added Ontario is now a North American leader in the creation of these higher paying, export-oriented “green” industries.

Podesta provided the cautionary tale of China’s efforts to corner the renewables market, both in terms of technology development and dominating the export market. Recent media reports make it clear that China, as part of its push to become a world leader in green technology, is intent on putting a price on carbon as a component of its transition to a greener economy. I’ve made my position clear on the need for pricing carbon in Ontario in a previous blog. What’s really interesting about China is that it is being supported, in part, by the US Energy Foundation. As Podesta noted, China’s centrally controlled economy and its ability to regulate “at will” means they will increasingly challenge for world market dominance.

So, it’s concerning when a report just released by the Deutsche Bank in July singled out Ontario as a jurisdiction of concern where the outlook for green energy has “deteriorated” in part due to uncertainty over the future of the FIT program. Ontario has to decide where it wants to be in the international green economy in coming years.

The electrical grid is at the heart of our daily activities, yet we rarely think about how electricity is delivered to us. In its simplest form, the grid is made of a series of wires that carry electricity from the source of generation to our homes and businesses, as well as equipment like transformers that regulate the voltage of the power delivered. This is the electricity we use to power almost everything, from computers, televisions and air conditioners, to our traffic lights, hospitals and shopping malls.

In my Annual Energy Conservation Progress Report – 2010 (Volume One): Managing a Complex Energy System, I discussed the importance of a smart grid, which is the next step for our electrical grid.

Tomorrow's Smart Grid, as shown on pg. 45 of Managing a Complex Energy System.

What is a smart grid?

A smart grid involves monitoring and controlling the electrical grid to ensure it remains balanced and reliable. This will allow us to adopt newer and greener technologies, such as electric vehicles, without compromising our electrical grid’s reliability.  This is a simplified diagram of a smart grid, illustrating how the different components of the grid are connected together.

Report highlights

My report highlights some important components of a smart grid, including smart meters, distributed generation and energy storage. For example, smart meters record when and how much electricity is used, allowing consumers to learn more about their electricity consumption habits.

Several Ontario utilities (such as Toronto Hydro) have taken the lead by providing Internet applications that show users their metered electricity consumption data collected from smart meters. At these websites, consumers can monitor their electricity usage to identify sources of electricity waste and shift some of their electricity use to times when the overall demand is lower. This will reduce the strain on our electrical system and help avoid the need for new and costly peaking power plants that are built for use during times of very high electricity demand. I believe that for the smart grid to succeed, one organization must establish the vision and provide overall leadership necessary to guide all participants towards the common goal of modernizing the grid.

Conserving electricity in this province has never been more important. According to Ontario’s Long-Term Energy Plan, provincial electricity consumption will grow by 15 per cent between 2010 and 2030, meaning that we will need more generating stations to provide power. However, if we use what we already have more efficiently, we could decrease the amount of new generation required. Due to the physics of delivering electricity over wires, Ontario loses about 6% of its electricity between the generating stations and consumers. By minimizing these losses, we can get more power from our existing generation stations to the end-users. In fact, my report recommends that the Ontario Energy Board encourage and facilitate smart grid investments that reduce line losses, putting these investments on an equal footing with conservation investments.

Ontario’s existing grid was developed long-ago and, although our electricity needs have increased and evolved, our grid has not changed in a similar way. We expect that our grid will continue to provide us with reliable electricity, and modifications are needed to ensure the grid remains reliable and dependable.

For more information on Ontario’s smart grid, you can visit the websites for Ontario’s Smart Grid Forum and the Smart Grid Working Group. These groups are monitoring and facilitating progress in developing the smart grid.

In my Annual Energy Conservation Progress Report – 2010 (Volume One): Managing a Complex Energy System released earlier this week, I took issue with energy price subsidies, whether in the form of the 10% rebate on electricity bills currently delivered through the Ontario Clean Energy Benefit, or the idea of removing the HST from energy costs.

Removing energy subsidies is always going to be tricky politically, as Adam Radwanski skilfully pointed out in the Globe and Mail. But I still think it’s the right thing to do.

First off, let’s remember that the money for these subsidies doesn’t fall from the sky – it comes from your tax dollars. The Ontario Clean Energy Benefit will cost us 1.1 billion dollars this year. Under the Benefit’s current design, the size of your rebate is tied directly to the amount of energy you use. So if you and I have the same income, but I use twice as much energy, the Benefit will essentially transfer money from your pocket to mine; not very fair, and not an incentive to conserve energy.

As with many goods or services, the amount of energy we use will depend on the price. If we keep the price of energy artificially low through subsidies, we’ll use more of it, and undercut our conservation efforts. One study estimated that the 10 per cent reduction in the price of electricity provided by the Clean Energy Benefit will increase total electricity consumption in Ontario by 1.3 per cent. That will eliminate one-third of the electricity savings expected from utility conservation programs between 2011 and 2014.

It gets even worse in the long term. When deciding whether to invest in conservation measures such as insulation or higher efficiency appliances, most people compare the extra upfront cost they will pay with the savings they will see over time from lower energy bills. Keeping the price of energy artificially low distorts this comparison, making investments in energy efficiency less attractive to the consumer.

People often tell me that removing energy subsidies is unfair to low-income people or to families. There are two ways around this: A government can offer rebates or tax credits to protect vulnerable groups. You could expand these rebates and credits to everyone, but that will likely depend on your political beliefs. From an environmentalist’s perspective, I make just one request: don’t tie the size of the credit to the amount of energy you use!

Secondly, if you want to minimize any tax credits, create programs to help low-income households conserve energy by helping them make home improvements. My report commends the government for the province-wide low-income program it’s recently developed, particularly for encouraging a co-ordinated approach between electric and gas utilities.

This approach can be applied more generally to all consumers. Instead of subsidizing the price of energy, we could use government funds to reduce our energy bills by investing in conservation. That would be a much better idea than cancelling energy conservation programs such as the Home Energy Savings Program, which the Ontario government just did.

So it might not be popular, but I’ll stand by my comments – subsidizing the price of energy is not fair, and it hurts the cause of conservation.

Toronto, June 14, 2011 – Ontario’s Environmental Commissioner says the province’s energy regulator is putting up barriers to increased energy conservation. This is just one of the conclusions from his Annual Energy Conservation Progress Report – 2010 (Volume One), Managing a Complex Energy System, released today.

• Watch the webcast of the press conference live from Queen’s Park
• Watch videos of the Commissioner outlining key points of the report:
  • Overview
  • Electricity pricing
  • Smart Grid
• Click here for more information about the report
• Download the report on your computer (.pdf)
• Download the entire report on your mobile device (.epub)

“The Ontario Energy Board (OEB) plays a valuable role in protecting consumer interests, but this traditional regulatory function is in conflict with its expanded powers over conservation,” says Commissioner Gord Miller. He points to recent decisions by the OEB that have forced both electricity and natural gas distributors to restrict the conservation programs they offer to consumers.

One of the OEB’s key objectives is to promote energy conservation, but the Board recently told Union Gas and Enbridge Gas Distribution to curtail proposed increases in their conservation budgets and instead, freeze them at existing levels for the next three years. “The ‘low-hanging fruit’ in conservation has already been harvested,” says Miller, “but the Board won’t approve the investments that are necessary to accomplish further energy savings. The Board is ignoring the benefits that will come with reduced infrastructure costs and lower greenhouse gas emissions.”

The progress report also says the OEB has established rules that could hinder the Conservation and Demand Management (CDM) programs offered by the province’s electricity utilities. “The Ontario Power Authority has designed province-wide conservation programs, yet it’s the electric utilities who will carry them out. The Ontario Energy Board has given utilities all of the responsibility but none of the freedom to modify or improve programs if necessary.”

Conservation is only one of the areas where the OEB has been asked to take on an expanded policy-making role. The government has also told the OEB to facilitate the adoption of the smart grid – a modernized electricity system that uses information technology to operate more efficiently. Miller believes that “one entity has to be given the responsibility for establishing the vision of an integrated electricity system, and providing the leadership for modernizing our electricity grid.” However, the Commissioner questions whether the OEB would be the appropriate choice to achieve this innovative objective, given its conflicted responsibilities.

For more information, contact:

Maria Leung
Communications and Outreach Coordinator
Environmental Commissioner of Ontario
416-325-3371 / 416-819-1673
1-800-701-6454
Maria.leung@eco.on.ca

For French language release and bilingual support, please contact:
Jean-Marc Filion, 705-492-6997
The report is available for download at www.eco.on.ca

Aussi disponible en français

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The Environmental Commissioner of Ontario is the province’s independent environmental watchdog. Appointed by the Legislative Assembly, the ECO monitors and reports on compliance with the Environmental Bill of Rights, the government’s progress in reducing greenhouse gas emissions and its actions towards achieving greater energy conservation in Ontario.

Toronto, June 14, 2011 – Ontario’s Environmental Commissioner says the Ontario Clean Energy Benefit (OCEB) is a perverse incentive that could endanger the energy conservation savings the government is hoping to achieve.

• Watch the webcast of the press conference live from Queen’s Park
• Watch videos of the Commissioner outlining key points of the report:
  • Overview
  • Electricity pricing
  • Smart Grid
• Click here for more information about the report
• Download the report on your computer (.pdf)
• Download the entire report on your mobile device (.epub)

In his Annual Energy Conservation Progress Report – 2010 (Volume One): Managing a Complex Energy System, released today, Gord Miller says “The 10 per cent rebate on electricity bills is an artificial subsidy on the price of electricity so it encourages consumers to use more.” A study by energy analysts estimated that the OCEB could wipe out a third of the planned conservation savings over the next four years.

Miller praises the government for introducing time-of-use pricing that encourages households and businesses to shift their consumption away from periods of high demand, but noted that price subsidies undercut this development. Prices will necessarily rise because of a backlog of transmission investments and new generation projects.. “Unfortunately, the government hasn’t addressed the issue of rising prices in a way that prioritizes conservation,” says Miller. “Instead it has continued the failed policy approach of the past where the government’s only answer to higher electricity prices is to artificially lower electricity prices.”

If the government feels the need to help consumers with the higher energy costs it could make the benefit a fixed amount, instead of tying it to consumption levels. “That way,” says Miller, “the Clean Energy Benefit would be less of a disincentive to electricity conservation.”

Miller is also concerned about delays in rolling out Ontario’s important Conservation and Demand Management (CDM) programs. Between now and 2014, electric utilities, supported by the Ontario Power Authority, are supposed to reduce overall electricity use, as well as peak demand. “Province-wide conservation programs were all supposed to begin in January 2011,” says the Commissioner, “but the delays mean we will miss opportunities this year.”

The Environmental Commissioner is also questioning a recent decision by the Ontario Energy Board to freeze conservation budgets for Union Gas and Enbridge Gas Distribution, particularly at a time when the government has cancelled its own conservation programs for gas consumers. “The Board has too narrow a view about the benefits that will come with increased conservation. It is ignoring the avoided infrastructure costs and reduced greenhouse gas emissions that will come with reductions in consumption of natural gas.”

For more information, contact:
Maria Leung
Communications and Outreach Coordinator
Environmental Commissioner of Ontario
416-325-3371 / 416-819-1673
1-800-701-6454
Maria.leung@eco.on.ca

For French language release and bilingual support, please contact:
Jean-Marc Filion, 705-492-6997

The report is available for download at www.eco.on.ca

Aussi disponible en français

- 30 -

The Environmental Commissioner of Ontario is the province’s independent environmental watchdog. Appointed by the Legislative Assembly, the ECO monitors and reports on compliance with the Environmental Bill of Rights, the government’s progress in reducing greenhouse gas emissions and its actions towards achieving greater energy conservation in Ontario.

There has been much effort made in the media to lead the public to believe that their electricity bills have been spiralling due to the cost of subsidies to wind and solar initiatives of our energy conservation programs.  The 80 cents/kilowatt hour (kWh) for solar is frequently cited as the greatest offender, even though that rate only applies to rooftop solar with a capacity of 10 kW or less. In total, such installations currently amount to just 34 MW out of the 37,000 MW of installed generation in the province.   Not mentioned are the subsidies paid to our private natural gas generators, or those paid to Bruce Power, when the market price doesn’t meet their guaranteed price (which is almost all the time).  The latter subsidies involve 70% of the global adjustment monies paid out, simply because they pay for the delivery of much more power.  In fact, the Ontario Power Authority paid out $1.35 billion in 2010 to meet gas and nuclear power purchase agreements.

So how significant are the subsidies to renewable energy and the monies paid for conservation in a typical residential electricity bill anyway?  To answer that we had better clarify what a typical electricity rate is per kilowatt hour delivered to your home.  There has been much confusion about that as well.

A typical electrical bill consists of a charge per kWh of electricity used, plus a charge for transmission and distribution, plus a fixed fee to the utility, plus a regulatory charge, plus a debt retirement charge, plus HST, less the 10% the Province has just given us in the clean energy benefit.  It is a complicated system to be sure. To get an estimate of a representative rate, we looked at a typical home that heats with natural gas and uses 800 kWh of electricity per month, and we compared that to a similar house with electric heat that uses typically 2500 kWh of electricity per month (averaged over 12 months).  Although the costs per month obviously varied ($105 vs. $303) the cost of electricity per kWh “all in” was the same, about 13 cents.

So how much of that is due to renewables and conservation?   In 2010, the Ontario Power Authority paid electricity resource costs of $317 million for conservation programs, and $269 million for renewables.  That is a lot of money – but you must realize that it is recovered over a total Ontario consumption in 2010 of 142 terawatt hours (that’s 142,000,000,000 kWh), which amounts to 0.4 cents per kWh (split roughly equally between conservation and renewable subsidies).  So the cost of conservation and all the renewable subsidies in 2010 amounted to 0.4 cents of the 13 cents we paid for a kWh in our homes.  A significant amount, perhaps, but hardly the bogeyman that it is so often made out to be.

In fairness, it must be acknowledged that this 0.4 cent amount will rise as more green energy comes on line in future years, but in 2010 that is what it was.  During these times when we are publicly discussing a long-term electrical energy plan, I think it is important to be honest about the current cost of electricity.

The Commissioner made this presentation to the Ontario Sustainable Energy Association this week on disinformation in the green energy debate, and establishing a basis for public discourse and policy discussion on a factual basis.

Gloom lifted on solar prices: OPA listens and responds to applicants with its decision on the microFIT rate

On August 13th, the Ontario Power Authority (OPA) released its much anticipated decision on the proposed price cut to Ontario’s renewable energy feed-in tariff (“microFIT”) for ground-mounted solar installations that are less than 10 kilowatts (kW) in capacity.

The new rate will be 64.2 cents per kilowatt-hour (¢/kWh) and will be applied to those who submitted applications as of July 2, 2010. Originally, the OPA had proposed to cut the tariff rate from 80.2 ¢/kWh to 58.8 ¢/kWh – a steep 27 per cent reduction.

The Environmental Commissioner of Ontario, Gord Miller, applauds the OPA’s decision not to make the price cut retroactive. It will not affect the price received by microFIT applicants who submitted an application before a proposed price change was announced. Miller said, “this shows due consideration for the applicants who designed projects and arranged financing based on a price and rules that were agreed to following consultation in 2009.”

“The OPA clearly listened to the advice it received during consultations from the applicants and industry who are the first movers that will help build a green economy, and that is encouraging – the OPA’s consultation process worked”, said Miller.

In future, to ensure predictability and stability for investors watching Ontario’s renewable energy industry, the process must be transparent and open. The decision to establish a program advisory panel is a positive step.

Related:

• Ontario’s solar sector is being harmed by uncertainty around microFIT, July 21, 2010
• Rethinking Energy Conservation in Ontario, first Annual Report on the progress of activities in Ontario to reduce or make more efficient use of electricity, natural gas, propane, oil and transportation fuels.