Insights

Get into Aegent's thoughts. Search Aegent's insights and thinking by keyword or category.

Categories:

Green Power Math - It Adds Up to "Dilution"

November 2009

  • The Ontario Power Authority, with its previous Renewable Energy Standard Offer Program and its new Feed-in Tariff, would seem to have a very firm hold on the province's green electricity market.
  • The Feed-in Tariff program's price premiums and its long-term agreements mean it will be tough for green power retailers to compete with the OPA to buy new green generation.
  • For green retailers to make it work, dilution will be required, which means the lion's share of what ends up being sold will very possibly be supply that has been firmly entrenched in the province's electricity mix for some time.

State of the Market

Someone who chooses to buy "green electricity" for their home or business likely has two objectives. One goal is to promote the use of renewable sources for new power development, making our power system incrementally greener. The second goal is to be seen as a green energy supporter. This visibility factor can help to grow momentum for the green power cause, and it can also help to promote the green energy buyer's "brand" - corporate or personal - as environmentally aware.

A retailer looking to sell green energy has to offer these two features (after all, the electricity looks the same by the time it gets to your refrigerator). But that may be increasingly difficult to do in Ontario.

As coal-fired generation is phased out and the provincial government pursues its vision of a green future and economy, renewable generation is burgeoning in Ontario. In its third quarter 2009 update on electricity supply, the Ontario Power Authority (OPA) reports the Renewable Energy Standard Offer Program has executed 444 contracts with a total capacity of 1,422 MW. Out of these, 198 projects with a total installed capacity of 122 MW have achieved commercial operation over the period 2007 to the end of September 2009. Of the remaining 1300 MW under development, just under 50 MW is planned for the fourth quarter of 2009, 365 MW for 2010 and about 888 MW for 2011.

The OPA, with its previous Renewable Energy Standard Offer Program and its new Feed-in Tariff (FIT) program, would seem to have a very firm hold on the Ontario market for green electricity. The FIT program's price premiums and its long-term agreements are designed to be very attractive to project developers, likely making the OPA the buyer of choice for those looking to produce and sell renewable energy. It will be tough for green retailers to compete with the OPA to buy new green generation.

In its contracts with generators, the OPA retains all environmental attributes arising from new generation. Where will a green retailer get the green attributes that enable it to differentiate its product, and sell green power to environmentally-aware consumers?

Existing Green Power - Vintages

EcoLogo certification is a common means of identifying green power. There are three EcoLogo vintages or types:

  1. electricity from a generation facility that began operations (generating electricity) prior to January 1, 1991;
  2. electricity from a generation facility that began generating electricity from January 1, 1991 to March 31, 2001, inclusive; and
  3. electricity from a generation facility that began generating electricity on or after April 1, 2001.

Green Power Math

If the Ontario Power Authority will be contracting most of the new renewable generation projects and the environmental attributes that go with them, will retailers offering EcoLogo certified green power be forced to include more Type I and Type II power in their portfolio?

Let's look at a green electricity retailing example.

Retail buyers of green energy are willing to pay a premium for it to fulfill their two objectives. Let's assume that premium is $30/MWh. If a retailer retains $15/MWh for its administrative costs and a level of profit, then they're left with $15/MWh to pay premium price to their green electricity suppliers.

An onshore wind generator will be paid $135/MWh under the terms of Ontario's FIT program. If we assume the average price of power in the market is $75/MWh, then the FIT program is paying the wind generator a green energy premium of $60/MWh. (The green energy premium is likely higher than this, since current market prices are much lower than $75/MWh. For example, base load 7X24 power is currently priced at $38/MWh for 2010.)

The OPA can finance this premium by amortizing the extra cost over all the power sold in Ontario. This is done through the Global Adjustment mechanism. They can pay a lot for an incremental amount of power, and when that cost is rolled into the cost of all the power in Ontario, it raises the overall average price by a relatively small amount. (Of course, if green procurement at premium prices proceeds on a massive scale, the impact on the overall cost of power in Ontario will be noticeable.)

A private green electricity retailer forced to compete with the OPA's financial security and long-term agreements may have to pay an additional premium of $15/MWh, for a total premium of $75/MWh, to get the onshore wind generator to eschew the security of the OPA contract and sell to the retailer instead. How then does the green retailer exist if they must pay a premium in the order of $75/MWh to buy green power, but have only $15/MWh with which to play?

The answer, in a word, is "dilution".

The green electricity retailer will pay a $75/MWh premium (over the normal market price) for some portion of its supply portfolio, and then complete the portfolio with less expensive supply, likely from EcoLogo Type I and/or II sources.

If the retailer pays a nominal premium of $5/MWh for its Type I and/or II supply, their resulting overall portfolio can be comprised of about 14% of "new green stuff" diluted by 86% of "old green stuff".

The table below summarizes this math.

greenMathChart.JPG

Dilution or Substitution?

Although the example involves a number of assumptions, it illustrates that a lot of dilution is required to make the math work for a green retailer, especially for one looking to provide some portion of new and truly incremental green power.

The unfortunate truth is that it's very possible the lion's share of what one is buying was already firmly entrenched in the province's electricity supply mix quite a while ago. Even in the best-case, Type II supply scenario, this supply is over eight years old.

Some retailers may choose to buy "renewable energy credits" associated with incremental renewable generation built in jurisdictions other than Ontario, and finance those with the premiums paid by Ontario buyers of green energy. Those credits may be cheaper to buy than competing against the OPA for Ontario-based green power. The premium price for green energy may indeed be supporting increased used of renewables in some other locale.

Green electricity purchasers should be aware of what they're buying, and evaluate to what extent the product being offered meets the purchaser's green objectives.

In future articles, look for a discussion on how the OPA could help break its own stronghold on green electricity and how the carbon intensity of the Ontario electricity supply mix will evolve over the next years. With the latter in mind, we'll revisit the implied carbon price associated with different types of new generation.

Ontario Green Power "Brand Management" Read more »