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The continuing evolution of Ontario's electricity sector

October 2015

Ontario’s power sector continues to evolve. On the horizon are new procurement mechanisms such as capacity auctions, and a changing supply/demand picture with very significant numbers of nuclear reactors being retired or refurbished.

Lucrative prices guaranteed to renewable energy producers, regardless of a project’s actual cost, have been replaced with the “Large Renewable Procurement” or LRP process. Rather than a standing offer made available to developers, prospective proponents bid on- and off- peak prices that cannot exceed technology-specific thresholds. Prices are adjusted to consider energy production on- and off- peak and the value of offsetting energy and capacity that would otherwise be procured, and to accommodate varying project development timelines. The net result is a competitive procurement process ensuring more reasonable prices for large-scale renewable energy projects.

Prices made available to small-scale generation through the fourth generation of feed-in-tariffs (FIT) are substantially lower than expected. While the damage done from past FIT and microFIT contracts will continue to influence power costs for many years, contracts signed today for future projects are at prices lower than previously forecast.

Over the next decade and a half, the Pickering nuclear facility will retire all of its units while all four of Darlington’s units and six out of Bruce’s eight units will be refurbished. This reduction of reliable baseload power is complemented by an influx of intermittent renewables. The result is an expected increase in gas-fired generation.

In 2014, 17% of Ontario’s electricity was provided by gas-fired generation. Current plans call for better utilisation of Ontario’s gas fleet during the nuclear retirement and refurbishment years. Since most of the costs for gas-fired generation are fixed capacity payments, the only incremental ratepayer impact is the deemed marginal cost of generation.

Concerned that using our gas-fired power plants more would make Ontario’s carbon reduction commitments difficult to meet, the Ontario Government has initiated consultations with the governments of Québec and Newfoundland and Labrador to increase firm imports from those provinces. While the Ministry of Energy indicates that they would not do so unless the cost is lower than an alternative resource, it is difficult to imagine firm imports being cheaper than the marginal cost of electricity production from gas-fired plants.

Considering an average combined-cycle gas turbine heat rate of 7 MMBtu/MWh, average marginal operations and maintenance of $5/MWh, and the current Dawn price of US$3/MMBtu, the average marginal cost of gas-fired generation is about $33/MWh. Electricity commodity costs in these provinces vary wildly depending on a customer’s rate class and monthly consumption; however, it seems unlikely that either government would be able to provide electricity for less than $33/MWh.

Alternatively, the cost-competitiveness of firm imports could be subject to a capacity auction. The Independent Electricity System Operator has been conducting extensive consultations and has drafted the high-level design of future capacity auctions. When a need for additional electricity arises in Ontario, resources can bid multi-year capacity costs, with contracts awarded to the lowest cost capacity. If a capacity deficiency exists, and firm imports could be procured for a lower price than alternative resources bidding into the capacity option, then firm imports could be a good deal for Ontario.

Future plans still do not call for a return to objective, independent power system planning. Long term energy plans reading like political platforms continue to replace resource procurement instantiated from independent power system planning. Hopefully Ontario won’t fall on past habits, where politically motivated rationale results in procuring resources for above-market costs.

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