Why ‘down’ is actually ‘up’ in topsy-turvy Ontario
Last month, the Independent Electricity System Operator (IESO) released the grid-connected 2018 Electricity Data. Under the “Price” heading the IESO said this: “The total cost of power for Class B consumers, representing the combined effect of the HOEP [2.43 cents/kWh] and the GA [9.07cents/kWh] was 11.50 cents/kWh”.
In 2017, that combined price was 11.55 cents/kWh, so there has been a slight decline. That slight decline represents an annual savings to the average household consuming 9,000 kWh per annum of—wait for it—$5.00.
If Bob Chiarelli was still Minister of Energy, he would probably suggest you could now purchase two “Timmies” with that much money!
The price drop isn’t very much but, the question is, how or why did the average price drop?
Ontario’s overall consumption in 2018 increased from 2017 by 5.3 TWh (terawatt hours) or 4%. In 2017 the IESO reported grid-connected consumption was 132.1 TWh and in 2017 it increased to 137.4 TWh. This is increase is a “good thing.” Here’s why:
Curtailed (paid for but not used) wind power fell by 1.207 TWh, which saved around $145 million!
Nuclear maneuvers (steam-off) or shutdowns declined by 791 GWh (gigawatt hours) and saved approximately $60 million.
Net exports (exports less imports) also fell by 2.318 TWh and, combined with the higher HOEP average for the year, saved ratepayers approximately $320 million.
Foregone hydro generation was probably lower as the first three quarters reported by OPG show it dropped from 4.5 TWh to 2.4 TWh (down 2.1 TWh). That saved around $90 million.
Taken together, that $615 million ratepayers had to absorb in 2017 comes to much more than Class B residential ratepayers benefited in 2018. There are only 4,665,000 of them so total net savings was only about $25 million.* Other Class B ratepayers presumably received some very minor benefits, too.
The reason these benefits were not more is because additional costs were levied in 2018, absorbing most of the remaining $590 million. The Ontario Energy Board approved large rate increases for OPG for the regulated hydro and nuclear generation segments. The rates for the latter rose substantially and will also increase further in 2019 and 2020 before falling back in 2021 as the OEB used their power to attempt to “smooth” the nuclear refurbishment costs over several years.
Despite the fact that increased consumption in 2018 helped to, ever so slightly, reduce costs, the IESO continued their efforts to get us to reduce consumption by spending upwards of $350 million on conservation programs.
The small price drop for Class B ratepayers turns the economic law of “supply and demand” which is: increased demand will increase prices. Somehow that law works in reverse in Ontario’s electricity sector!
Enjoy your two extra “Timmies” this year!
*These savings have nothing to do with the 25% reduction under the Fair Hydro Act which eliminated the 8% provincial portion of the HST and provides a 17% reduction for residential ratepayers. The FHA amortized assets over a longer timeframe than normal in the rest of the electricity generation world.
Last week, a news article appeared in the Nation Valley News reporting the local Conservative MPP, Jim McDonell’s response to a question asking on why the government hasn’t cancelled the 100-MW Nation Rise wind power project. Mr. McDonell said, “We’ve always been clear: We would cancel any project we could cancel economically,” and he added “… we just can’t spend a billion dollars to cancel a project and get nothing from it.”
The same day, a press release from the Ford government noted that Premier Doug Ford told people attending the annual Rural Ontario Municipal Association (ROMA) conference, that “We’re lowering electricity costs”
I am at a loss to explain Mr. McDonell’s suggestion that cancellation of the Nation Rise IWT project would cost the same as the McGuinty/Wynne gas plant moves, but that’s what he said. It’s worth a look back at how this power project came into being, as it illustrates the disaster that has been Ontario energy policy for the last 15 years.
The Nation Rise wind project was one of five awarded contracts in March 2016; after that, its history gets really interesting … and very political.
Cost of the project
The Independent Electricity System Operator (IESO) at that time noted the average price for all the projects proposed was $85.90/MWh (or 8.5 cents per kWh). Over 20 years that would produce revenue of about $450 million, or less if their bid was lower than the average..
If the project were cancelled, no court would award them the full contract amount; it is more likely the government would be on the hook for perhaps 5 to10 % of that amount (on the high side).
There is no doubt that cancelling this project would save Ontario citizens hundreds of millions.
Timing of the approval
According to the Environmental Registry the Nation Rise entry for the Renewable Energy Approval or REA is dated May 7, 2018 and indicates it was loaded to the registry May 4, 2018. That is just four days before the writ was drawn up by former Premier Kathleen Wynne, formally announcing the upcoming Ontario election. It was known* the voting date would occur on June 7, yet the REA — a major decision — was given by the Ministry of the Environment and Climate Change (MOECC). At that time, not only were polls forecasting a defeat for the Liberal government, “electricity prices” and hydro bills were a major election issue. The MOECC issued the decision anyway.
Is the power needed?
In 2015 (before the IESO called for more wind power proposals) Ontario had a huge surplus of generation. Our net exports (exports less imports) were 16.8 TWh (terawatt hours) or enough to supply almost 1.9 million average households (over 40% of all Ontario households) with their electricity needs for a full year. It cost ratepayers an average of 10.14 cents/kWh to generate that power which was sold for an average 2.36 cents/kWh, representing a cost of $1.3 billion to Ontario’s ratepayers.
Due to the highly intermittent nature of output from wind turbines, the IESO’s projections of long-term capacity use only 12% of the nameplate capacity for wind power installations when calculating their contribution to overall capacity. So for Nation Rise, the IESO is projecting that the useable contribution of the project will be 105,120 MWh — just .0765% of the IESO’s forecast power consumption of 137.4 TWh. That is a fly on the flank of an elephant, in my estimation.
Cancellation of Nation Rise would not affect the long-term supply of electricity for the people of Ontario.
Worse, adding more capacity, particularly from an intermittent source, could result in more spilling of hydro, more curtailment of wind power generation, additional nuclear shutdowns or steam-off, all of which would drive Ontario’s electricity bills rates higher.
Property value loss
The property losses in value caused by the presence of 33, 650-foot industrial wind power generators throughout the countryside in the Nation Rise project will be in the tens of millions of dollars according to a study which notes: “Using research completed recently by a land economist with the University of Guelph and published in Land Economics, Wind Concerns calculates that overall, the property loss for houses within 5 km of the 33 planned turbines could be $87.8 million. Using other research that is less conservative, however, the property value loss could be more than $140 million.”
A loss of either magnitude would impact North Stormont’s realty tax base leading to either significant drops in revenue for the township or realty tax increases as a multiple of the COL (cost of living).
And then there’s the water
One condition among many in the REA given to EDP/Nation Rise was related to identifying and mapping all water wells in the project area within a set range of any proposed equipment, meteorological tower or wind turbines. This was due to concerns about construction activities on the local aquifer. While EDP identified 444 wells, the community group says there are more than 800 homes within the immediate project. Water wells in other areas of Ontario and elsewhere have become contaminated allegedly due to drilling and vibrations from wind turbines. There is significant concern about contamination of the wells, and the assessment taking place.
North Stormont is dairy farm country, and each farm operation uses thousands of litres of water every day — what would be the effect on these businesses, and Ontario’s food supply, if suddenly, the water wells were not functioning?
Who is EDP?
EDP (parent of EDPR) is a Portuguese utility company partially owned by two of the Chinese government’s companies; China Three Gorges (23.27%) and CNIC Co., Ltd., (4.98%) and the former has been trying for several years to acquire the balance of the shares. That attempt is speculated to be off; however, a recent NY Times article suggested otherwise, based on discussions with Portugal securities regulator CMVM.
Where is democracy?
North Stormont, where the Nation Rise wind project is planned, declared itself an “unwilling host” in 2015, well before the award of the contract or the issuance of the REA. The people perhaps relied on promises made by former energy minister and Ottawa Liberal MPP, Bob Chiarelli, when in 2013 he declared: “It will be virtually impossible for a wind turbine, for example, or a wind project, to go into a community without some significant level of engagement”. Despite their council passing the unwilling host motion, and also joining the 117 Ontario municipalities demanding a return of local land-use planning for energy projects, the IESO still granted Nation Rise the contract.
There are many questions about this project and many reasons why it simply isn’t needed. Cancelling this contentious project is a perfect way to lower future electricity costs, directly.
*The Toronto Star reported in an article dated October 19, 2016 the next Ontario election would be on June 7th, 2018
Texas small town Mayor Dale Ross meets up with reality
In early January I wrote about “virtue signaling” by the mayor of a small Texas city who was wooed by none other than Al Gore because he used “facts” to sign long-term contracts committing his city to purchase 100% renewable energy.
He has had a long hard fall from grace.
Dale Ross set himself up as a “green” hero, and claimed his social media news has been seen by 2.1 billion people around the world. He was even touted as a celebrity and interviewed by CanWEA at their convention last fall.
At the time, I said this about Mr. Ross and his claim to fame:
“This unexpected cost will presumably have a detrimental effect on the services that the city will be able to deliver OR service costs (electricity, water and waste removal) will spike much higher! These are just a couple of ‘facts’ that will make Georgetown’s utility consumers upset.”
Well, it now appears the bad news is out: the city’s ratepayers are facing increases in their electricity bills of more than $1,200 USD per year.
I surmise Mr. Ross will not be greeted warmly by his constituents.
After seven years, the Ontario Energy Board has determined that a move by the McGuinty government to shift the burden of electricity costs to smaller ratepayers was “complicated and non-transparent.” What took them so long to find out that out, when it cost Ontario citizens billions?
Back in 2011, the Dalton McGuinty government introduced the Industrial Conservation Initiative (ICI) with the idea of changing the way Global Adjustment (GA) costs were allocated to different classes of consumers. “The stated purpose of the ICI is to provide large consumers with an incentive to reduce consumption at critical peak demand times. The resulting reductions in peak demand were expected to reduce the need to invest in new peaking generation and imports of electricity from coal-reliant jurisdictions.”
The government had been lobbied hard by the Association of Major Power Consumers of Ontario (AMPCO) who had been feeling the effects of climbing power rates brought on by the Green Energy Act (GEA) and the resulting FIT (feed-in-tariff) contracts for renewable energy (wind and solar).
Needless to say, the Liberal government caved, the ICI was born and officially started September 2011.
Just over a week ago the Ontario Energy Board released a report titled: The Industrial Conservation Initiative: Evaluating its Impact and Potential Alternative Approaches. What struck me immediately was this sentence in the Executive Summary: “In the Panel’s view, the ICI as presently structured is a complicated and non-transparent means of recovering costs, with limited efficiency benefits.”
It took the OEB seven years to come to this conclusion. And they are supposed to be the regulators for the energy sector. Their vision is: “The OEB supports and guides the continuing evolution of the Ontario energy sector by promoting outcomes and innovation that deliver value for all Ontario energy consumers.”
So, it took seven years to determine the ICI wasn’t delivering value?
The ICI was created via a change in the Regulations* and was posted August 27, 2010 on the Environmental Registry with this statement: “As a result of the consultation, there was general agreement that the proposed changes would result in a net benefit to electricity consumers, the electricity system and the broader Ontario economy.”
The new OEB report noted the Class B to Class A shift commencing in 2011 “has shifted nearly $5 billion in electricity costs from larger consumers to smaller ones. In 2017, the ICI shifted $1.2 billion in electricity costs to households and small businesses—nearly four times greater than the amount in 2011.”
Wondering what 2018 would bring in respect to the B to A shift and, knowing IESO now posts both consumption and costs of the GA by customer class on their website, it was worth an exercise to determine if the $1.2 billion shift of 2017 would increase or decrease. Using IESO’s data it appears the subsidy for the first 11 months was about $35.4 million per TWh (terawatt hour). Based on 36.9 TWh consumed by Class A ratepayers the cost shift is $1.306 billion. The 4,665,000 residential ratepayers who use 9 MW of electricity annually will absorb approximately 30% of those costs — in other words, it represents an annual subsidy to Class A customers of almost $100 from each ratepayer.
Small and medium sized businesses will pay a lot more absorbing the remaining 70%, or about $900 million!
Now you know why the price of that hamburger and everything else went up!
Electricity price increases have hit all classes of ratepayers in the province and now that we see the shift of costs, it is helpful to look at the cause!
Renewable energy in the form of wind and solar** power generation has played a big part in rising electricity bills, so it is an interesting exercise to do a simple calculation to determine what wind generation and curtailment have cost in the first 11 months of 2018. My friend, Scott Luft posts actual wind generation and curtailment for grid-connected (TX) and distributor-connected (DX)*** wind. Calculating the TX, wind generated (9.655 TWh) and curtailed (1.940 TWh) for the 11 months indicates costs were $1.305 billion for grid-accepted generation and $230 million for curtailed (paid for but not used) wind.
That brings total costs of intermittent and unreliable wind to more than $1.5 billion. ****
What this simple exercise really does of course is demonstrate how our costs would be much less without intermittent wind power generation, which is produced out-of-phase with demand in Ontario. Considering first-to-the-grid rights for wind power operators means it also results in spillage or waste of hydro (5.9 TWh in 2017) and nuclear steam-off (1 TWh in 2017) and must be backed up with gas generation — all of which we pay for — wind power simply increases our electricity bills without any significant benefit to the environment or power system.
If solar costs were also included in these calculations, we would be in the $3 to 4 billion range.
Short story: Without all that waste, all classes of Ontario ratepayers would have reasonable and cost-competitive electricity rates.
Conclusion The OEB should have stood up for consumers a lot sooner and called out the government for NOT delivering the “outcomes and innovation that deliver[d] value for all Ontario energy consumers.” Instead, the OEB simply watched while billions of dollars were removed from ratepayers’ pockets for foreign-owned wind power developments and stood by for seven years while residential, small and medium sized businesses provided increasing subsidies to large industrial companies for a program “with limited efficiency benefits.”
* Class A was limited to very large consumers with an average monthly peak demand of more than 5 MW (primarily large industrial consumers). Since then, the government has expanded eligibility such that Class A now includes all consumers with an average monthly peak demand of more than 1 MW, as well as consumers in certain manufacturing, industrial and agricultural sectors with an average monthly peak demand of more than 0.5 MW.
**IESO do not disclose solar generation until early the following year ***Estimated for grid connected but generally very close to actual generation.
****Generated wind at $135/MWH and curtailed at $120/MWh.
The quote “A lie told once remains a lie, but a lie told a thousand times becomes the truth” is attributed to Joseph Goebbels, the Minister of Propaganda in Nazi Germany from 1933 to 1945.
Ontarians have been lied to by politicians (although none has held the title “Minister of Propaganda”) particularly related to electricity. Here are some examples.
Job creation Deputy Premier and Minister of Energy and Infrastructure George Smitherman, in a speech to the Toronto Board of Trade February 20, 2009 at the launch of the Green Energy Act had this gem: “Mimicking the impressive employment growth in various European jurisdictions, economic modeling projects that the GEA will create more than 50,000 jobs in the next three years.”
Those jobs never materialized despite repeating that claim (lie?). Instead as electricity costs climbed many good manufacturing jobs were actually lost inOntario.
Low cost renewables Smitherman also made an interesting claim to the Ontario Standing Committee on Estimates on May 27, 2009. He said: “Through our projected investments and expenditures as part of the Green Energy Act, electricity prices are expected to rise approximately 1% annually, on average, over the next 15 years for ratepayers.”
Wow, 1% annually over the next 15 years! What really happened was that at the end of 2008, electricity prices were 5.2 cents/kWh, and by the end of 2017 they were 11.55 cents/kWh for an increase of 122% for residential ratepayers over the nine years. Not quite the 9% increase Smitherman promised (under oath) to the Committee. Needless to say, those claims were repeated over and over again to presumably make us believe it was the truth.
CanWEA’s role One can only assume fabrications like these were developed as part of a communications strategy either by politicians or by stakeholders who stood to reap financial benefits from the passage of the Green Energy Act. The spin by lobbyist and trade association the Canadian Wind Energy Association (CanWEA) and by “environmentalists” has been constant in order to get buy-in from gullible politicians! The spin has been highlighted in the past by many including me. A couple of examples are:
A 2016 Pan Canadian Wind Integration Study (partially funded with tax dollars) in an article titled: Wind power industry claims Canada needs more wind power–with a hefty price tag for electricity customers and more recently another
One titled Wind Power in Panic Mode as a new Ontario Government signaled the end of lucrative wind energy contracts and another more recent one titled
CanWEA’s spin hasn’t stopped as their President Robert Hornung once again is singing the praises of that biased Pan Canadian Study in a recent posting on their website titled: Wind Energy: A Reliable Part of Today’s Energy Mix. Hornung’s article on wind power has Hornung describing it as “low-cost” twice, as “reliable” eight times and he even makes the claim that wind turbines would “help grid operators maintain reliability in the case of system imbalances or emergencies – services wind energy can often supply to the grid more quickly and cost-effectively than conventional generation.”
As if that wasn’t enough of a blatant distortion of reality, Hornung suggests the Pan Canadian “study found that if Alberta increased its wind energy capacity from 1,500 MW to 17,700 MW, reserves would need to increase by only 430 MW or 2.4 per cent of total wind energy capacity. In most of the rest of Canada the percentage would be even lower.”
What he doesn’t mention in the same context is the billions and billions of dollars needed to augment the grid via transmission spending for the many times wind turbines simply don’t generate sufficient power. The net result would mean Alberta and “most of Canada” would need to depend on neighbours to supply them with electricity should the wind be dormant—that would require those major transmission enhancements. As an alternative wind power could be backed up with gas plants as we do in Ontario and as elsewhere around the world.
It certainly appears CanWEA is hoping to convince Premier Notley or her successor that Alberta should believe his spin just as the Ontario government did under former Premiers McGuinty and Wynne. As if Alberta (and Canada) is not suffering enough due to the restricted ability for the province to build even one to pipeline to get a natural resource (oil) to a competitive market.
“Politics preys on people’s naivete,” wrote Bangambiki Habyarimana, in his book Pearls of Eternity.
Many people have taken advantage of Ontarians’ wish to do what’s right for the environment by using “feel good” promises and claims for power and profit.
In the future it is likely those who were preyed upon will realize the benefits promised by wind power proponents was simply “spin” meant to capitalize on their naivete.
Ontario Power Generation (OPG) released its 3rd Quarter report in mid-November, and it was impressive!
Revenue was up $156 million to $1,373 million (+12.8%) and after-tax income was 113% higher, increasing from $131 million to $279 million. For the first nine months of 2018, OPG reports RoE (return on equity) of 10.8% and will easily generate record after-tax profits for the full year of well over $1 billion. Nine-month profits sit at $948 million, up 84% or $433 million—that’s a record.
Revenue is also poised to crack the $5 billion-dollar level (nine-month revenue is $4,062 million) as it has many times in the past; however, after-tax profits have never been this high since the creation of OPG in 1999 when Ontario Hydro was broken up into several different entities.
What’s interesting about those record profits? OPG is record profits despite a substantial decline in generation.
Look at year-end December 31 2000: OPG generated and sold (into the grid) 139.8 TWh (terawatt hours) and earned revenue of $5,978 million for an after-tax profit of $605 million. What that means is, back in 2000, OPG’s approximate cost to generate 1 TWh was $42.7 million (4.3 cents/kWh). In 2018 (so far) the cost has jumped to $74.8 million (7.5 cents/kWh) for the 54.3 TWh delivered in the first 9 months.
The 54.3 TWh delivered so far in 2018 is down from the comparable 2017 period by 1.7 TWh or 3% and from 2000 (9 months) by 49.4 TWh* or 46%! Comparing the first nine months of 2018 to 2000, net income is up $405 million or 74.6%
With such significant drops in generation one would expect net income to drop so what happened?
Some five years ago (December 4, 2013) an article I wrote for Energy Probe was headed up: “OPG-whipping boy for the Ministry of Energy” and it outlined how the GEA (Green Energy Act) had a detrimental effect on OPG’s electricity generation and its revenue, which resulted in declining profits.
I noted how their many “unregulated hydro” assets received only the HOEP (hourly Ontario energy prices) which produced revenue of just over 2 cents/kWh, and how they had been instructed to build “Big Becky” (cost of $1.5 billion) and the Mattagami run-of-river project (cost of $2.6 billion). Falling out of the GEA also was the rise in prices caused by wind and solar generation with first-to-the-grid rights and had resulted in declines in consumption. That meant much of OPG’s power generation was called on less and less.
OPG were also instructed by the Liberal Minister of Energy to convert power plants such as Atikokan and Thunder Bay from coal to biomass and to close the remaining coal-fired plants, one of which required a multi-million dollar write-down for prior expenditures on “scrubbers” to eliminate emissions.
As all this was happening, over the subsequent years, OPG applied for rate increases such as being paid “regulated prices” for all of their hydro assets and for revenue when they were forced to spill hydro. Those were eventually approved along with other increases to cover pension contribution shortfalls, increases in operational management and administrative costs (OMA), and for refurbishment of some nuclear plants.
OPG’s capacity has fallen from 25,800 MW in 2000** to 16,218 MW today, yet in 2000 they generated electricity at a capacity level of almost 62%. So far in 2018, they are operating at a capacity level of just under 51%.
OPG power could have eliminated excessive costs for wind and solar
If OPG were granted the rights to operate at the 62% level of capacity as they did in 2000, they could have generated 65.8 TWh easily, replacing all the generation produced by industrial wind turbines and solar panels. That generation would have resulted in a cost of electricity of less than 7.5 cents/kWh and eliminated the excessive costs for wind and solar under those 20-year contracts!
Today, OPG seems to no longer look like the “whipping boy” but still produces power at prices well below the costs of contracted generation under the GEA and should earn over $1 billion for 2018!
*Enough to power all of Ontario’s 4.9 million households for a full year with over 5 TWh left over. **Staffing levels have dropped from 12,250 (including 650 under contract) in 2000 to 7,700 in 2018 meaning the ratio of employees to capacity has remained static at 2.1 employees per MW.
The Hydro One press release immediately following the decision by the State of Washington’s regulator denying them the right to acquire Avista Corporation was short but expressed “extreme disappointment.”
“TORONTO and SPOKANE, WA, Dec. 5, 2018 /CNW/ – Hydro One Limited (“Hydro One”) (TSX: H) and Avista Corporation (“Avista”) today received a regulatory decision from the Washington Utilities and Transportation Commission (UTC), denying the proposed merger of the two companies. The companies are extremely disappointed in the UTC’s decision, are reviewing the order in detail and will determine the appropriate next steps.”
How did investors view the denial? Avista shareholders were definitely in the “extremely disappointed” crowd as their shares tumbled, but Hydro One investors were probably “extremely happy” as their shares had one of their very best days ever!
Remember, Hydro One offered to purchase Avista shares well over book value and at a high multiple to earnings ratio. While the prior Board of Directors of Hydro One and then CEO Mayo Schmidt, along with Glenn Thibeault, former Minister of Energy, were excited about the offer to purchase Avista, it certainly appears that shareholders weren’t!
Some media blame “political interference” by Premier Ford as the principal reason for the denial! One such individual was quoted in CBC article stating: “Ontario Liberal finance critic Mitzie Hunter said Ford’s “reckless conduct” at Hydro One continues to damage the province’s interests.” Apparently Hydro One’s investors are not buying Mitzie’s claim!
There will, however, be a cost to Hydro One. When the purchase was negotiated, they agreed to a “termination fee” of US$ 103 million (CAD$ 139 million) and will have to pay that to Avista for distribution to their shareholders. Hydro One will also have to unwind foreign exchange forward contracts and accumulated acquisition costs which will be expensed. They also have to deal with the large convertible debenture issue ($1,540 million) which has a 10-year maturity and interest payments above market rates prior to conversion.
I assume we ratepayers will have to sit on the sidelines until Hydro One’s year-end report in early 2019 is issued before we get an estimate on the costs of the denial by the State of Washington’s regulator.
We can then hope our regulator, the Ontario Energy Board (OEB), doesn’t grant a rate increase to Hydro One to cover the costs of their ill-considered attempt to acquire a company 3,200 kilometres away at an inflated price.