Ontario Hydro’s Most Costly Legacy (Isn’t Darlington)

Of all the generation sources operating substantially unchanged since the days of the old Ontario, which ones are the most costly for consumers today?

Power systems rely on capital-intensive and long-lived assets. To understand a utility’s performance, it is useful to consider trends over long time periods. Ontario Hydro’s monopoly was replaced ten years ago yesterday, initially by a shortly lived competitive electricity market and later replaced by a so-called “hybrid” market of increasing government control. Before the competitive market opened, the provincial government broke up the old Ontario Hydro into five agencies. The transparency benefits of unbundling the old Ontario Hydro is the only important remaining public interest benefit of the reform process that broke up Ontario Hydro.

Most of Ontario Hydro’s generation assets moved to the crown agency, Ontario Power Generation. The Bruce nuclear complex was soon leased from OPG to a consortium of industrial and financial interests. All of Ontario Hydro’s contracted generation, mostly from natural gas-fired generators but also from hydro-electric generators, became the responsibility of the government agency called Ontario Electricity Financial Corporation (OEFC). OEFC also picked up a large piece of the old Hydro’s debt and waste disposal liabilities, most of which was nuclear related. OPG privatized four hydro-electric units capable of modest annual production in a competitive auction in March 2002.

Ontario Hydro’s (now OPG’s) large but rarely used peaking natural gas and oil-fired generator located near Kingston today produces very costly power per unit but the annual output is trivial. Pickering A is also very costly, with most recently reported operating costs alone of $92/MWh, but its costs arise from a refurbishment project that completed in 2005.

Of all the baseload generation once owned or controlled by the former Ontario Hydro, by far the largest consumer burden per unit of production today is from the contracted generation.

Here are some production and revenue figures from four Ontario Hydro-contracted gas-fired or gas/biomass fired generators operated by publicly traded Northland Power and the resulting consumer impact:

Facility Total Revenue ($M) Production (MWh/yr) Consumer Net Cost ($/MWh)
Cochrane Power (35.8 MW CCGT) 34.961 315873 111
Kirkland Lake Power (102MW CCGT) 92.864 806179 115
Iroquois Falls Power (110MW Cogen) 79.303 727670 109
Kingston Cogen LP (110MW formerly Cogen) 93.559 819298 114

The implied capacity factors that these production and capacity figures represent suggest that Northland Power’s gas-fired capacity and gas/biomass capacity is running hard during times when Ontario has surplus power. Because OEFC bears substantial but undisclosed losses disposing of this power, the final delivered cost of power to consumers would be higher than the figures presented here.

Even if we were to assign all of OEFC revenues from the payments-in-lieu from distribution utilities, the Debt Reduction Charge, and the net income of OPG and Hydro One to the cost of the former Ontario Hydro’s nuclear generation including the boondoggle Pickering A station, the consumer costs would be in the range of $80-95/MWh — still below the rate impacts of the NUGs.

Normal utility financial models applied to the natural gas-fired and hydro-electric generators contracted by Ontario Hydro in the late 1980s and early 1990s would have had those facilities generating very cheap power in 2011 and 2012 as the effects of depreciation and declining gas prices rolled in. Instead, the use of back-end loaded financial instruments created a massive liability for consumers and a windfall for a handful of developers.

Northland’s gas-fired contracts originally negotiated with the old Ontario Hydro expire in 2015 and 2017. In a properly functioning and transparent power system, consumers would be expecting relief.

On November 23, 2010, the Minister of Energy directed the OPA to renegotiate the OEFC contracts in advance of their expiry. Northland reports in its 2011 Annual Report that it has commenced the process of engaging with the OPA in pursuit of obtaining new contracts for its owned and managed facilities with OEFC power purchase agreements.

The precedents set by the Ontario government’s Hydro-Electric Contracting Initiative, where secret deals ripped off massive but undocumented consumer value to the benefit of firms like Brookfield, suggests that help is not on the way.

Back-end loaded financial instruments represent a hidden hazard for electricity consumers. Sophisticated financial discounting and escalation clauses in the hands of unsupervised financial engineers negotiating with government monopolies can make good projects into bad ones and can make bad projects appear to be angels for the first few years of service. This is exactly what is happening now with the Muskrat Falls project in Labrador, where the Newfoundland government is trying to use back-end loading to transfer the costs to the profoundly unnecessary and uneconomic project out up to 57 years into the future. Back-end loading is a central feature of the current FIT program and a key reason behind the gold rush attracting international investors now feasting on future Ontario ratepayer dollars.

(The original posting had to be migrated to the new site manually. The comments had to be moved in the post body, but are recorded here faithfully to the original.)

7 Comments

  1. Scott Luft says:

    Thanks Tom – there’s a lot to digest in this.
    Perhaps you could provide an opinion on the Bruce A contracts, and if there were lessons learned there compared to the Pickering refurbishment. While clearly it’s an awkward time (to put it mildly) for new inflexible generation to come online, my understanding is the auditor general did feel these contracts offered much better protection for consumers.

  2. NormRubin says:

    Tom, the metric here is $/MWh, not total impact on our bills, right? I was impressed with SP Stensil’s recent analysis of OEB reports showing that OEB’s nukes are responsible for way more of our rate increases than the FIT renewables. These contracted sources represent much fewer total $, but they hit higher $/MWh, yes? (Need some more coffee. . .)

  3. Bruce Sharp says:

    Not sure if this was the analysis but I did see a Greenpeace blog post, that included this gem:

    Luckily for consumers, however, the Green Energy Act is also designed to reduce prices paid for new wind and solar installations as prices drop due to innovation in the industry. And the government reduced prices paid for renewables earlier this year.

    Too bad the OPA hadn’t blinked and implemented solar price degression … but when the kids said, “We want to eat Count Chocula for every meal”, Jason Chee-Aloy et al. said “Sure, you know what’s best”.

    Here’s the recent work Aegent did for CME and other consumers groups and that was submitted to the OEB.

    http://www.rds.ontarioenergyboard.ca/webdrawer/webdrawer.dll/webdrawer/rec/211562/view/CME_EVD_20100826.PDF

    By the end of 2012, the new GA dollars in 2012 (instantaneous) will be Bruce A = $ 587 million, wind + solar = $ 274 million.

    By the end of 2013, the new GA dollars in 2013 will be Bruce A (added in 2012) = $ 1 million (escalation tempered by higher spot prices), wind + solar = $ 1,011 million.

    By the end of 2016, wind + solar adds a total of $ 3,050 million, to curent wind + solar costs of ~ $ 450 million.

  4. Scott Luft says:

    You need more than coffee Norm. Stencil didn’t do an analysis. He found big numbers and misinterpreted them.
    http://morecoldair.blogspot.ca/2012/05/dead-for-left-greenpeace-has-new-lie.html

  5. Parker says:

    Norm: We kind of know you are not a big fan of nuclear but to brazenly say that SP Stensil’s article “impressed” is over the top. Tabuns will now whisper even more BS in Andrea’s ear. Stenzil conveniently ignores output versus contribution to the GA for wind and nuclear, the effect wind production has on the HOEP-drives down pricing, causes OPG to spill hydro, etc., etc. Don’t give these dolts more ammo!

  6. Quoting Tom Adams: “… Northland Power’s gas-fired capacity and gas/biomass capacity is running hard during times when Ontario has surplus power. Because OEFC bears substantial but undisclosed losses disposing of this power, the final delivered cost of power to consumers would be higher than the figures presented here.”

    Excellent points, Tom. Although people like me, who had attempted to indicate the existence of local public opposition to Northland Power’s proposed “pumped storage” project (as was previously enabled on your site on December 15 2011 herehttp://tomadamsenergy.com/?p=1433 ) had discussed similar points locally, none of us offered such comments online and at that time. Shame on me!

    Although I don’t mean to needlessly expand on the topic of this “Most Costly Legacy” posting, I hope you won’t mind me now pointing out that one of the lingering public beliefs here in Marmora is that this proposed facility would generate electricity only upon IESO direct request and therefore sell it to the grid only during peak requirements.

    This local belief grew its legs from public statements like the following, published in the FAQ that Northland posted on their own website, which was mirrored on the Marmora and Lake municipal promo page – also becoming a “letter to the editor” published in newspapers local to Marmora:
    “…Ontario currently has energy sources such as nuclear, wind and waterpower
    that generate power beyond the grid’s needs at certain times, especially at night. In those
    periods, the independent system operator would signal Marmora to fill the upper reservoir—
    knowing that it is storing power it will need during coming high-demand periods.”

    I have no reason to suspect that these points Tom has made regarding excess to costs to consumers related to Northland’s others facilities would not be equally relevant to its pumped storage plant proposed for construction here in Marmora. In case it is pulled up in a search and because I have linked to it from my own site, I have now also cross-linked an adaptation of this statement as feedback to Tom’s previous posting of December 15 2011.

  7. What’s unfortunate in all the complaining about my blog post above is no one actually refuted what I (or the OEB was saying) was saying. A big portion of *recent* Global Adjustment increases have been caused by the regulated prices given to OPG and Bruce Power.

    What the blog argued was that green energy costs need to be put in context. That’s a fair argument and I haven’t heard any argue against it. As the OEB (not me) said: “The major factors that led to the increase in 2009 were a significant decrease in wholesale electricity price and a higher regulated price paid to OPG.”

    So yes, 45% of increased electricity generatin costs is due to nuclear subsidies. And yes, there other aspects of your bill. That’s a fair statement and important context for public debate. Most comments I’ve seen by green energy critics have not provided such context.

    Another distinction that should be made is between *recent* sources of increased generation costs (as reported by the OEB) and *projected* increases in generation costs. Important to be clear on what you’re saying. My blog was clear that I was referring to the former.

    And when it comes to talking about projections of future generation increases, these should also consider the contribution of nuclear, specifically the Bruce A restart and OPG’s coming rate request. We can assume OPG will ask for more because of the age of its reactors (that’s the trend) and will probably ask for CWIP for the Darlington refurbishment (at least under the GEA you only pay for electricity generated). And yes, with increased renewable power coming online, this will also increase generation costs. Just put it in context.

    And in regard to Bruce prices, these should also mention the increased floor price given to Bruce Power for the Bruce B reactors. This got increased once the over-runs started at Bruce A – another hidden subsidy to the Bruce A restart and contributor to Global Adjustment costs (Under the GEA, operators can’t pass on cost over-runs like this.)

    Ok that’s it.

    You folks are all pretty smart people. You should perhaps tone down your rhetoric. It makes you sound defensive.

    Cheers.

    Shawn-Patrick Stensil, Greenpeace

     

    Post from Scott Luft @ 5:07 May 6

    I provide a link above that shows the lie, or the ignorance, both in your original post, and your claim your post wasn’t refuted.
    The GA is one portion of the bill, and the growth is primarily due to a collapse in the HOEP – and that is a clear market signal that capacity should not be increasing.
    If you claim the GA is the subsidy (and I’ve had an editor do so!), then everything is subsidized and it leads nowhere.  If you look at what generators received for their output, and what it received through both market and global adjustment mechanisms, it’s a much more meaningful determination of which suppliers are subsidized – and by which other suppliers.
    The spreadsheet embedded in http://morecoldair.blogspot.ca/2012/01/sober-look-at-ontarios-2011-electricity.html estimates what revenue gets moved around through the GA mechanism – nuclear production was resold for about$900 million more than the grid paid for it, while wind and solar were resold for about $400 million less.
    This isn’t some weird parlor trick.  If you paid $70/MWh, it would be expected the generators receiving less than that are subsidizing those receiving more.
    You can use my figures to say nuclear was subsidized about $2.4 billion in 2011 – and hydro $180 million, while wind was only subsidized by $422 million.
    I can’t.
    I know it’s untrue.

2 Comments

  1. It is hard to stomach just how far Ontario’s power system has devolved since I started with the OH in the 70s. It was a well run entity for a large corporation. The system will never recover from the mismanagement over the last 40 years by the multitudes of political hacks.

    • For all the deficiencies of both the old Ontario Hydro and the attempt at introducing a competitive market in the period 1997-2002, there used to be a consensus that the purpose of Ontario’s power system was to serve consumers. Now the consumer is off the list of priorities. Instead, the purpose is some kind of “green” economic and social transformation. High prices are obviously not an impediment to government directions. The government and its allies are sure that whatever is going on now is a “success”.

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