Renewable energy consultant, Jon Kieran, is back, this time presenting a solid, practical and immediate initiative to prune long-term power costs in Ontario.
Jon’s previous guest posts on TAE are here and here. Although an elected member of the Canadian Solar Industries Association (CanSIA), Mr. Kieran has arrived at these whistle-blowing views on his own.
Mr. Kieran’s new post represents a counterpoint to the recently restated opinions of Lawrence Solomon in the National Post promoting the idea that the Ontario government should selectively abrogate certain power contracts. I commented on what I consider to be the irresponsibility of Solomon’s proposal when he first published it in the Post in 2010. Since that time, general two election results have favoured the party committing Ontario to the contracts Solomon attacks as illegitimate, a factor I believe weakens an already weak argument.
“HEY, LONG-SUFFERING ELECTRICITY CUSTOMERS: IF YOU WANT TO SAVE A BILLION DOLLARS, TELL YOUR MPP TO TERMINATE LRP 1. BUT ACT NOW!”
By Jon W. Kieran
October was a wake-up call for Ontario electricity customers figuring out how to pay their new monthly hydro bill (which costs about the same as two months’ billing less than eight years ago). The news this month has been all bad.
First, an October 13 NAFTA tribunal ruling confirmed we’ll be forking out $28 million to pay for the government’s 2011 decision to cancel a 300 MW offshore wind project. Next, we learned from the American wind company filing the complaint that the tribunal still considers Ontario’s original contract to be valid – and the developer has every intention of building the project.
The horrifying prospect of another 300 MW of unneeded wind energy in Ontario was momentarily delayed by a feel-good news conference in which Premier Wynne announced that Quebec will sell us up to 2 TWh of electricity during the next seven years. It didn’t feel so good when the premier refused to disclose what price Ontarians will pay for the electricity. Effectively positioning the agreement as an electricity storage opportunity to reduce gas generation, the premier bragged that it will save $70 million over the seven-year period.
Easy come, easy go. The next day an accounting error at the IESO was revealed that will cost Ontario electricity customers an additional $80 million in funding of the system operator – wiping out in one day more than all of the “expected” savings from the Quebec contract to 2022. The costs relate to higher pension obligations to be paid at the IESO, including, one assumes, to the 489 employees who made Ontario’s 2015 Sunshine List of salaries and benefits over $100,000. [Memo to self: how many additional employees does it take to enable the system operator to psychically endure regular interference from the Minister of Energy’s Office?!…].
The high price of Liberal blunders is hardly newsworthy in Ontario, and $80 million – or even $80 million + $28 million – is a drop in the bucket compared to the $1.1 billion in incremental cost that was bled from electricity customers after two gas plants were cancelled and recontracted at more costly locations in 2010. For most Ontario citizens, these wasted billions only fuel voter angst and outrage. Let’s face it, political motivations have underpinned all of these sudden cancellations.
Fast forward to today, and Kathleen Wynne is delaying cancellation of yet another procurement program that no sensible electricity customer in Ontario wants to see finished (except perhaps for the few dozen employees of the large renewable companies who were recently offered contracts). This program is the first phase of the Large Renewable Procurement (known as “LRP 1”).
Many voters will know that the second phase, LRP 2, was canceled with great fanfare in late September. Energy Minister Glenn Thibeault indicated that the “suspension” of the 1,000 MW procurement in LRP 2 would save Ontario $3.8 billion with no cancellation penalties. But what most electricity customers don’t realize is that the 455 MW LRP 1 procurement has just started to get underway, and is also a prime candidate for similar termination.
The case for cancelling LRP 1 is well documented. Ontario is facing an historic electricity surplus, while annual customer demand in 2016 is staying in its 11-year slump. Given system projection models that show 30% of monthly wind production is already being stranded in Ontario during low-demand periods, it’s possible that most of LRP 1’s 300 MW of wind capacity will be wasted for years after it comes into service (assumed to be in the last quarter of 2018).
One simple question should be on the minds of all Ontarians struggling to pay their hydro bills: if the government follows its own lead on cancelling LRP 2 – and makes the same decision for LRP 1 – will electricity customers be on the hook for power plant cancellation costs?!
There’s reason for hope, but there’s also a real incentive to act before it’s too late! Ontarians should be telling their MPP to terminate LRP 1 now, with a high degree of confidence that cancellation charges would be a fraction of the amounts that resulted from termination of the gas plants. This view is based on the three key facts:
Timing – Unlike the gas plants and the offshore wind project, LRP 1 is still in its formative stages. Contracts for the 18 awarded projects were only signed six months ago, and no significant construction work is allowed to begin for at least another 12-14 months.
Consistency – If the LRP 1 cancellation applied to all 455 MW of awarded technologies – wind, solar and hydro– no one technology would be disadvantaged over another. The government’s decision in 2010 to cancel only offshore wind projects while maintaining onshore wind and other technologies, may have been a factor in the NAFTA tribunal ruling.
Early Termination in the IESO Contract Template – It’s well known the IESO published an advantageous voluntary termination clause in the LRP 1 contract template on July 31, 2015, just one month prior to receipt of all bids. The IESO finalized the contract earlier this spring with developers who were awarded projects – but these signed agreements were not published. Unless the IESO choked on the original termination terms, the 2015 contract template included a crystal clear “Optional Termination” clause for the benefit of the IESO – and Ontario electricity customers. Section 9.6(j) stated that if the IESO elects an Optional Termination prior to the date when a project investor confirms it has achieved “Key Development Milestones” (i.e. documented receipt of a wires connection, project permits and a funded financing plan), the IESO may terminate the contract and must only pay the developer “Pre-Construction Development Costs”.
If the government cancelled LRP 1 tomorrow, Pre-Construction Development Costs would be limited to the typical early “development expenses” associated with a renewable energy project: securing the land lease, conducting the bid process, negotiating the contract and undertaking preliminary site due diligence. These amounts are a fraction of the $1+ billion that will be spent in 2018 by developers on materials, labour, turbines, concrete, wiring, inverters, substations, etc., once they have achieved Key Development Milestones.
The time to cancel LRP 1 is now. Don’t wait until 2018; it will be too late! Although Ontario electricity customers will wince at the burden of modest LRP 1 termination charges today, these amounts will be tiny in comparison to the higher hydro bills that we will endure over the next 20 years if LRP 1’s unneeded mega projects are built and we end up having to pay for electricity that is mostly unneeded.