Guest Post: Responsible Ontario Power Cost Control

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.

10 Comments

  1. Tom, in your Dec 13/2010 piece you said: “During the gas price spikes of 2005 and 2008, the cost of natural gas-fired power in Ontario was far higher than the prices the Ontario government is now agreeing to pay land-based wind generators…Today, the delivered cost of power to consumers from the Pickering A reactors far exceeds the prices paid to land-based wind producers…”

    Be that as it may, the big difference is that solar and wind renewables are totally useless, unreliable, destructive to the environment and communities, and the little bit of power they manage to produce is not needed, whereas with gas and nuclear none of these things are true. Therefore, I think that all wind and solar contracts should be axed forthwith.

  2. Thanks Carmen,

    Please give me an opportunity to be the first to respond to your comment. Tom may also wish to reply…

    First things first. No amount of citizen outrage to the outcome of renewable procurement in Ontario will change an unchangable fact: the rule of law applies in Ontario, and signatories to a valid power purchase contract have enforceable rights in Ontario courts.

    When I hear calls for the unilateral termination of contracts — my reflex is to reach for my wallet. Because I know that after years of lucrative litigation for a bunch of corporate lawyers, the developers who signed these contracts are going to prevail in court. As electricity customers, we’re gonna pay. Either way.

    That’s why my column aimed at a practical, achievable result: early termination of LRP 1. If we succeeded in getting LRP 1 terminated anytime soon, the total cost to Ontario customers might be in the many millions of dollars. Ouch. I get it. BUT — if LRP 1 proceeds anywhere close to the construction stage during the next 12-18 months, the cost to customers will exceed a BILLION DOLLARS.

    Choose your poison. My advice is — save a billion! In other words, let’s focus on what’s practical and sensible for Ontario electricity customers.

    Truth is, I’m just as frustrated as you.

    But I know that opponents to the goverment’s renewable energy fiasco are far more threatening to Kathleen Wynne when we offer practical, achievable ways to reduce cost burdens going forward.

    Best,

    Jon

  3. Thanks Jon. I agree that early termination of LRP 1 is a sensible, logical, practical, feasible idea, and further, a there should also be a total cessation of any plans to install any of the useless wind or solar factories in the future.

    As for the rule of law, if what I’ve been reading is correct, an act of the Ontario legislature could end the current contracts. It is within the power of the government to do that, apparently, and therefore would be deemed legal (of course, we need a change in government for that to happen). Not nice for the contract holders, but considering that no cost-benefit analysis has ever been done with respect to wind and solar, and that the wind factories were brutally forced down the throats of rural dwellers, whose democratic rights to have a say were abrogated by the draconian Green Energy Act, I think such a remedy would be morally and ethically “the right thing to do.”

  4. Jon is convinced that if the provincial government breaks power generation contracts that therefore the generators will prevail in court and be fully compensated for any loss. I am not certain Jon’s assumption on this point is so sure-fire, although the Windstream case has established that some substantial compensation might arise from breaking some contacts.

    In a paper I wrote with Ross McKitrick in 2014, we discussed the treatment of existing contacts at some length. Part of that discussion was:

    Another approach proposed for mitigating excessive costs to ratepayers
    is to investigate cases where the business arrangements to procure high cost
    supply may have arisen in circumstances where competitive pressures were
    diminished and consumer interests may therefore not have been adequately
    protected. Of particular interest is the case of Samsung’s wind and solar contracts,
    which were a sole-sourced procurement estimated to cost each Ontario
    resident $1,400 directly without considering indirect effects in its original
    form. The counterargument to cancelling existing contracts through legislative
    measures is that it risks turning off future investors in the same types
    of projects. But when the contracts were so badly conceived and costly to
    taxpayers, creating disincentives against future such contracts is potentially
    a positive side-effect. Some of Samsung’s wind developments are still pending
    and have been locally opposed, both factors that might be considered in
    efforts to mitigate future ratepayer exposure.

    A moratorium on new solar projects can be implemented immediately.
    As with wind procurement, legislation can be used to tear up solar FIT
    contracts, requiring solar providers thereafter to compete on the wholesale
    market.

    (ref: https://www.fraserinstitute.org/sites/default/files/what-goes-up-ontarios-soaring-electricity-prices-and-how-to-get-them-down.pdf)

    Leaving aside the legality of abrogating contacts, a consideration that weighs on me is the mob rule flavour of selectively ripping up some government contracts.

    There many positive actions that can be taken now to contain power rates immediately, reduce rates in the longer term and enhance the transparency of the power system. Jon has laid out beautifully a high benefit/low cost exit strategy for LRP 1.

    For another example, the government should immediately cancel FIT 5. Those contracts haven’t been signed yet so I would expect that the cancellation would be pure benefit and no cost to ratepayers.

    And another thing, the government should simply cancel the conservation con immediately. Right now the function of conservation programs is to market the government’s rate increases. Subsidizing conservation while we also subsidized exports of power and pay generators undisclosed amounts to not generate power is obscene. Cutting junk conservation programs could provide rate relief in the order of $400 million to $600 million per year starting now and stretching out to 2020. Except for bloviating hot air blasters like Dianne Saxe, few people are sucked in by those junk conservation programs.

    On transparency, some of my concerns include disclosure of payments to generators to not generate, investigation of the amount of capacity installed and under development on customer premises for the purpose of bypassing Global Adjustment, and disclosure of OEFC’s historic and current plans for debt repayment. The government either has, or ought to have, all of these readily available.

    Solomon is an articulate advocate for abrogating contracts. If he knew how many easy options we have to make the situation dramatically better immediately, he might have said instead, let’s do the easy stuff first and then wrestle with the difficult questions of how to treat existing contracts later.

  5. Carmen/Tom,

    We agree on the cost pressures caused by unneeded renewable energy procurement in Ontario, and the urgency of terminating procurement for projects that have either not contractually achieved critical milestone dates (i.e. typically “Notice to Proceed” or “Key Development Milestones”) or passed beyond deadlines contractually imposed by the IESO.

    BUT — I will resist with the full force of my common sense, my wallet, my ethics and my concerns about future investment in Ontario any attempts to abrogate legal contracts, rebuild coal in Ontario and/or betray the provincial economy into taking a poison pill.

    Yes, the Legislature may pass any act it wants, at any time, and such legislation may unilaterally revoke contracts in which the Province is a counterparty. But to confuse that temper tantrum with simply walking away from a contract is — respectfully — not the way our legal system works in Ontario. The owners of those projects have legal recourse, and electricity customers should prepare themselves that such a political stunt will result in a commercial settlement awarding equivalent damages to the owners. Need I mention recent findings in favour of the Mississauga and Oakville gas plants, and Windstream?

    I’m an electricity customer. I pay my bill every month now. I’ve already been aggrieved by how badly Kathleen Wynne mismanages implementation of renewable energy procurement. Please let’s not make my financial burdens any worse by inviting litigation from a bunch of well heeled, American-run energy behemoths…

  6. One suggestion I have in respect to the existing wind contracts is to change the regulations so that they are paid on the same basis ratepayers are charged. They should be paid for when the generation is delivered at different rates based on time-of-use generation. Pay them the highest price for delivering during on-peak hours and the lowest for off-peak hours. Average the pricing so that it still conforms to the value of the contracts which pay them the average of 13.5 cents per kWh delivered instead of the full price for delivering the power during off-peak hours. That might mean paying them upwards of 25 cents during on-peak but only 9 cents during off-peak. Much of the IWT generation is now delivered in the middle of the night when its not needed. The same concept should be applied to curtailed generation. This is something that may be easily changed without impacting the contracts resulting in lawsuits and should be examined by the lawyers who drafted the contracts.

    I also believe that many of the wind contracts could be challenged on the basis of harm to nature in respect to allowed carnage of birds and bats at risk. The regulations for carcass searches are now confined to a small search area surrounding the towers resulting in false counts meaning the turbines are not shut down during migration periods. In other words MOECC is lax in both handing out the REAs and in monitoring the wind developments once they commence operation. Appropriate fines should also be set.

  7. Perhaps the contracts that windmill companies have with our governments should be regarded as “void ab initio”?

    During development and subsequently, developers said that projects were “safe” and would not cause harm to nearby residents.

    However, Ontario goverment commissioned expert, Mr. Brian Howe, a licensed professional engineer, advised Ontario in his commissioned report, “Low Frequency Noise and Infrasound Associated with Wind Turbine Generator Systems: A Literature Review:”

    “The audible sound from wind turbines, at the levels experienced at typical receptor distances in Ontario, is nonetheless expected to result in a non-trivial percentage of persons being highly annoyed. As with sounds from many sources, research has shown that annoyance associated with sound from wind turbines can be expected to contribute to stress related health impacts in some persons.”

    (This report was first provided to the Ontario government in late 2010, suppressed throughout the Erickson ERT hearing, and finally released to the public in late 2011.)

    “Annoyance” in this context is a serious situation. Attempts to characterize it as a purely psychologically-derived adverse effect ignore the physical “sensation” that is reported by people around the world including Ontario Ministry of the Environment badge-carrying officers, the overwhelming infrasound and low frequency components of wind turbine noise emissions, the amplitude modulation characteristic of the noise emissions that Ontario regulators have neglected to account for, etc.

    I ask that all readers empathize with victims who report being negatively affected by wind turbine projects operating under contracts which were written on the premise that the projects would not cause harm. Sleep deprivation is torture. Just think about if it was your mother, or your children, or your grandchildren being harmed.

    In contract law, a person cannot rely on false information to get a contract or else it could be considered void. To uphold the integrity of our legal system we must respect this fundamental element of contract law.

  8. Carmen says: “Be that as it may, the big difference is that solar and wind renewables are totally useless, unreliable, destructive to the environment and communities, and the little bit of power they manage to produce is not needed, whereas with gas and nuclear none of these things are true.”

    You appear to be starting from incorrect assumptions.

    Reliability: Solar and wind cannot be turned on when you need them. Nuclear cannot be turned off when you don’t need it. Which is more of a problem? Neither is dispatchable. Only gas is dispatchable, but at high cost.

    Environment: Wind produces noise pollution and kills birds. Solar has minimal environmental impacts. Nuclear creates waste that will still be a problem for thousands of years. Gas produces greenhouse gasses. Which is worse? My money says wind and solar are the preferred options for the environment.

    Communities: Gas creates jobs in Alberta and the northern US. Nuclear creates boom and bust jobs in one or two communities, none elsewhere. Wind and solar create local jobs throughout Ontario. In addition, wind provides supplementary income to family farms that are otherwise at risk of losing their land. Again, who wins here?

    Power Not Needed: The vast bulk of the surplus power we have in Ontario is called surplus baseload generation (SBG), and it arises because the nuclear stations have to keep running, even when we don’t need the power. Wind and solar don’t always track load, but they are less of an SBG problem than nuclear.

    What is the best solution? Of course it is complicated, but the fundamentals of wind and solar are better. They harness the natural forces of nature, a literally endless supply, and inherently not harmful. Do we have to do more work to optimize these choices? Of course. But comparing them to burning fossil fuels, or unleashing dangerously radioactive substances that we know we can’t really control, wind and solar clearly win.

    • Nuclear is somewhat dispatchable. For example, maintenance outages are often planned for seasonal demand lows and weekends.

      Regarding the tradeoff between carbon abatement vs. cost, how much of a penalty should consumers bear go fossil fuel free? Ontario has slashed fossil emissions in the power sector from 35 MTCO2E in 2005 to 5 MTCO2E now. Nuclear output was fairly steady over the period, ranging from about 50% of overall supply to 62%. Meanwhile, our average cost per unit of energy (as measured by inflation-adjusted Revenue Requirement divided by TWh of sales) has increased by about 50%. For me, that is too much pain for too little gain, but you might have different views.

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