Ministry of Energy Explaining Rising Gas Plant Costs

This email details the evolution of gas plant costs borne by consumers in Ontario. This document is referred to in today’s Globe and Mail report. Notice the drastic escalation in costs to consumers over successive waves of government contracts. Notice the clear advantage to consumers of competitive procurement.

Subject: FW: Gas plant background information

From: Kett, Jennifer (ENERGY) [mailto:[email protected].ca]
Sent: July 16, 2012 3:48 PM
To: [email protected]
Subject: Gas plant background information


Dear Gallery,


I’ve included some background information you may find helpful on considerations that went in to the negotiation of the long term power purchase agreement (NRR) with Greenfield South:


·         Total costs for relocating the plant is approximately $180 million.

  • That includes costs that cannot be repurposed at the new site, early termination settlement to EIG and additional Mississauga site specific costs


Details on the Net Revenue Requirement

·         The Net Revenue Requirement (the monthly payment used to cover costs to build the plant and the cost to operate the plant) is $12,400 MW/Month.

  • This is lower than the original Greenfield South NRR of $12,900 MW/Month as per the November 2009 contract.
  • Included in the NRR calculation is a $45 million refundable upfront payment from the OPA to Greenfield South to provide cash flow assistance during the development and construction period.  It is repayable over 13 years once the plant begins commercial operation in 2017. The forgone interest on the refundable upfront payment helped to reduce the NRR.
  • Other factors that explain the reduction in the NRR include the repurposing of gas turbines, steam condenser, the step-up transformer ($75.5 million),  and engineering/design work ($10 million).

Capital Cost of Plant

·         Greenfield is responsible for the plant capital costs.

  • A plant of this type would typically cost around $1.2 million per MW, which would total approximately $360 million.  Greenfield is solely responsible for project costs and there is no risk to ratepayers should the company experience cost overruns.
  • The average benchmark NRR for Ontario’s gas fleet is $13,187 MW/Month.
  • Older plants that resulted from a competitive process typically are under $10,000 MW/Month.  Newer plants that were negotiated and procured in a time of shortage tend to be over $15,000 MW/Month.
  • The ratepayer pays no pre-determined rate of return for Greenfield South.  It is up to the proponent to configure the project as they see fit and the rate of return is dependent on whatever their costs are to develop the project and operate the plant.

Additional Information

·         There is no agreement for full government financial backing for the new plant. Our expectation is that Greenfield will be able to secure full financing for development of its plant on its own.  Should Greenfield require assistance in this regard, the government is prepared to consider Greenfield’s request, but again there is no agreement for full financing.

  • As the Minister announced the recommended site is on OPG’s Lambton site. OPG has executed a purchase and sale agreement with Greenfield South Power Corporation on July 9th.  Before the purchase is finalized, a final purchase price will be based on three independent appraisals of the property.  The first will be done by Greenfield, OPG will do the 2nd and the parties will agree together on the 3rd appraiser. A local appraisal provided an initial land valuation of about $500,000. The land will be purchased by Greenfield, with the final price paid to OPG.
  • There is no reason to believe that an alternate site would be required. However, it is possible that for reasons outside anyone’s control (i.e. environmental contamination), Greenfield could be unable to develop at that site. As such the agreement contemplates the possibility of other sites in St. Clair Township. We are confident the plant will be developed at the OPG Lambton site.

Keele Valley Issue

·         To focus on the relocation of the gas plant, the OPA expedited the timeline on resolving that outstanding issue between the OEFC and Eastern Power.

  • The issue related to the Keele Valley NUG contract (landfill gas facility) between OEFC and Eastern Power, a dispute that has been outstanding for approximately 13 years. While not a party in that dispute, OPA felt that expediting resolution of that dispute was a good mechanism since OPA will inherit the NUG contracts from OEFC as they come up for renewal.
  •  OPA agreed to advance $10m to Eastern as a result, with the provision that $4.6m would be refunded to OPA once the issue was settled. The remaining $5.4m was to be repaid immediately if a contract for Keele Valley was renegotiated within 120 days. It was not. The OPA’s expectation is that this amount will be credited against amounts owing under any new contract, the terms of which are to be negotiated.
  • In summary, while a simultaneous consideration, the NUG payment was with respect to resolving a separate electricity contract dispute. As a result, it is the OPA’s view that the $5.4m is not a relocation cost.