by Tom Adams Tom Adams Energy
Institutional reform is needed in Ontario’s electricity sector so that key public agencies can properly perform their duties serving consumers while balancing the needs of producers.
This essay argues that the Ontario Independent Electricity System Operator (IESO) belongs on the list of key agencies whose inappropriately cozy relationship with government is harming consumers.
Many public agencies must function well for Ontario’s power system to effectively serve consumers. Key ones include:
- Ontario Electricity Financial Corporation (OEFC) that manages the electricity liabilities directly held by the Provincial government,
- Ontario Power Authority (OPA) responsible for long term power system planning and procuring the required resources,
- Ontario Energy Board (OEB) with a broad suite of regulatory duties in the electricity sector including rate setting for transmission, distribution and some generation, agency oversight, market rules appeals, market surveillance, retail commodity price administration, consumer information, licensing market participants, and other duties, and
- The IESO responsible for the reliable operation of Ontario’s power system, creating the market rules, supporting the Market Surveillance Panel, liaising with neighbouring reliability agencies, and other duties.
Whereas my main criticisms of OEFC and the OPA date back to their origins, my criticisms of the OEB and IESO relate to recent actions. I object to the way these organizations have lost track of their obligations to consumers. The politicized policy environment crystallized in the Green Energy Act and decline in the general standards of administrative law, particularly the degraded standards of tenure for heads of administrative agencies, have had a corrosive effect.
OEFC’s standards of reporting leave consumers and taxpayers in the dark . Last year, OEFC took in from consumers $4.6 billion and seems likely continue at that pace into the indefinite future. OEFC holds an inventory of liabilities it pegs at $29.9 billion. OEFC has never disclosed its plans for how its debts and charges are expected to roll out over time.
The expanded Ministerial directive powers contained in the Green Energy Act have moved the OEB away from independence toward being another government department. I have previously criticized the OEB’s decision-making on cost of capital issues as appearing to be unduly coordinated with government policy decisions. I have also criticized the OEB for its recent decision on renewal of the OPA’s license as undermining the significance of license compliance.
Recent statements on behalf of the IESO raise concerns about its current state of independence and its capability to provide trustworthy advice to the public on the consequences of policy initiatives affecting Ontario’s electricity sector.
Paul Murphy, CEO of (IESO), presented a speech to an Ontario Energy Network luncheon on January 11, 2011. Murphy’s speech suggests that the IESO sees itself more as a defender of government policy than as an independent supervisor of the electricity market. For an organization whose prime directive is independent service to the market, this is cause for regret and impetus for reform.
Murphy is one of the most important electricity executives in the province. His position requires that he stay abreast of industry developments. Industry insiders pay close attention to his remarks as a leading indication of where the sector is heading.
Opening with the promise that he would “provide relevant and factual information”, Murphy instead launched into a broad defense of the electricity policy status quo. His defense relied on straw man arguments, claims directly contradicted by his own agency’s analysis, and claims far off the mark of industry developments.
Murphy attacked critics who have raised concerns about wind and solar power’s ability to cut carbon emissions — a key government justification for the lush subsidies directed at these power sources. As wind and solar output increases, Murphy asked rhetorically, “What do these people think is being reduced?” He answered, “Wind and solar doesn’t generally displace other non-carbon sources like nuclear and hydro. It displaced carbon sources like coal and gas.” The only factual support he offered were anecdotal references to two particular recent days of high wind production.
Murphy’s carbon defense of wind and solar power misses key carbon concerns. Rising wind power in Ontario, particularly in 2009 when hydro-electric production was close to normal, contributed to large amounts hydro-electric and nuclear production deliberately wasted. Low water conditions reduced this spill in 2010, but the spilling is forecast to rebound. The IESO staff issued an analysis indicating that on current trends, the available baseload nuclear and hydro-electric generation combined with intermittent wind and solar generation will exceed Ontario’s load approximately 14.5% of the time by 2013. The IESO’s analysis may underestimate the coming waste of non-emitting, low operating cost power generation resources. The analysis did not take into account the outputs of solar generators, cogeneration units that must run, or fossil generators that may be required for reliability purposes.
The claim that wind and solar power displaces carbon-fueled power sources rather than non-carbon-fueled power is most true with respect to short-run system operations when fossil generation is deployed as a marginal generation resource. However, from a long-run power system development perspective, intermittent generation directly competes with baseload generation in meeting consumer needs. Both intermittent and baseload generators produce take-it-or-leave-it electrical energy. These generators are generally not flexible in responding to consumer needs. Curtailing their production to manage excess generation events does almost nothing to reduce ultimate consumer costs. If consumers are to be protected from the consequences of wasteful surplus power, the expected capacity of intermittent and baseload generators should not exceed the expected minimum load of consumers. The more wind and solar Ontario has, the less room we have for nuclear, hydro-electric, and cogeneration.
The efficiency impacts of integrating wind and solar power onto the power grid are a function of the scale of renewable developments, the wider context of electricity demand, the capabilities of other generators and the overall transmission system.
One driver for recent and forecast increases in power prices is the cost of paying utilities, and sometimes industries, in neighbouring provinces and states to dispose of our excess power. This situation has arisen because irresponsible government planners have contracted for excessive amounts of intermittent generation at a time of falling demand and adequate baseload capacity. Government policy has ignored the performance characteristics of baseload and intermittent generation sources that make them alternatives to each other rather than complements.
In some specific conditions on Ontario’s power system, both wind and solar power directly increase fossil generation requirements. One example is on sunny winter afternoons. Ontario’s winter electricity consumption ramps up as evening falls. This is exactly when solar generation declines from its mid-day peak and stops. The combination of falling solar production and rising demand requires that generators deployed to cover the evening ramp up have to idle lower at midday and accelerate faster over the afternoon. Ontario’s hydro-electric resources capable of performing this function are already fully deployed for this purpose. Gas-fired generators will be the main workhorses as a growing solar fleet makes this task ever more challenging. The unfavourable duty cycle of these gas generators will reduce their efficiency.
Another carbon concern with respect to wind and solar power is the impact of their poorly predictable, highly intermittent output. As wind and solar grow in importance, the utilization patterns for all other forms of generation in Ontario will be impacted, particularly gas-fired generators. Fast up and down ramps will be required on short notice, again reducing efficiency.
These operational realites are not presented to argue that wind and solar have no emission benefits. Wind and solar will reduce the use of fossil generation in some circumstances, but the net effect, particularly the net effects of increments of renewable capacity, deserves careful study. Ontario is almost certainly already passed the point where incremental wind and solar contracts will have a significant impact on near term carbon emissions. Without using system simulations, there is no way to accurately estimate how much carbon reduction Ontario’s higher rates are buying, much less how the carbon profile of the power system would change by spending more or less on renewable subsidies.
The overall grid integration implications of wind and solar power should be studied by Ontario’s official electricity planning agencies – the IESO and the Ontario Power Authority. The main published analysis on grid reliability issues associated with the integration of wind power in Ontario was research commissioned by the IESO and published in 2008. The companies selected to do the work had direct interests in the expansion of wind investments. General Electric, the main contractor, has since admitted to major errors in its work.
The implications of wind and solar should have been thoroughly studied before Ontario entered into supply contracts worth tens of billions of dollars. Because of the unique characteristics of Ontario’s generation fleet, lessons from other jurisdictions are not easily imported. This difficult analytical work must be done reflecting local conditions. The technical basis for this analysis was readily available not less than five years ago and probably much earlier. Instead of studying the key renewable energy issues in a timely way, the work is now just beginning in earnest after the horses have run from the ratepayer’s barn. By its selection of conflicted analysts to perform the 2008 work, the IESO introduced uncertainty into the reliability of the results. Murphy’s speech raises new questions about how reliable further analysis overseen by the IESO will be.
On the subject of power rates, Murphy presents rate increases as unavoidable and continent-wide. He stated, “another claim being perpetuated is that Ontario energy prices are now through the roof and are the highest in North America. This claim troubles me a lot.” Although our current rate trajectory will move Ontario’s power rates to the top end of the scale in North America, no informed critic could assert that Ontario’s power prices are now even close to the highest in North America.
As for Murphy’s claim that everyone should expect higher power prices, the U.S. government’s respected Energy Information Administration forecasts that residential power prices in the U.S. will decline at an average annual rate of 0.2% over the next 25 years after taking into account inflation.
In reflecting on how Murphy could be unaware of electricity price trends in the U.S., consider how deeply Ontario’s power system and the IESO specifically are embedded in U.S. electricity affairs. The IESO and its predecessors have been a prominent members for decades of the Northeast Power Coordinating Committee and the North America Electric Reliability Corporation — major U.S.-based electricity agencies. Murphy has held high positions in both organizations.
Murphy sought to downplay concerns over power prices by noting that power rates have only increased by 30% over the last 15 years. Comparing the overall normalized revenues, not including sales tax, by Ontario distribution utilities in 1996 and 2009, this observation is approximately correct. However, Murphy’s comments ignore the most serious rate concern which is the trajectory over the foreseeable future.
Household power costs rose more than 10% in 2010 not taking into account the increase due to a change in sales tax. The Ontario government’s Long Term Energy Plan includes a forecast that residential rates will rise a further 46% by 2015.
Much of Ontario’s current rate increase trajectory could have been avoided had the Ontario government prioritized in the interests of consumers. The burden on Ontario consumers of costly surplus generation was imprudently incurred as a result of acquiring excessive amounts of short lead time, intermittent generation resources during a period of ample baseload generation. As Ontario’s contrasting experience between the costs of competitively vs. non-competitively procured wind generation resources demonstrates, a substantial fraction of the cost of the current feed-in tariff (FIT) program are utterly unnecessary, even assuming the currently contracted capacity of FIT wind projects is needed. Wind power costs were as much as 36% lower when the provincial government contracted for wind power using competitive auctions as compared to the lowest of current FIT wind prices.
According to its legislative mandate set down in Ontario’s Electricity Act, the IESO is required “to collect and provide to the OPA and the public information relating to the current and short-term electricity needs of Ontario and the adequacy and reliability of the integrated power system to meet those needs.” The government of the day would always prefer endorsement and comfort from its agencies. However, as its name says, the legislation requires the Independent Electricity System Operator to be independent.
Ontario electricity consumers need a fully functional and trustworthy IESO. Murphy’s speech indicates that consumers need a newly strengthened and fully independent IESO.