Ontario Power Agencies Failing Consumers: Examining the IESO

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 OPA’s board of directors and management are and have been riddled with business and political conflicts of interest, creating a bias against consumers.

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.

18 thoughts on “Ontario Power Agencies Failing Consumers: Examining the IESO

  1. Good job Tom!

    Telling it like it is, but dare I ask what penalty or enforcement is available when the legislated “independence” is demonstrably absent?

  2. Have a question. Does Tom Adams know of any stockholder U.S. electric company that is in the financial mess that Ontario finds itself in with their power provider?

  3. So everyone has to pay for green energy that nobody wants except for the developer and the tax collector. I know why it’s called green energy. It takes everyone’s green money and energy. Why don’t they put solar in everyones back yard? Why build more transmission lines for something no body wants? Wind farms are expensive, not sustainable and bad on the eco-system. What will the impact be on the birds, bats and bugs over time. More transmission lines more stray voltage. I pray the Judge gets this one right. If not the days are short.

  4. RIGHT ON TO SILENCE DOGOOD. it is to bad the Liberal government does not listen to the people of Ontario. They must be making a lot of money for themselves on this or why would they not listen to the people of this Province that they are suppose to take care of????????????????

  5. Tom Adam’s points are well taken. What mystifies me is why we have wind and solar in the first place. There is no rational business case, yet $ billions have been committed. If there’s no rational business case (cost/benefit) then on what basis was this decision made?

    Ross McKitrick makes this point in his presentation “The Case Against The Case Against Conventional Energy.” (link is below) From slide 2 in the presentation:

    A general principle from economics:
    – Force the proponent to clarify what they are concerned about.
    – Presumably we are not interested in wind energy for its own sake.
    – What are you really interested in? – let’s target that directly
    – If it’s air pollution, we regulate air pollution
    – If it’s greenhouse gases, we can regulate GHG’s too
    – If it’s economic growth, we already try to promote that
    – But in none of these cases does the stated concern lead to the conclusion that we should pursue wind energy.

    http://rossmckitrick.weebly.com/uploads/4/8/0/8/4808045/mckitrick_windconference.pdf

  6. “Why don’t they put solar in everyones back yard? ”

    Silence Dogood…

    They ARE! It’s called the “MircoFIT” program!

    Why in hell do you think your electricity rates are skyrocketing – wind turbines?

    Wind is subsidized at about 3.5 times market rates while “MircoFit” solar is subsidized at over 21 times market rates!

    Right now according to the IESO, the market rate for electricity is 3.77 cents/kwh, the “global adjustment” is 4.21 cents/kwh. The “global adjustment” is the subsidy we are paying for all those “private” power contracts over market rates and what we pay so other jurisdictions can get our power at true market rates! Sometimes, like on Jan 1, 2011, this subsidy constitutes more then 100% of the market price for electricity. That’s right, sometimes we PAY to have others take our power!

    Right now, the market price for Ontario consumers is 7.98 cents/kwh. We are paying more then DOUBLE the market rate for electricity!

    If you factor in delivery charges that other jurisdictions who purchase our power DO NOT PAY, we are paying more then FOUR TIMES the market rate for electricity and that is using current market rates before TOU!

    To paraphrase Tom Adams: “We are getting screwed and it is painful!”

    B.B.W.

  7. “What mystifies me is why we have wind and solar in the first place. There is no rational business case, yet $ billions have been committed. If there’s no rational business case (cost/benefit) then on what basis was this decision made?”

    Come on B.O.B, surely you know the answer to that question?

    Seems more to me like we’re just bending over while being conned yet again by another fascist industry in bed with their (our??) government bidders.

    So, and this is to everyone, enough of this “idiot this”, “stupid that”, “what are they thinking”, “doesn’t make sense” crap. In my opinion, we’re being raked over by some very cunning and greedy people. When something on the scale of this, with so much dollars (and more) at stake, defies all logic to any rational person, what else could it be?

    Harse words? Yes. Nothing personal to anybody here…just saying what seems obvious to me.

  8. “What mystifies me is why we have wind and solar in the first place. There is no rational business case, yet $ billions have been committed. If there’s no rational business case (cost/benefit) then on what basis was this decision made?”

    I enquired about cost/benefit studies at the time of the GEA hearings. I seem to recall George Smitherman stating that such studies were not relevant, that the environment was too important to leave strictly to these determinations. He referred to something like social/wellfare analysis to be driving his decisions.

  9. Martin:

    “I seem to recall George Smitherman stating that such studies were not relevant, that the environment was too important to leave strictly to these determinations. He referred to something like social/welfare analysis to be driving his decisions.”

    Right…. which is why after all this social justice and analysis of the social implications we have an energy program that should put the vulnerable on Welfare…

    I remember the phrase “Social Contract…” Now where was that?

    Is that what you wanted to say?

  10. I think you said it much better.

    It is obvious that with respect to industrial wind turbines, if cost/benefit studies were ever undertaken, and I cannot believe that somewhere in the energy bureaucracy they were not, then they were totally ignored by Smitherman and his cabinet colleagues. The wind action policy is strictly about enviromental politics, not economics.

  11. Martin:

    The way you do it is to “plug” the terms of references such that the study MUST produce the desired results. There are lots of ways to do this…

    I have mentioned this one technique before…

    Read and enjoy:
    http://en.wikipedia.org/wiki/Spherical_cow

    “Spherical cow is a metaphor for highly simplified scientific models of reality. The phrase comes from a joke about theoretical physicists:

    Milk production at a dairy farm was low so the farmer wrote to the local university, asking help from academia. A multidisciplinary team of professors was assembled, headed by a theoretical physicist, and two weeks of intensive on-site investigation took place. The scholars then returned to the university, notebooks crammed with data, where the task of writing the report was left to the team leader. Shortly thereafter the farmer received the write-up, and opened it to read on the first line: “Consider a spherical cow in vacuum. . . .”

    Like any mathematical joke, it is told in many variants.

    In Russian, a spherical horse in vacuum from a joke about predicting race results is well known and is widely used common parlance.

    The point of the joke is that physicists will often reduce a problem to its simplest form in order to make calculations more feasible, even though such simplification may hinder the model’s application to reality.”

  12. Yes it is about enviromental politics plus money making for wind and solar developers.

    So far the people involved in enviromentl politics and green energy developers have been able to push this agenda onto people & places that do not want this.

    They were doing just fine until they got to Ontario and to their surprise have encountered intelligent opposition form Ontarians who are onto their green energy scam.

    Ontarians are not going to be forced into energy poverty to satisfy people who are pushing the green energy scam on them.

    Cost analysis is not needed nor wanted when you are pushing a scam onto people.

  13. Wegrait – I take your point about the futility of the “what were they thinking” line of reasoning.

    An in-depth analysis like Tom Adam’s (above) must have taken hours to put together. My post this morning was an attempt to politely point out that he’s wasting his time on all this detail, because the discussion needn’t go beyond pointing out that these things are good for nothing.

    Now you’re telling me that pointing out “they’re good for nothing” is also a waste of time. I’m inclined to agree with you. So now what ?

  14. Tom Adams (as usual) wrote a great article. I have a modest contribution to make — not something of mine — just something I found through a Toronto Star Article…

    Go to the Engineers Without Borders Site
    http://www.ewb.ca/en/whatsnew/publications.html

    Scroll down on that page till you see “2010 Failure Report”

    ************************
    The Star had this to say…
    “Engineers Without Borders is calling on other development aid agencies and NGOs from around the world to publicly admit their failures on a newly launched innovative website.

    The idea came from a broader concept that “failure is only bad when it’s repeated,” explains Ashley Good, managing director of Admittingfailure.com.

    If you talk about failure in an open and transparent way, she added, you can improve the way you do things.

    That’s the whole point of the website: to get those in the development-aid sector to be openly self-critical in an attempt to do things better, she said.”

    ****************

    Why just development aid? Why not Climate Science and Green Energy Science — if there is such a thing! 😉

    Maybe they can start with the Green Groups that support wind turbines, and, the NGO’s that slavishly push solar panels for village roofs… and other silly things…

    Maybe we can think about using the scientific method of always questioning our results, looking for ways to “disprove” our pet theories. That is the path to enlightenment.

    The path of closed ears and minds runs right next to the road paved with good intentions — and the destination is the same.

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