Comment on Samsung deal reporting

by The Energy Numbers Guy
Electricity policy is clearly a hot-button issue in the upcoming Ontario election. Sadly and as reported and commented on by Tom Adams, there’s very little to like about the electricity policy planks put forth by the three main parties. Worse, the public is left trying to sift through the policy detritus and has an information deficit. The media, clearly playing a role in filling in the gaps of the average voter, often falls short. An example of this is the Samsung renewable deal, where they will install 2,000 MW of wind turbine projects and 500 MW of photovoltaic solar projects.

In addition to receiving significantly above-market rates for the energy output from these projects and preferential grid access, Samsung will also receive economic adder payments. The Ontario government has always referred to the Net Present Value (also known as NPV — a method of bringing a string of cash flows back to time “zero”, using some discount factor) of the annual incentive payments. Recently, the government announced a reduction in the NPV of the economic adder from $ 437 million to $ 110 million – a reduction of 75%.

The tactic of reducing the economic adder was so artfully confusing that one has to wonder if the Liberal-connected Sutton Strategy Group was involved. The government’s economic adder math is questionable but ultimately the issue is a red herring – a huge distraction. Media outlets like the Toronto Star have provided a big assist through their reporting of the story. At least three times in the past two weeks, Star writers have misrepresented the facts of the Samsung story. Each time they have referred only to the “incentive” (economic adder) payments made over the life of the contract and not to the total additional cost to consumers. In making only reference to the “incentive” payments and not to the true additional cost, they leave readers with the strong impression that the $ 110 million incentive payment over 25 years is the only cost to consumers. Taking these numbers at face value, readers with even rudimentary math skills then conclude this is chump change – less than $ 5 million per year.

Analysis of the deal can be found on the web and anyone with a big–button calculator and knowledge of the deal parameters and scientific notation (because there are a lot of zeros) can do the math.

Making certain assumptions, the annual output from these projects will be a total of 5.9 billion kWh. Given that the original economic adder unit rate was likely 1 cent/kWh, the reduced rate is likely 0.25 cents/kWh, meaning the new, total annual economic adder payment is therefore $ 14.7 million.

Originally, Samsung was to be paid a total blended price of 17.75/kWh. The economic adder reduction of 0.75 cents/kWh then reduced their total blended price 17.0 cents/kWh. This reduction of about 4% is a small price to pay to help insure the future of a deal that is otherwise extremely lucrative for Samsung.

What though is the true impact on Ontario electricity consumers – is it the $ 14.7 million per year economic adder or “incentive” payment ?

No, it’s much, much bigger.

The first clue is that Samsung will be paid a total annual amount of $ 1 BILLION for its output. Given that Ontario has a significant electricity supply surplus and is currently a strong exporter of electricity with little chance for this to change any time soon, most or all of the Samsung output will effectively be exported from the province. Under this scenario, the sale price will be an estimated 3.6 cents/kWh, meaning each kWh will be sold at a loss of 13.4 cents/kWh. Multiply this by 5.9 billion and the annual added cost to consumers is $ 791 million. This cost is 54 times the new economic adder portion and the latter represents only 1.9% of the total additional cost.

So, every time the media report on the Samsung deal and mention only the “incentive” payment, they under-report the total additional cost to consumers by 98% and leave readers with a far more favourable impression of the deal than is deserved.
The alternative generation or sale price of 3.6 cents/kWh is open to challenge. Even if a higher value of 7.0 cents/kWh (the current blended price of contracted and uncontracted supply in Ontario) is used, the annual added cost to consumers is $ 590 million. This cost is 40 times the new economic adder portion and the latter represents only 2.5% of the total additional cost.

Whichever annual cost number one chooses — $ 791 million, $ 590 million or something in between, it’s a heck of a lot bigger than the annual economic adder number of $ 14.7 million.

The public can do without red herrings and deserves better reporting.

9 thoughts on “Comment on Samsung deal reporting

  1. I believe Sutton Strategy Group should read Sussex Strategy Group – a minor point in a excellent article

    • Thanks Tony … just trying to provide a little confusion. 😉

  2. Nice article…
    Here’s a thought I had after reading “The alternative generation or sale price of 3.6 cents/kWh is open to challenge. Even if a higher value of 7.0 cents/kWh (the current blended price of contracted and uncontracted supply in Ontario) is used, the annual added cost to consumers is $ 590 million” … it’s this type of uncertainty that makes people think estimates are like a#…. ah … they are like opinions.
    So here’s a suggestion. Why not get the price of generation from coal-fired generation, maybe with forecasts for pricing (preferably from a group like the US EIA, but if not from the coal lobby).
    The claim that these things are replacing coal keeps being made, so why not use the $29/MWh OPG received for thermal generation over the first half of this year (the average HOEP was $31.52 over the same period – so there isn’t a lot of difference).
    Then you get a price on this deal as an option in replacing coal … and we can also demonstrate at that price we still can’t eliminate coal capacity, but only some coal generation.
    And if we really got into it, you could also get a price on carbon that would justify this Samsung expense, and use that as the expected value a McGuinty government will put on carbon in their carbon tax.

  3. The $ 36/MWh value came from a combination of current forward, one-year prices, for 7 x 24 and 5 x 16. Compared to natural gas at $ 75/MWh and 0.4 tonnes CO2/MWh, the implied carbon price for onshore wind is $ 150/tonne. Compared to natural gas at $ 100/MWh (giving it a generous allowance for when solar is generated), the implied carbon price for large scale solar is $ 860/tonne. As I mentioned in an earlier post on another story, if we had a carbon tax of less than $ 150/tonne, we could stick a fork in renewables (at their current prices) and call them done.

  4. All these numbers and incentives and Net Present Value and economic adder and……. and…….. is making my head hurt. It is a very complex issue. I have trouble comprehending it all AND I very much care, and want to know more about this whole topic. So having said that, the average person in Ontario likely doesn’t care about this topic as much as I do, so if it is too complex to understand people are going to tune it out.

    I read earlier in one of the posting that Hudak is struggling to explain the shortcomings of GEA and green energy in an easy, comprehensive way, etc. People won’t understand the shortcomings until it hits them in the pocketbook within the next year or 2. ‘Cause people may not understand the issues, but OH, Yeah, they will understand that their hydro bill is higher – then SH*T will hit the fan. Then it might be too late. Vote PC.

    • Yes, this is complex. It reminds me of when I took some Tai Chi lessons with an instructor who was a horrible communicator (long story). He did however make an impression on me with his statement that “It’s not fast food”..

      The purpose of the piece is to be different and hopefully credible by showing the details. The pro-green arguments all use the same canards. They try to sound authoritative by making quantitative statements such as “renewable energy will cost …” “a doughnut per month” … “a coffee and doughnut per month” (I do note a trend), etc., while providing absolutely no details of how they arrived at their numbers.

  5. The true cost of the Samsung deal is 54 times as high as what’s being reported in the press.

    Hudak needs to make his message just a tiny bit more complex. Higher bills -> less money in pockets (residential and business) -> less jobs.

    There will be a time lag but given the amount of money flowing outside the province, the jobs lost will likely exceed the jobs added.

  6. OK, here’s my point – and it may not be for broad communication, but maybe there are some points others can make clearer.
    I’ve done an hourly analysis of the 12 months from September 2010 through August 2011 (google spreadsheet at http://tinyurl.com/4yjqtrt ). Ontario only generated 4790 GWh of electricity with coal. The Korean syndicate will create closer to 6000 GWh – so it obviously isn’t all going to replace coal.
    The assumption for your figures on carbon costs is on 1 MW of wind, or solar, replacing 1 MW of coal or gas. Which everybody who looks at it knows is nonsense, but people stumble over quantifying.
    The pricing of what wind is replacing is also probably very wrong because wind doesn’t replace capacity – so the value of what it replaces is not the LUEC figure, but only the fuel figure.

    The review based on 8760 hours with actual capacity figures for wind, a wild guess at solar CFs, and actual hours coal and gas figures gives a much better idea of the cost of the Korean syndicate deal. Assuming 1000MW of gas supply is NUG contracts (being extended), Samsung production could only possible replace 2460GWh of coal production and 2085GWh of gas … 1447 GWh replace other non-emitting sources, or add to exports which will further devalue all exports. They are utterly worthless MWh.
    Estimating $30/MWh just for the fuel costs, which is all it saves, the cost per tonne of CO2 would need to be around $300/tonne.
    If the Samsung deal makes sense, so does a carbon tax of $300/tonne.
    That must be McGuinty’s plan!

    • Scott,

      I agree, it’s nonsense to say wind or solar directly offsets coal or natural gas. It was an error of omission to leave out the statement. The purpose of the $/tonne analysis is to be ultra-conservative. If one uses the arithmetic-average Ontario carbon intensity of 0.12 – 0.15 Tonnes/MWh (reflective certainly of wind displacing ALL generation types), the $/tonne does go up.

      TENG

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