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.