Single Buyer and Ontarios Electricity Supply Structure

presented by

Jan Carr, CEO, Ontario Power Authority

to the workshop on

Reforming Electricity Industry in Saudi Arabia

Riyadh, November 6, 2006

Ontario at a Glance
population 12 million
40% of Canada

GDP US$500billion/year
40% of Canada

main industries
mining and forest products automotive parts and assembly financial services
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Ontario Electricity System

31,000 MW
Supply Types by Capacity (MW)
1% 16% 25% 19% 22%
Nuclear

155 TWh
Supply Types by Energy Production (TWh)
8% 1%
Hydroelectric

Coal

20%
Natural Gas/Oil Fired Wind and Biomass

38%

50%

Electricity Use by Sector (TWh)

Residential Commercial Industrial

Electricity Industry Structure

1905 2002
provincial government owned monopoly utility
generation, transmission and rural distribution

300+ municipally owned distribution utilities

2002
restructured to introduce competition provincial utility split into separate companies
generation transmission/rural distribution system operator

all municipal utilities and provincial companies (except system operator) converted to commercial corporations with share capital transmission and distribution prices regulated (by Ontario Energy Board a quasi-judicial tribunal) prices for electricity established in competitive market

Electricity Industry Structure Result

market effectively closed 6 months after it was opened through imposition of a retail price freeze
government reaction to public unrest due to volatile and opaque pricing interests and needs of small retail consumers were ignored in restructuring resulting in them being served directly from the wholesale spot market

2004
passage of additional restructuring legislation
removed price freeze and substituted a price smoothing mechanism for small retail consumers established Ontario Power Authority
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OPA Mandate
long range planning
prepare and keep updated a 20-year plan for generation and transmission

ensure adequate investment in generation

procure generation through contracts (the single buyer aspect)

conservation
procure conservation and demand management promote a culture of conservation

sector evolution
facilitate changes that reduce the dependence on procurement contracts (supply and conservation) i.e. enhance competition

OPA Procurement Processes

OPA procures generation, conservation and demand management
following discussion focuses only on generation procurement

procure only if investment activity is not forthcoming due to action of market forces
buyer of last resort, not first resort

OPA Procurement Processes

3 broad approaches:
Request for Proposals (RFP)
to date has covered gas-fired generation and renewables

Standard Offer Contracts (SOC)

starting November 2006 will initially cover only generation from small renewables projects (less than 10MW)

sole source negotiations

time urgency or unique situations only
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RFP Procurement First Process

3 RFPs within 1 year
2 for renewables 1 for gas-fired generation

rationale - supply/demand imbalance and local transmission constraints

locational credits for projects in constrained areas

evaluation and selection of bids based on:

a targeted maximum capacity cost (gas plants)
bid to a financial contract based on deemed dispatch operating cycle total cost based on proxy for capacity payment, and energy payment project Heat Rate was major driver for energy cost evaluation based on 2 years of historical gas and electricity prices

cost (renewables)
$/MWh for production based on assumed capacity factor

price discontinuity concept

compared ratio between average bid and next highest bid projects priced too far beyond average could be rejected

First RFP Process Lessons Learned

locational credits insufficient to award projects in most critical locations
awarded locations resulted from minimizing other development costs especially natural gas costs

proponents had put limited effort into obtaining land and environmental approvals
resulted in significant construction delays

lack of prequalification process prevented avoiding:

projects in non-preferred locations projects with high probabilities of delays

consumers benefited from low hanging fruit, for example:

grey-market generation equipment locations with simplest gas supply
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RFP Process Next Round

similar process with several refinements:
specified transmission facilities to which plant must connect
in effect, prescribed the general location of acceptable plants

preliminary prequalification round before allowing submission of priced bids

experience of developer community relations management plan and actions to-date
reduce risk of delays from approvals

results very satisfactory but very recent so not fully tested

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RFP Process - Future

procurements to-date have been addressing chronic backlog of new generating capacity needs future procurements will be less urgent and will be based on a long-term power system development plan now being prepared therefore, anticipate future procurements will:
give 12-36 months notice of intent to issue RFP give priority to sites that are more advanced in local and environmental approvals be increasingly specific on required characteristics
base load, intermediate, peaking, high efficiency etc.

parallel electricity sector development efforts by OPA will also reduce level of support and general attractiveness of contract provisions, for example:
increased market-based options for hedging fuel and electricity
development of forward electricity markets

reduced contract term perhaps in the front-end rather than back-end incentive to develop merchant component of plant in conjunction with contracted capacity

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Standard Offer Program

for small scale projects only
10 MW or less must connect to distribution system and not transmission system

intended to reduce disproportionate cost of RFP process for localized generating projects
will be administered by local distribution companies on behalf of OPA

launching in November
no experience to-date very high level of interest
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Standard Offer Contract

initially only available for renewable sources 20 year term but program may be modified (or suspended) for new entrants at any time pricing based on most recent renewables RFP plus:
allowance equivalent to avoided transmission losses allowance for small-scale (as noted from RFP results)

a special incentive rate for solar voltaics has been put in place to determine the value and uptake rate in the Ontario context
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Summary
single buyer negatives
without extraordinary effort, brings neither the precision of a centralized monopoly (match of projects built with system needs) nor the risk transfer of a market based system (contract results in moving risks onto consumers)

single buyer positives

ensures investment happens and therefore useful in situations where:
ensuring supply reliability during the transition toward a competitive electricity structure a competitive electricity structure is not feasible (small or isolated system) and it is desired to use private capital and not public capital
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Appendix: RFP Contract Summary

gas-fired generation:
20-year financial contract gas price risk pass through to buyer deemed dispatch provides financial incentive for operating when market economics so dictate dispatch price determined from heat rate and market price total economics to plant = plants contracted Net Revenue Requirement (proxy for capacity payment)
some or all of economics gained from market buyer tops-up when market economics are insufficient however, Buyer claws-back economics when market economics exceed Net Revenue Requirement

renewables:
20-year physical contract Buyer resells into market no obligation to operate paid only for actual production

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