Making Electricity Markets Work: The Ontario Industrial Perspective presented to CAMPUT Annual...

Making Electricity Markets Work:

The Ontario Industrial Perspective

presented to

CAMPUT Annual Conference 2005

Mike KuriychukChair, Board of Directors

Association of Major Power Consumers in Ontario (AMPCO)

May 3, 2005

Presentation to CAMPUT 2005 ConferenceMay 3, 2005

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Who is AMPCO?

The collective voice of large industrial electricity consumers Over 60 member companies with total load over 3000 MW

size range: 5 MW to over 250 MW each wide range of industrial sectors

Fundamental goal: to preserve and enhance industrial competitiveness through appropriate electricity policy in Ontario

Activities: provide policy advice to Ontario politicians on electricity issues provide technical and regulatory advice to the Ministries and

electricity organizations such as IESO, OEB, OPA, OPG, Hydro One provide a clearing house for technical and strategic information

among members


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Outline

Attitude of large industry: market vs. regulatory solution

Ontario electricity history from an industrial viewpoint

Elements that create short-term risk in the hybrid market

What should be the ultimate end-state of the system What mechanism can be used to get there


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What industry is seeking

The lowest practical delivered price of electricity, consistent with reliability, power quality, and environmental sustainability

The effects go beyond just an industrial consumer’s bottom line:

Electricity cost escalation in Ontario is adversely affecting profitability, as well as industrial competitiveness, economic diversity, employment, the balance of trade, and the provincial standard of living


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Drivers towards a market solution

Experience with markets for manufactured products and production inputs

Preference for minimum intervention and the freedom to creatively solve problems

Belief in the economic efficiency of competition and choice

Skepticism in the ability of government and its agencies to solve problems

Distrust of political interventions Memory of excesses under the previous, regulated

Ontario system


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Drivers towards a regulated solution

Realization that market dominance in generation has not been resolved and probably will not be, in the short term

Realization that electricity markets have some characteristics that preclude pure competition

Evidence from other jurisdictions that market solutions for generation capacity do not work

Evidence from other jurisdictions that open market regimes do not necessarily result in lower prices

Positive prior experience leveraging industrial capabilities in the regulated Ontario environment, for example, various interruptible rates


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Outcome of this balance of opposing forces

Industry favours open market solutions as the preferred choice, but tempered by practical considerations:

Market solutions where possible, with minimum regulation where necessary


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Electricity history in Ontario through industrial eyes (1)

Relentless cost escalation under former Ontario Hydro regime: went from second-lowest price jurisdiction in Canada to second highest over 15 years

Provincial utility had co-opted its shareholder and its regulator and was effectively out of control

With this history, the breakup of Ontario Hydro and creation of an open market was seen as a welcome change

But there were concerns over: opening the retail market – would unduly complicate the transition decision not to break up OPG into competing companies at the

outset – seen as a compromise and ultimately a problem opening market during a supply shortage – a timing issue


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The market opening process went very well planning, technology, and processes were almost flawless

Short-term price predictability was an operational issue pre-dispatch vs. dispatch prices items hidden in “uplift” (surcharges) Lack of generation transparency

But companies were learning to live with the situation: MPMA/BPPR provided an inherent hedge forward products were available, even though market was thin prices had moderated somewhat in the second year; more

supply was coming on stream from refurbished nukes many companies learned to mitigate risks of the new market


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Intent to further decontrol OPG (the basis of the MPMA) was abandoned, first informally by the PCs, then officially by the Liberals with the creation of the “hybrid” market

Cost overruns on OPG Nuclear are a continuing problem The issue of inadequate new supply needed to be

addressed due to the age of existing generation asset base However, too many decisions are now being driven by

ideology: “coal is bad; natural gas is the answer” “conservation/smart metering/windmills will save the day” insufficient cost/benefit scrutiny of programs, development

processes, renewables technologies


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Risks in the present situation

Coal phase-out will come at the cost of significant price escalation: expect to see additional 20-30% price increase Classical rent-seeking behavior among prospective generators apparent lack of appreciation of the impact of fuel on the

margin --it’s not just an issue of percentage of generation cost escalation may make removal of fixed prices/revenue caps

politically difficult Some moves have been made to limit OPG rate of

return, but upward cost pressure in that organization still needs to be better controlled

Tendency within government and its agencies to adopt solutions with inadequate cost/benefit scrutiny


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Risks in the present situation (cont)

Risk transfer from producers to consumers, through the Net Revenue Requirement with lack of transparency: NRR will be aggregated with other items in the Global Adjustment

Apparent execution issues with the generation RFPs: delays, lack of major players, local opposition some projects don’t fit criteria; additional processes will be needed

Realization in government that socioeconomic disruptions from electricity policy are occurring; uncertainty about what to do about it

Need to address longer term supply-side issues, e.g. next generation nuclear, clean coal, natural gas depletion

“Sovereign risk” (political/regulatory) in Ontario electricity industry is still high by international standards, inhibiting investment


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Desired end-state: principles to follow

A balanced generation portfolio by technology, geography, plant size, ownership, useful life

Market liquidity on both the purchaser and seller side still room for more aggregation on the purchaser side long-term contracts need to play a larger role

Avoidance of risk transfer generation investment and operational risks need to stay with

the generator’s investors Stable policy environment

essential for sound investment planning on both the generator and large consumer sides

Balance of supply-side and demand-side solutions expanded role for industrial Demand Response


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Attention to cost causality avoidance of cross-subsidies between producers and

consumers; between different classes of consumers, etc.

Transparency clear and unambiguous rules disclosure of reasoning for decisions reached opportunity for meaningful input derivation of cost components identified

Desired end-state: principles to follow (cont)


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Some mechanisms to get there

Reconsider the off-coal decision why create additional crises?

Maintain and enhance the life of existing generation assets generally less expensive to maintain than replace will minimize NIMBY and BANANA

Adjust the generation procurement process to include opportunities that did not fit into the previous RFPs examples: industrial cogeneration, district heating establish an “evergreen” or open season process for projects maintain environmental standards and verify proponent

credibility on all proposals avoid arbitrary or ad-hoc solutions


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Some mechanisms to get there (cont)

Monitor and control market power to avoid supra-normal profit levels

Maintain effective regulation of natural monopoly elements

Provide minimum levels of incentives for new generation

Assess the cost implications of fuel choices, technologies, and other concepts and ideas

Adopt the experience and best practices of others


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Conclusions

Original intention to deregulate Ontario electricity market was the right move for its time

Some execution problems got us into the present “hybrid” state

Long-term goal should still be as much competition as possible, tempered by practicality

In the short term, cost escalation is still a major concern and must be controlled by addressing all components

Attention to fundamental principles will help us manage our way through this transition state


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Contact Information:

Mike Kuriychuk, Chairman, Association of Major Power Consumers in Ontario162 Cumberland Street, Suite 305Toronto, ON M5R 3N5

Web Site: www.ampco.org

Direct Line: (807) 475-2432

E-mail: [email protected]

Making Electricity Markets Work: The Ontario Industrial Perspective presented to CAMPUT Annual...

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