10)ontario s global adjustment out of market, out of touch by Energy Matters Summit

Ontario’s Global Adjustment: “Out of Market, Out of Touch”

Peel Region Energy Matters Summit May 2, 2011

Direct Energy in Ontario    

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Entered the Ontario market in August 2000 Employs over 1000 people in Ontario Invested over $5 billion in North America Serves over 40% of all households in Ontario, with electricity and natural gas commodity and/or energy efficiency products and services Helps consumers use energy wisely by installing thousands of high efficiency furnaces, air conditioners and water heaters Offers consumers the ability to make their energy consumption “green” Offers choice to consumers through various pricing plan options Offers energy solutions to Ontario companies through DEBS business unit

The Ontario Market  Few industry participants believe the current Ontario wholesale electricity market structure is economically sound and sustainable  Need to find a way to incorporate the full cost of electricity into the Hourly Ontario Energy Price in a fair, transparent and cost effective manner that is understandable by all market participants  The “out of market” Global Adjustment is not working How do we transition from the current situation to a market based solution, where true costs are reflected in the electricity price?

The Global Adjustment      

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Introduced in 2004 (originally the “provincial benefit”) Out of market price settlement mechanism Used to settle the difference between the wholesale market price and the cost of contracted or regulated generation Introduced with the goal of providing a natural price hedge against volatile market pricing for contracted and regulated generation Paid for by electricity users in Ontario, not exporters Supply settled through the GA has gone from 11,000MW when it was introduced to 23,000MW at the end of 2010 – This represents almost 2/3 of Ontario’s installed capacity – The LTEP may add an additional 15,500 MW of additional capacity on government contracts by 2030 (Excluding coal phase-out and nuclear refurbishment)

$3.8 Billion in 2010 and estimated to be closer to $5 Billion in 2011 as new FIT contracts come online

Excerpts from the OEA’s: A Blueprint for Energy Policy in Ontario  “Government should review electricity pricing to make electricity costs more transparent to consumers and to align the role of price in signaling consumption and conservation.”  Future energy programs should be cost-effective over the long term. In its long-term planning, government should be mindful of impacts on energy bills.”  “In addition to concern about rising electricity prices, many consumers – including families, small businesses and industrial consumers – find electricity prices increasingly complex and difficult to understand, especially the Global Adjustment.”

IESO Goals  The IESO has created a Market Roadmap Forum: “ Issues driving the need for a review of Ontario’s market strategy include: the complexity of our current market; the need to better integrate contract, market and operational drivers; the role and value of the market and the role of efficient pricing, both generally and in light of developments such as smart grid-enabled demand response; and the importance to Ontario of market co-ordination with surrounding jurisdictions.”

Recent Headlines in the News  We're paying others to use our electricity – again http://www.moneyville.ca/article/973579--ontario-power-prices-go-below-zero?bn=1

 Analysis: No One Satisfied with Ontario Energy Policy http://www.nationalpost.com/news/Analysis+satisfied+with+Ontario+energy+policy/4321990/story.html

 Waking Up From the Eco-Dream ttp://www.nationalpost.com/news/Waking+from+dream/4283411/story.html

 Doubts Cloud Ontario’s Green Plan http://www.nationalpost.com/news/Doubts+cloud+Ontario+green+plan/4234415/story.html

 Temporary Green Policies Leave Businesses in Limbo http://www.theglobeandmail.com/report-on-business/industry-news/energy-and-resources/temporary-green-

policies-leave-businesses-in-limbo/article1954145

There is significant confusion and growing concern in the marketplace !!

Why is the Global Adjustment so High?  High fixed price contracts combined with low gas prices  Design of FIT contracts provides for a flat contract price  Low HOEP creates a wider gap between the HOEP and contract prices – Baseload supply surplus – too much generation – Gas prices are relatively low  Exporters take power from the grid but do not pay the Global Adjustment. In 2010, Ontario consumers subsidized exporters by over $450 million (Gross export volume X Global Adjustment)

Market Pricing

Why is this Problem Only Getting Worse?  More contracted generation coming online – FIT Contracts – LTEP call for 10,700 MW wind & solar by 2030

 Bruce 1 and 2 units coming back after being refurbished will add to the baseload generation  Will Ontario one day have a negative HOEP with all of the energy costs flowing through the GA?

Current Reserve Margin 2010 Installed Capacity

35,138

Peak Demand

25,063

Reserve Margin (MW)

11,675

Reserve Margin (%)

40.19

 “Normal” reserve margin is 15 - 20%. Well below current and projected actual levels  Ontario has too much capacity – and Ontario ratepayers are paying the price for this over-insurance  Significant over-supply of baseload power as well

Why the Current GA Structure is Problematic for Wholesalers  Excessive generation capacity  Lack of transparency for market participants  General unease with the market caused by inconsistent government involvement  No incentive to build any new generation if there is no contract in place

Why the Current GA Structure is Problematic for the Retail Market  Wholesale market price signal is not sufficiently reflected in retail prices – GA is charged on a monthly lagged basis so load cannot respond – Total energy price is not reflective of the cost to produce

 Global Adjustment cannot be hedged by market participants – Businesses and consumers are left exposed to significant monthly volatility

 Rate payers will continue to pay fixed price for technology with no recognition of declining cost or competition  Rate payers are unable to manage their electricity costs – Pricing mechanism is too complicated and not transparent

 Cost of power to rate payers keeps climbing

Why the Current GA Structure is Problematic for LDC’s  A high GA can translate into cash flow difficulties for the LDC’s – Often underbilling customers owing to GA underestimate  The LDC’s own the customer relationship and are therefore forced to explain a large bill item that is confusing and unclear to customers  The GA is difficult to message and contentious  LDC’s have to justify their CC& B costs (incl. call centers) to regulators  Higher prices likely means higher bad debt and therefore higher costs to all customers  Messages have to be focused on the GA instead of on conservation and demand management 14

The GA is not Meeting Government Objectives  Rising energy cost discourages investment and job creation in the province of Ontario  Does not allow Ontario to capture the full benefits of initiatives like the Smart Grid  Costs to consumers are climbing despite falling commodity prices globally

Ontarioâ&#x20AC;&#x2122;s Vicious Circle

Goal: A Regulatory Framework that Leads to Efficient Outcomes          

Accurate wholesale market price signals Elimination of out-of-market pricing mechanisms and average pricing Scarcity pricing events incenting merchant generation build Strong link between wholesale market prices and retail pricing Consumers get price signals that lead to the right behaviour Effective tools for consumers to manage their bottom line Retail and energy efficiency product and service innovation Rate and tax payer funding only as last resort and as a compliment to, not a replacement of, independent actions by consumers Energy policy not used as a proxy for industry, labour or social policy Government involvement only at policy level – market operation left to implementing agencies

Ontario’s Virtuous Cycle

HOW DO WE ACHIEVE OUR GOAL?

#1 â&#x20AC;&#x201C; No Incremental Generation Procurement ď&#x201A;§ Ontario needs to acknowledge that it has more generation capacity than it currently needs and should not sign any further contracts for generation.

#2 – Phase Out the Global Adjustment  No perfect solution but several alternatives for further investigation and consideration. 1. Only pay regulated/contract price for a portion of load generated in any given hour, HOEP on the remainder 2. Introduce capacity factors for all generation and only pay regulated/contract price up to this capacity 3. Impose a large tax on all GA revenues 4. Require regulated/contract generators to “bid in” at a floor of their regulated/contract price

Option 1: Pay Contract Price for a Portion of Generation  Only pay the regulated/contract price for a portion of the supply generated, and pay the HOEP for the balance  Could be phased in over time – 80% regulated/contract price, 20% HOEP the first year – 60% regulated/contract price, 40% HOEP the second year – Etc….

 Exposure to the HOEP would incent generators to bid economically and rationally  Would result in a higher HOEP, a lower GA and possibly a lower overall energy charge to consumers  Price paid by exporters would be more reflective of cost  HOEP would provide a better price signal to consumers

Option 2: Introduce Capacity Factors  Only pay generators their regulated/contract price up to a reasonable capacity factor and pay HOEP for anything above that capacity  Flow these “capacity” payments through as an uplift to the HOEP  Exposure to the HOEP would incent generators to bid economically and rationally  Including the GA as an uplift to HOEP will enhance visibility and therefore act as a better signal to consumers  2 HOEPs (adjusted and unadjusted) may be confusing for the market  Would need to find a way to ensure the market wasn’t flooded with imports  Would result in a higher HOEP, a lower GA and possibly a lower overall energy charge to consumers 23

Option 3: Impose a Large Tax on the GA  Impose a 95% tax on GA revenues  This would incent generators to recover as much as possible through the HOEP as opposed to relying on the GA  Would not rely on any changes to the generator contracts  Would result in a higher HOEP, a much lower GA and possibly a lower overall energy charge to consumers

Option 4: Generators “Bid In” at Contract Price or Higher  Legislate that regulated and contract generators “bid in” at a floor of their regulated or contract price  Generators could have the option of adjusting down their contract price  Generators would be paid the HOEP for all volume produced, which should be contract price or higher if dispatched  May need to exclude some units (Nuclear, wind, etc…)  The true cost of power would be reflected in the HOEP  Units would only be dispatched if it is the most cost-effective solution for end-use consumers  Would result in a higher HOEP, a much lower GA and possibly a lower overall energy charge to consumers

Other Approaches     

Wait 20 years Re-examine the privatization of OPG Retire rather than refurbish Terminate all contracts Other?????

Next Steps  The ultimate goal is an energy market that is fair, transparent, and cost-effective  Many stakeholders acknowledge that this is not where we are today nor are we on a path to getting there  The only question left….. – Are we willing to work together, make compromises and do what it takes?