“Single Buyer” and Ontario’s Electricity Supply Structure

presented by

Jan Carr, CEO, Ontario Power Authorityto the workshop on

Reforming Electricity Industry in Saudi ArabiaRiyadh, November 6, 2006

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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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Supply Types by Capacity (MW)

20%

1%

16%

38%

25%

Supply Types by Energy Production (TWh)

19%

8%

Electricity Use by Sector (TWh)

Residential

Commercial

Industrial

Ontario Electricity System31,000 MW 155 TWh

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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

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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

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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

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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 RFP’s 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

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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 = plant’s 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