Ontario’s Electricity “Market”

When referring to Ontario’s electricity “market”, the word “market” should always be in quotations.

Ontario has a spot “market” for electricity. Every hour, the Independent Electricity System Operator (IESO), forecasts how much power is required. They hold an auction one day in advance where generator’s submit bids to supply power in a particular hour. Bidders include OPG’s coal plants, some private sector gas plants, some hydraulic plants, and some of the output of the some of the Bruce nuclear plant. The bids are stacked from lowest to highest, and the IESO buys as much power as they need, at the the market clearing price – the price where enough supply will be provided to meet the forecast demand. All the bidders receive the market clearing price. I am simplifying somewhat, since there are actually several markets – 10 minute, day ahead etc. Supply is continually adjusted so that it meets the overall system demand within a tight margin. If supply is inadequate, then the voltage drops, and if supply exceeds demand, then voltage increases. So it is important to keep supply and demand in balance at all times.
The spot price is quite volatile. In December, when heating load was high, it was over 8.5 cents/kWh. In May so far it has been below 5 cents. And from hour to hour the price varies even more. Last night it was a half cent for an hour – demand is low in May, and the hydraulic plants have lots of water. And on a hot summer day in July it might be 20 cents, as air conditioning load peaks.

Demand in the province varies between 13000 and 26000 MW. You can check this out at the IESO.

The nuke plants bid zero, so all of their supply will always be used. This is because if a nuke plant is shut down, it can take several weeks to re-start it. This is one of the reasons why Ontario had so much difficulty recovering from the 2003 blackout. Hydraulic will adjust their bid to account for how much water they have available, and for the time of day they are allowed to release water under their agreement with the Ministry of Natural resources. Sometimes they bid high to save water for even higher prices in the future. Of course when they are running at capacity during the spring run off, they would want to bid low, so they don’t have to spill water. The bids from natural gas plants will depend on their cost of fuel, which today is about US$6.50/mm btu. At this price, the cost of gas alone is at least 5 cents/kWh for the most efficient plants, but of course the gas operator has to earn more to cover the cost of operating their plant, so they might bid 8 or 9 cents. Coal is quite cheap, and the coal plants may offer bids of 3.5-4 cents. It takes some time for coal plants to ramp up and down. Nuclear cannot ramp up or down, and natural gas and hydraulic can ramp up and down fairly quickly.

Intermittent renewable energy sources, like wind power, are called a “must run” facility. That means they do not submit bids – they simply receive the market clearing price, and the system will take all the power they can produce.

But there are some serious deficiencies in this “market”. A true market relies on both buyers and sellers submitting bids to complete transactions. In practice in the electricity market, there are few users who can vary their demand in response to price. In fact, half of the market – consumers, institutions like schools, and small commercial establishements – are completely sheilded and unaware of a change in the market price. They have no incentive to shift their demand to a lower price timeframe. Smart meters may help, as it will allow consumers to respond, in part, to price signals. 60-70% of the market is supplied by OPG, owned by the government, and so many suspect that they have an incentive to keep prices low, as it would cause political problems for the government if prices were too high. 20% of the market is supplied by the Bruce nuclear plant, which operates on a below market long term lease from OPG, and which doesn’t have responsibility for waste storage or decomissioning the plant at the end of its life.

On top of this, imports are scheduled at a different time than Ontario source generation, so sometimes the IESO is paying more for imported power than they are paying for domestic supply. Perhaps it is better to build your facility in Michigan.

And finally there are contracts offered by the Ontario Power Authority (OPA) to build new capacity. For example, in the past 2 years, the OPA has signed contracts for 1300 MW of new renewable energy, 2000 MW of new gas fired capacity, and 1300 MW of nuclear refurbishment at the Bruce plant. They have also contracted for small amounts of conservation measures. Some of these contracts have been awarded on a “market” basis, by selecting the low price winners from a Request for Proposal process – but not the nuclear contract – it was done by direct negotiation. But the effect of increasing the supply through this means is to depress the spot “market”.

These manipulations of the “market”, by OPA through new supply, by the IESO through imports, the government owning 60-70% of the generation, and by sheilding customers from price changes, means that the spot market is not a market at all. Rather, it is a system constructed simply to ensure efficient dispatch of facilities in the short run. It is not structured to allow a return to construct generation facilities for the long run. In fact, much of the reason the OPA had to be created was because investors lacked conficence in the market. The Ernie Eaves government’s 4.3 cent price capfor small consumers, introduced before an election, was the final straw.
Lenders are quite naturally reluctant to provide financing in this environment.

The other key issue is external effects. The coal plants don’t provide compensation to those who suffer from asthma, or who die prematurely from smog, or to those affected by climate change. The nuclear plants claim to have set aside sufficient funds for plant decomissioning and waste storage, but given that we have never decomissioned a plant, and never stored waste safely for 100,000 years, how could their budgets possibly be right? What exactly is budget for a security gaurd in the year 102006? Without payment for these external effects, or future costs, we will continue to make wrong choices on where we get our power.

Interestingly, the OPA’s legislated mandate is to move to a market basis over time. There is no sign of this happening. The folks who work at the OPA have job security – they will be needed to write long term contracts for a long time to come.

So, beware the spot “market”. And always use quotation marks.

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