Renewable Energy Facts

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3 Renewable Energy Facts Ontarians Have a Good Deal Review of the December 2011 Annual Report by the Office of the Auditor General of Ontario June 2012 By Bridgepoint Group Ltd.

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5 Renewable Energy Facts Ontarians Have a Good Deal Table of Contents Executive Summary...2 Introduction...5 Electricity Price Increase...6 Transmission Investment...13 New Capacity Investment...14 Comparing Technology Costs: Renewable Energy versus Natural Gas...16 Comparing Technology Costs: Renewable Energy versus Nuclear Energy...20 Comparing Other Renewable Energy versus Large Hydroelectric Plants...23 Renewable Energy as Source of Surplus Base-Load Generation...24 Renewable Integration Approaches...27 Increase in Flexible Generation and Demand Resources...27 Enhanced Transmission between Regions...29 Backup for Intermittent Wind and Solar...30 GHG Emission Reductions from Renewable Energy Generation...32 Employment Effects of Renewable Energy Generation

6 Renewable Energy Facts Ontarians Have a Good Deal Executive Summary The December 2011 annual report by the Office of the Auditor General of Ontario was extremely critical of the rapid expansion of the Province of Ontario s renewable energy industry and the Green Energy and Economy Act. It questioned the industry s ability to supply affordable and reliable energy, reduce carbon emissions, and create jobs. In the interest of public education, we investigated the above claims by synthesizing a broad spectrum of published research, and found contrary evidence. We found that the annual report lacked comprehensive research and citation to support its claims. It abstained from comparing the current renewables scenario to other realistic scenarios with mostly conventional sources, thus reaching incorrect conclusions about the negative impact of renewables on energy price and jobs. The Auditor General s report included a price increase from 2006 to But in comparison to reports by the Environmental Commissioner of Ontario and Ontario Energy Board, the annual report did not include 2005 electricity prices, which exceeded the highest prices from 2006 to It also did not present the context that average residential prices in Ontario have steadily increased from 1966 to 2006, except a government price cap from 1994 to This inclusion of data could have more accurately reflected the reality of Ontario electricity pricing to the public. The annual report overstated the amount and nature of backup required for wind power. It also failed to mention numerous non-emitting integration options other than natural gas-fired generation. Although the report correctly assesses that gas-fired back-up would lower renewable energy s potential to reduce GHG emissions, it ignores the fact that natural gas is not the only option to backup renewables. Demand response mechanisms and importing power through long-term contracts are some other solutions that do not result in GHG emissions. Nevertheless, the annual report alerted the need to plan backup in a manner that meets GHG reduction objectives. Below are some paraphrased claims from the Auditor General followed by this report s key findings about the renewable energy sector in Ontario and around the world: The Auditor General claimed that the above-market Feed-in Tariff (FIT) prices dramatically increase electricity bills. He also compares prices of new, future renewable capacity with those of old capacity 2

7 such as natural gas and nuclear. Renewable Energy Facts Ontarians Have a Good Deal Results from a Pembina Institute study show that electricity prices would continue to rise from 2011 to 2020, regardless of whether the new capacity is supplied by renewable or natural gas generation. The price increase is due to a mounting need to replace and maintain ageing supply and transmission capacity, not due to renewable technology generating the supply. While the electricity prices in renewable scenario would increase at a 0.15% higher compounded annual growth rate (CAGR ) from 2011 to 2020, the prices would decline faster by 0.34% CAGR in the renewable Scenario 1 than in the natural gas Scenario 2 from 2021 to Increased reliance on renewables via the FIT program results in marginally cheaper electricity prices for consumers over the next 20 years than installing new natural gas capacity. Bloomberg New Energy Finance projects wind technology costs to decline so rapidly that it will reach parity with natural gas output even without a carbon price by Wind is already cheaper and solar will soon be competitive with new and refurbished nuclear, currently estimated at a range of /kwh by Wall Street and independent analysts. These cost estimates suggest that planned refurbishment of 50% nuclear would cause a significant portion of the price increase projected in the Pembina Institute study over the next decade. As per the 2012 OEB Market Surveillance Panel report, 45% of the global adjustment portion of the Ontario electricity bills from has risen due to nuclear and only 6% due to renewables. The Auditor General feared significant costs of integrating renewables in the Ontario grid i.e. resolving part of the surplus supply and backup challenges that is directly associated with renewables. A 2009 International Energy Agency (IEA) study reports an insignificant cost estimate ranging from 0 /kwh to 0.5 /kwh to integrate 5%-20% wind in areas across Europe and North America. Transmission costs to integrate wind are not prohibitive either. The U.S. Energy Information Administration s Annual Energy Outlook 2011 estimates that transmission costs in 2020 for wind power (0.34 /kwh) would be 0.24 /kwh more compared to that for natural gas combined cycle (0.12 /kwh) and nuclear (0.10 /kwh). The Auditor General seemed to have incorrectly interpreted that 47% additional capacity needs to be 3

8 built to backup 10,000 MW of wind, thus implying a new build of 4700 MW. Renewable Energy Facts Ontarians Have a Good Deal If the Auditor General were referring to the GE report issued by the Ontario Power Authority (OPA) and Independent Electricity System Operator (IESO), then the backup capacity required for 5-minute variability in a system with 10,000 MW of wind is MW. This is 47% higher or 155 MW more than the backup usually needed without wind (see detailed explanation in the report). A peer-reviewed and published article shows that, despite using only fossil fuel-fired backup, 10% of wind power in a grid results in 12% net emissions reduction. The Auditor General feared that renewable energy would result in a net job loss. An IEA-recommended study shows that when compared with a conventional energy scenario, increased share of renewable energy in Europe would bring more net jobs, GDP, investments and exports. Finally, the above study also suggests that to further maximize and prolong the GDP and employment benefits of renewable energy, policies that promote technological innovation in the sector and improve technology manufacturers competitiveness are needed. In summary, this report analyzes the systemic reasons behind the challenges facing the Ontario energy sector while also showing evidence towards the positive contributions of renewable energy. 4

9 Renewable Energy Facts Ontarians Have a Good Deal Introduction In the Renewable Energy Initiatives chapter of the December 2011 annual report released by the Office of the Auditor General of Ontario, the expansion of the renewable energy sector through the Green Energy and Economy Act is deeply criticized. As well, the annual report also questions the industry s ability to supply clean, affordable and reliable energy, reduce carbon emissions, and create jobs in the Ontario economy 1. In the interest of public education, we investigated the above claims by synthesizing a broad spectrum of published research and found contrary evidence. While the annual report emphasized a need for cost benefit analysis to inform decision-making about the power grid, it did not use citation or comprehensive evidence to support claims about the negative impact of the renewable energy sector. This report seeks to provide evidence on the energy sector, thus informing the true impact of renewable energy. It also highlights frequent instances of narrow analytical scope and data misinterpretation in the Auditor General s report. This report is organized into six sections. The first section describes the true impact of renewable energy generation on Ontario electricity prices. The following three sections contextualize the challenges and solutions related to surplus base load generation, backup capacity, and the integration of renewables in the Ontario power grid. The final two sections share evidence from other jurisdictions that renewable generation reduces net emissions despite gas-fired backup and increases net employment and GDP in the economy. Due to a lack of citation, the authors could not always trace or understand the evidence supporting the opinions of the Auditor General. This challenge was overcome by taking a research-based approach to situate the issues in a broader, more comprehensive context and show evidence contrary to many claims raised by the Auditor General. Nevertheless, accurate citation is a critical ingredient in making any analysis accessible and comprehensible to the citizens at large. 1 The Office of the Auditor General of Ontario, Annual Report (December 2011), Section 3.03, 5

10 Renewable Energy Facts Ontarians Have a Good Deal Electricity Price Increase The Auditor General presents the actual and projected Ontario electricity prices over a selected range of years ( ) to show a steady increase in Figure 1 below. Figure1:ElectricityCharge,2006"2014( /kwh) 2./&%-$0%0-1(,$0%&2(0*(9::;( 63"2-("<-&*(&@%&&+0*7(5//(,$0%&2(<$"3(A:=(-"(B>:8(not included(cd0/&( 0//#2-$5-0*7(5(2-&5+1(,$0%&( 0*%$&52&(<$"3(9::=(-"( 9:>:?(( However, addition of the year 2005 to the graph above shows a different electricity price trend. The Environmental Commissioner of Ontario in his report includes this year (Figure 2 below) to show that electricity prices in 2005 exceeded the highest electricity prices from 2006 to /&%-$0%0-1(,$0%&2( 6"$5*7&(/0*&8(0*( 9::;(exceeded( 5//(<#-#$&(,$0%&2( <$"3(9::=(-"( 9:>:?(( Figure2:CombinedElectricityPrice(OrangeLine)inOntario,2005" "#$%&'()*+&,&*+&*-(./&%-$0%0-1(12-&3(4,&$5-"$( 2 P This graph from 2005 onwards also appeared on page 61 of the Ontario Energy Board s Market Surveillance Panel report published in April Electricity Commissioner of Ontario, Electricity Pricing: Managing a Complex Energy System. Annual Energy Conservation Progress Report 2010, P

11 Despite prices in 2005 exceeding all prices from 2006 to 2010, the annual report did not investigate it Renewable Energy Facts Ontarians Have a Good Deal along with the current and future price increase. Using the same IESO data, two different officers of the legislature the Auditor General and Environmental Commissioner of Ontario paint different pictures. In our opinion, the Auditor General should have included the 2005 electricity prices, which are the highest in recent times, in order to represent the true nature of Ontario electricity pricing in the report 5. Moreover, if the price trend over a few decades from 1966 to 2006 is presented, then readers have an accurate context against which to compare the current and future price increase. In a background report by Sustainable Prosperity entitled What Is Happening to Ontario Electricity Prices?, the Economist Donald Dewees illustrates in the inflation-adjusted upper graph in Figure 3 below that Ontario power consumers have always except during the period from 1992 to 2004 when the government had imposed a price cap experienced price increases since Figure3:Long"termOntarioAverageResidentialPrice,1966" The jump in the early 1990s was because the Darlington nuclear generating station costs were rolled into consumer prices. The government price cap in 1993 caused inflation-adjusted prices to decline until the cap was removed for 6 months in 2002, and then removed permanently in 2004 when prices were regulated. While a cap temporarily reduced prices, it resulted in a risk of delaying investment in 5 While the Auditor General expresses a concern that rising global adjustment from 2006 to 2014 results in a price increase, he omits showing the price spike in 2005 was caused by a hike in wholesale electricity prices. Investigation of the reasons behind price increase in 2005 would be necessary for comparison with and an informed judgment of the current and future projected price increase. 6 Dewees, D. March What is happening to Ontario Electricity Prices? Sustainable Prosperity. 7

12 the province s electricity system and increased the debt level both of which is to be borne by future Renewable Energy Facts Ontarians Have a Good Deal consumers 7. Again, the reader has better context to judge the current and future price increase when comparing it against the steady price increase from 1966 to The Green Energy and Economy Act has become a suspected contributor to future electricity price increases in Ontario. The Auditor General s annual report asserts that the above-market contract prices of renewable electricity will significantly increase overall electricity bills: Following passage of the Green Energy and Green Economy Act in 2009, the OPA was directed to significantly expand renewable energy by offering very attractive contract prices to developers of renewable energy projects. These contracts are expected to lead to significantly higher electricity charges through the (global adjustment) GA portion of the electricity bill 8. Despite all fears of the large impact of renewable energy projects on the global adjustment (GA) portion of the bill 9, the Renewable Energy Facilitation Office (REFO) of the Ontario Ministry of Energy estimated that the 246 MW of FIT capacity that reached commercial operation by the end of fourth quarter of accounted for less than one percent of a typical residential bill in 2011 and less than two percent of Global Adjustment 11. The OEB s Market Surveillance Panel Report states that renewable energy generation from 2006 to 2011 has contributed to only 6% of the total GA in Ontario. Nuclear has contributed to 45% of the total GA. The report also explains that GA increases when wholesale market electricity price drops (strong inverse relationship) and vice versa. As shown by Figure 4 below, GA from 2009 to 2011 has increased 7 Ibid, P. 6 8 Ibid. p Definition: Global adjustment (GA) accounts for difference between the (wholesale) market price and the rates paid to contracted generators and for conservation and demand management programs. By IESO in: OEB explains that GA is largely used to make generators whole to a regulated or contract price, and hence, a lower wholesale market electricity price will result in a higher GA (strong inverse relationship) and vice versa in P Ontario Power Authority, A Progress Report on Electricity Supply, Fourth Quarter pdf 11 Primary correspondence, Nathan Fahey, Senior project advisor, Renewable Energy Facilitation Office (REFO), Ministry of Energy, May 29, 2012, 9:42 am 8

13 mainly due to proportionately higher GA payments to generators of all energy sources, which in turn, Renewable Energy Facts Ontarians Have a Good Deal were triggered by a significant drop in wholesale electricity prices 12. Figure4:MonthlyGlobalAdjustmentbySource,Feb 06"Oct 11($MN) 13 While renewable energy would partially contribute to a future increase in GA (and hence electricity prices), the analysis below will show that building the same level of new capacity, using other conventional sources such as natural gas or nuclear, would likely result in a similar or higher future price increase. Closer investigation of the annual report also shows that renewable energy prices seem incorrectly high due to inaccurate comparisons with energy prices from installed, depreciated assets such as hydroelectric, coal and nuclear: Prices for renewable energy, especially under the FIT program, have 12 Ontario Energy Board, Market Surveillance Panel - Monitoring Report on the IESO-Administered Electricity Markets, (April 2012), p , All renewable generation from programs such FIT and RES between 2006 and Ibid. 9

14 been between two and 10 times higher than those of conventional energy sources, such as nuclear, Renewable Energy Facts Ontarians Have a Good Deal natural gas, and coal 14. With capital costs of installed hydroelectric, coal and nuclear plants mostly recovered, generators can bid very low prices on the IESO-administered markets to solely recover variable costs such as labour and fuel. In contrast, private investors will not build new capacity unless they see electricity prices high enough to recover their capital and investment cost. For an accurate comparison, prices of new renewable energy capacity must be compared with that of new nuclear, natural gas or hydroelectric capacity. Due to capital-intensive nature of generation technologies, prices also need to be compared over a decade or two rather than a snapshot in time. As shown in the Comparing Technology Costs sections below, the Auditor General s assertion that above-market renewable electricity prices would result in significantly higher future electricity bills is misinformed because he does not compare the current impact with that of other alternatives (ex. natural gas or nuclear). To assess the true impact of renewable energy on electricity price increase, it is important to compare the current scenario with a scenario that mostly adopts new conventional energy generation instead. The Pembina Institute conducted such a study entitled, Behind the Switch: Pricing Ontario Electricity Option, to evaluate the impact of cancelling the GEA from 2011 onwards. The study simulates and compares the electricity system costs of the two aforementioned scenarios from 2011 to In both scenarios, nuclear is assumed to supply 50% of Ontario s generation and total supply is targeted at 48,000 MW as per the Long Term Energy Plan (LTEP) of the Ministry of Energy. Scenario 1 in the study uses the Ministry s current renewable energy target of 10,700 MW through the FIT program and the Green Energy and Economy Act. Scenario 2 assumes that the government will dismantle this legislation, halt new generation after April 2011, revoke without penalty the 2500 MW contracted under the Green Energy Investment Agreement, and meet new capacity needs through mainly natural gas and some large-scale hydro instead. 14www.auditor.on.ca/en/reports_en/en11/303en11.pdf, p Weis, T. &Partington, P. J. Behind the Switch: Pricing Electricity Options. Pembina Institute. July The study uses a dynamic model of Ontario s energy system (including factors such as sectoral electricity demands, infrastructure costs and generator dispatch) within the Canadian Energy System Simulator (CanESS). The model consistently reflects all relevant costs including those of Ontario s current and future electricity system under both scenarios. 10

15 FIT contracts given out prior to April 2011 and other such commitments 16 are assumed to be sunk cost Renewable Energy Facts Ontarians Have a Good Deal and honored in both scenarios. While one could argue that the impact of these contracts on electricity price rise is not highlighted, this detail is insignificant in our opinion because it is consistently applied to both scenarios. The most important finding of this study is the comparison of the price rise for the same capacity across the two different generation scenarios rather than the absolute price increase. To meet the same amount of remaining targeted capacity from April 2011 onwards, the simulation results show that Ontario s electricity prices will rise sharply in either scenario, irrespective of whether the new capacity is supplied by renewable sources (Scenario 1) or natural gas (Scenario 2) 17. Figure5:SimulationResultsofAverageOntarioElectricityPrices(2010constantdollars) While electricity in renewable Scenario 1 (Figure 5 above) would be marginally more expensive than that in the reduced renewable (or natural gas) Scenario 2 until 2021 (a maximum 0.2 /kwh or ~ 2% difference), it becomes cheaper beyond 2026 as prices in gas Scenario 2 continue to rise. In 2030, electricity in the renewable Scenario 1 would be about 2% cheaper (or lower by 0.25 /kwh) than that in the natural gas Scenario McMillan, Clarification of Ontario PC Party's plans for feed-in tariff program, July 2011, Partys-plans-for-Feed-In-Tariff-program 17 Moreover, the price increase in the renewable Scenario 1 are within the same range as those published in the Ministry of Energy s LTEP, which projected a rise in residential rates from 11 /kwh to 17 /kwh and industrial prices from 10 /kwh to 12 /kwh during 2011 to Ministry of Energy, Long Term Energy Plan (LTEP). p

16 A comparison of the compound annual growth rates (CAGR) of the electricity prices in both scenarios Renewable Energy Facts Ontarians Have a Good Deal showcases an additional interesting nuance. While the electricity prices in renewable scenario 1 would increase at 0.15% higher compound annual growth rate (CAGR ) than those in the natural gas scenario from 2011 to , they would decline faster by 0.34% year-over-year (CAGR ) than those in the natural gas Scenario 2 from 2021 to This is because renewable FIT prices would remain flat, but natural gas prices are projected to increase from 2011 to As a result, electricity prices in renewable scenario 1 would grow at 0.1% lesser CAGR over the 20 years than those in natural gas scenario Increased reliance on renewable generation via the FIT program results in marginally cheaper electricity for consumers over the next 20 years than installing new natural gas capacity. However, one still needs to understand all the contributing factors that result in majority of the price increase for almost a decade in Ontario. The similar trajectory of price increase in both scenarios illustrates that the primary cause is the need to replace and/or maintain aging supply and transmission capacity, not the renewable energy generating the supply. Specifically, Ontario needs to make the following investments in the coming decade: 1. Maintain and upgrade transmission infrastructure 50% of which is more than 50 years old 21, 2. Replace or refurbish the nuclear plants going offline 22, and 3. Build new capacity to a total 48,000 MW target and meet a temporary deficit while nuclear is offline 23. A deeper look explains how each of these investments is causing the electricity price increase over the coming decade shown in Figure 5. Particularly, research about nuclear costs mentioned below suggests that a conservative estimate of planned refurbishment costs of almost 50% nuclear contributes to majority of the price increase in both scenarios in Figure As per Figure 5, from 2011 to 2020, the price increases in renewable Scenario 1 increases from 10.8 /kwh to 13.7 /kwh (a CAGR of 2.41%) versus in natural gas Scenario 2, from 10.8 /kwh to 13.5 /kwh (a CAGR of 2.26%). Difference is 0.15%. 19 As per Figure 5, from 2021 to 2030, the price decreases in renewable Scenario 1 from 13.7 /kwh to 13 /kwh (a CAGR of -0.52%) versus in natural gas Scenario 2 from 13.5 /kwh to /kwh (a CAGR of -0.19%). Difference is -0.34%. 20 As per Figure 5, from 2011 to 2030, the price increases in renewable Scenario 1 from 10.8 /kwh to 13 /kwh (a CAGR of 0.93%) versus in natural gas Scenario 2 from 10.8 /kwh to /kwh (a CAGR of 1.03%). Difference is -0.1%. 21 Ontario Energy Board. Docket No. EB , p , available at Assets and Investment Structure.pdf 22 Ontario Ministry of Energy.Long Term Energy Plan. (2010). p. 41. Available online at 23 Ibid. 12

17 Renewable Energy Facts Ontarians Have a Good Deal Transmission Investment Normal lifespan of transmission lines is approximately years 24. In Ontario, even though 50% of the transmission grid is greater than 50 years old 25, investments in their upgrades have increased minimally from 1996 to 2006 as shown in the Figure 6 (top and bottom). Figure 6: Ontario Transmission System Age/Grid Investments Thus, electricity consumer prices have been kept artificially low from 1996 to 2003 due to low investments in transmission capacity. With a mounting need to address the underinvestment, more than $7Bn has been spent between 2003 and 2010 and as shown in Figure 6 (bottom), average annual investment has doubled from A doubling of annual investments from 2003 to 2010 and additional $9Bn allocated for transmission investments until 2030 as per the LTEP will also cause a portion of the future price increase. 24 LES, Transmission: Frequently Asked Questions, 25Ontario Energy Board. Docket No. EB , p , available at Assets and Investment Structure.pdf 26Ontario Ministry of Energy.Long Term Energy Plan. (2010). p. 41. Available online at 13

18 Renewable Energy Facts Ontarians Have a Good Deal New Capacity Investment The Office of the Auditor General claims that Ontario does not need additional new capacity to meet demand. As illustrated in Figure (7) below, average demand is expected to drop from about 18,000 MW to 16,000 MW and peak demand from about 26,000 MW to 24,000 MW. In the same period...effective capacity (the portion of installed capacity that can be depended upon to produce electricity) is expected to grow from about 27,000 MW to 31,000 MW 27. While the grid currently faces some excess capacity, the annual report misses the point that interim effective capacity from 2018 to 2024 is not sufficient to meet peak demand (24,000 MW) and 17% reserve requirement if the renewable energy target is not added to the supply mix. Figure7:Ontario sinstalledandeffectivecapacity,andaverageandpeakdemand,2005" 2025(MW) 27www.auditor.on.ca/en/reports_en/en11/303en11.pdf, pg

19 A report by the Secor Group showed that Ontario faces excess capacity in 2011 during 20% of the Renewable Energy Facts Ontarians Have a Good Deal year, but also mentioned that planned capacity would be used to meet peak demand 28 during nuclear refurbishment 29. While the OPA has planned refurbishment from 2016 to 2024, historical delays in nuclear refurbishment suggest that the planned capacity would be needed for longer than 2024 and surplus supply would be further delayed 30. The key point to note is that electricity costs would increase because of the decision to add new capacity, not due to the use of renewable energy technology. In fact, the research below shows that renewable energy will have the lowest impact on electricity prices over a 20-year period in comparison with new natural gas and nuclear. 28 The OPA s supply forecast can be critiqued as too high because it is planned using peak, rather than, average demand. On the other hand, if provincial supply is planned using average demand, the true costs of meeting peak demand through imports need to be known for a true comparison. Additionally, average as well as peak demand may be underestimated emerging from the recession. While the optimal way to meet demand as well as deficit during nuclear refurbishment could be debated, new capacity addition is one way to meet the objective. 29 Secor Group. Ontario Natural Gas Generated Electricity. May p 2, Behind the Switch: Pricing Electricity Options. Pembina Institute. July P

20 Renewable Energy Facts Ontarians Have a Good Deal Comparing Technology Costs: Renewable Energy versus Natural Gas An accurate assessment of renewable energy s impact would compare the costs of new renewable energy generation with those of new natural gas, nuclear or hydroelectric generation. As evident from the Pembina study s model 31, electricity prices are expected to steadily increase over the next decade until 2021 regardless of whether new generation comes from renewable energy capacity or new natural gas capacity. At its peak in 2021, the additional 2% difference in renewables Scenario 1 works out to a potential cost of just $4 a month on the average household energy bill 32. If a 20-year view from 2011 to 2030 is considered, electricity prices in renewable scenario 1 would grow at 0.1% lesser rate (CAGR ) year-over-year than those in natural gas scenario 2. Thus, increased reliance on renewable generation via the FIT program results in marginally cheaper electricity prices for consumers over the next 20 years than installing new natural gas capacity. This is because natural gasfired electricity price is projected to increase until 2030, while renewable electricity price will remain flat. Current investment in renewable generation would start to act as a hedge against the rising price of natural gas. The Pembina study s model shows that impact of new renewable generation on average electricity prices over a 20-year period is slightly lower than that of new gas-fired generation for the following reasons: 1) the rapid decline in projected renewable energy technology costs and 2) the increase in gas-fired electricity prices due to projected natural gas price increases and possibly some form of price on carbon emissions. The model was conservative as it used learning rates 33 to estimate revised FIT rates, which are higher than the actual revised Ontario FIT rates announced in March International publications also show a rapid decline in renewable energy capital costs. Solar PV modules have dropped in price by almost 50 per cent in the past five years 35. An international literature review by the Melbourne Energy Institute states that 2010 total capital cost for utility scale PV facilities will reduce by 40% by 2015 and 31 Behind the Switch: Pricing Electricity Options. Pembina Institute. July Pembina Institute. Cancelling the Green Energy Act would have little effect on Ontario electricity prices: author of new report explains results. July New technology generation learning rates outlined in the U.S. Department of Energy, Assumptions to the Annual Energy Outlook 2010, Electricity Market Module (table 8.3), DOE/EIA-0554(2010), 34 Ministry of Energy, Ontario Feed-in-Tariff Program: Two-Year Review Report REN 21, Renewables 2010 Global Status Report (2010), 16

21 50% by Bloomberg New Energy Finance goes even further for wind: It projects that wind Renewable Energy Facts Ontarians Have a Good Deal technology costs are declining so rapidly that it will be competitive with gas-fired generation by 2016 in most jurisdictions in the world, without a carbon price and despite the shale gas supplies 37. As the revised FIT program can propose a price revision every year 38, the Ontario government could incorporate further price change to accommodate declining front-ended capital costs. While prices for natural gas are currently low, the US Energy Information Administration s Annual Energy Outlook 2011 projects the price to rise from 5.5 /kwh in 2010 to 6.8 /kwh in (increase of 24%) even after incorporating shale gas supplies. Reasons for the gas price increase range from the gas demand hike in the automobile and power sector, conventional gas production decline in favour of oil plays, and limited economic viability of shale gas production at current gas prices 40. As per the 20- year Clean Energy Supply (CES) contract 41, OPA payment liability increases with a rise in gas prices and is evident in the GA portion of the electricity price in the model. In the Pembina study s model, the gas-fired electricity price further increases due to likely introduction of a carbon price in Ontario. As shown in Table 1 on the next page, various organizations have published gas-fired generation CO2 emission rates ranging from 340 to 550 kg CO2/MWh, depending on the new generator s reported heat rates and deployed combustion technology. These emission rates indicate how carbon pricing would affect gas-fired electricity prices, outlined more explicitly in Table 2 on the next page. 36 Melbourne Energy Institute, Renewable Energy Technology Cost Review, March 2011 from 37 Bloomberg New Energy Finance, Onshore wind energy to reach parity with fossil-fuel electricity by Nov Ministry of Energy, Ontario Feed-in-Tariff Program: Two-Year Review Report. 39Reference case projection from U.S. Energy Information Administration, Annual Energy Outlook 2011, (April 2011) 40 Behind the Switch: Pricing Electricity Options. Pembina Institute. July P This is because gas-fired generators will receive from OPA a contingent support payment for minimum annual output in case they produce below minimum threshold. Independent Electricity System Operator, CES Contracts & EDAC Revenue Guarantees (2009), 17

22 Renewable Energy Facts Ontarians Have a Good Deal Table1:CO2EmissionRatesfrom NewGas"FiredElectricity Generation Table2:IllustrativeCompliance CostsforGas"FiredGeneration underdifferentcarbonprices Sources: The Pembina Institute. Behind the Switch: Pricing Electricity Options 4243 As a member of the Western Climate Initiative (WCI), Ontario has committed to a provincial target of 15% reduction in CO2e T below 1990 levels by If Ontario were to pass cap and trade legislation to meet its commitment, carbon-intensive industries and utilities would either need to reduce GHG emissions or pay for permits and carbon offsets from those who can reduce emissions at a lower cost. WCI has estimated that the minimum price for such carbon offsets would reach $32/CO2e T by 2020, and rise to $58/CO2e T by The model has used conservative WCI estimates. Other studies including the National Roundtable on the Environment and the Economy suggest a higher price of 42132: California Energy Commission, Comparative Costs of California Central Station Electricity Generation Final Staff Report (2010), C : U.S. Energy Information Administration, Updated Capital Cost Estimates for Electricity Generation Plants. 134: International Energy Agency, Are We Entering a Golden Age of Gas? World Energy Outlook 2011 Special Report (2011), : John Martin, Siting Power Plants in the Pacific N.W. (Pacific Energy Systems, 2002), 4, 136: This estimate applies to a combined-cycle plant entering commercial operation in : Heat rates from EIA (2010), unless specified. 138: International Energy Agency, Are We Entering a Golden Age of Gas? 139: Martin, Siting Power Plants in the Pacific N.W. 43 Different assumptions about the above factors result in different energy efficiencies, accounting for the differences in figures between studies. 44 Ontario Climate Change Action Plan, Annual Report Western Climate Initiative, Updated Economic Analysis of the WCI Regional Cap-and-Trade Program (WCI Partners, 2010), WCI-Regional-Cap-and-Trade-Program/ 18

23 $75/CO2e T by 2020 to adequately meet Canada s national climate change targets 46. Carbon costs are Renewable Energy Facts Ontarians Have a Good Deal expected to differ depending on the design of the cap and trade system and could be higher in a system involving a smaller market (i.e. Canada only) or where offset options are limited. While renewable energy generation with gas-fired back up produces emissions, it still produces less than that by equivalent gas-fired output. Every kwh of electricity produced from renewable power reduces net emissions when replacing one kwh of gas-fired power (as explained below in GHG Emissions Reduction section). Prudent planning that uses alternative back up options (such as demand response mechanisms, imports or hydroelectric/nuclear backup) rather than using natural gas generation, would further reduce emissions. Thus, the impact of carbon pricing will be significantly higher on gas-fired electricity than on renewable electricity. In summary, Ontario s renewable electricity prices have already been reduced once and will remain flat due to the rapid decline in technology costs relayed above. Gas-fired electricity prices, on the other hand, are projected to increase since natural gas prices are projected to rise from 2010 to 2030 and increased climate change action (including some form of carbon price) is highly possible. As a result, average electricity price in the gas scenario overshoots the price in the renewables scenario beyond 2026 and grows at 0.1% higher CAGR rate from 2011 to Investing in renewable generation today will keep consumer electricity price competitive with the natural gas alternative with the added benefit of reducing Ontario s net emissions. 46 National Round Table on the Environment and the Economy, Parallel Paths: Canada-U.S. Climate Policy Choices (2011), 19

24 Renewable Energy Facts Ontarians Have a Good Deal Comparing Technology Costs: Renewable Energy versus Nuclear Energy Due to extremely low price ranges published for current installed nuclear capacity, there is a misconception in the market that nuclear power is much cheaper than renewable power. As per the OPA s cost disclosure of various technologies in the summer of 2008 and based on existing supply contracts, nuclear power s levelized unit energy cost (LUEC) 47 ranges from 5 /kwh to 7.9 /kwh 48. However, in 2011 the OPA revised the range of refurbishing nuclear from 5 /kwh to 8.7 /kwh, and new nuclear ranging from 7.7 /kwh to 9.5 /kwh 49. As shown by the Ontario Clean Energy Alliance in the case of the Darlington rebuild, Ontario Power Generation (OPG) has calculated the published nuclear power costs to range from 6 to 8 /kwh by assuming aggressively low discount rates and the project being completed on time and on budget. According to OPG, by assuming 30% debt financing and an18% return on equity as prescribed by CIBC World Markets, the cost of the Darlington rebuild rises up to 10 to 14 /kwh (assuming an 82% average annual capacity utilization rate) 50. Thus, the published nuclear rates by the OPA and OPG are highly underestimated. Historically, nuclear projects in Ontario have overshot their original cost estimates by a factor of This has been the trend in the United States as well. A special report in the Economist explains the cost escalation phenomenon by stating that when these plants were first built, companies selling plants (that) they had no real experience of building offered fixed prices to make them attractive. (But) projects meant to be completed in years dragged on for more than a decade 52. Once cost escalation and cost of borrowing were included, two AP1000s planned by Progress Energy for its Levy site in Florida were recently reported at approximately $20 billion, which works out at $9000/kW 53. If the Darlington s actual rebuild cost exceeds OPG s original cost estimate range by a factor of 2.5, then the 47 The levelized unit energy cost (LUEC) is defined as the constant price per unit of energy that causes the investment to just break even Ontario Power Authority, Cost Disclosure - Generation Supply - Detailed Methodology. Accessed in July 2011 from 49 Ontario Power Authority, IPSP Planning and Consultation Overview II, (2011) 50 Ontario Clean Air Alliance Research Inc. Darlington Re-Build Consumer Protection Plan. (September, 2010). p. 2, 51 Ibid. P Economist, Special Report, Nuclear Energy: The Dream that Failed. Mar, P Ibid. 20

25 cost of electricity will range from 19 to 27 /kwh (assuming an 82% average annual capacity utilization Renewable Energy Facts Ontarians Have a Good Deal rate) 54, not the original 6 to 8 /kwh announced by OPG. Moreover, post-fukushima, even conservative estimates of overnight capital costs 55 have dramatically increased. The U.S. Energy Information Administration (EIA) reports overnight nuclear plant capital costs of $5600/kW in the Annual Energy Outlook (AEO) This is a 37% increase from overnight capital cost of $3902/kW in An EIA-commissioned study by R.W. Beck Inc. and SAIC published these figures for a dual-unit nuclear plant 56, which is similar to what is proposed in Ontario 57. Nuclear plant costs have dramatically increased over the past 50 years due to the constant need to improve designs to address new safety and environmental issues. According to calculations by Arnulf Grubler of IIASA, an Austrian think tank, each of the six designs France fielded has cost more per kilowatt than the previous one had 58. As shown in Figure 8 below, the rising trend in historical overnight capital costs and current estimates in the US also illustrates that nuclear plants have become more expensive over time. This has happened despite subsidies worth billions of dollars Ontario Clean Air Alliance Research Inc. Darlington Re-Build Consumer Protection Plan. (September, 2010). p. 2, 55 Overnight Capital Cost is often used to mean Engineering, Procurement, and Construction (EPC) costs plus owners costs, but excludes financing and borrowing cost, escalation due to delay in projects, and inflation 56 U.S. Energy Information Administration, Updated Capital Cost Estimates for Electricity Generation Plants (2010), 57Behind the Switch: Pricing Electricity Options. Pembina Institute. July P Economist, Special Report, Nuclear Energy: The Dream that Failed. Mar, P Ibid. P

26 Renewable Energy Facts Ontarians Have a Good Deal Figure 8: Overnight Cost of Completed Nuclear Reactors Compared to Projected Costs of Future Reactors 60 After incorporating cost overruns and the increased costs due to improved designs, the current estimates for new nuclear are much higher. Mark Cooper, a Senior Fellow at Economic Analysis Institute for the Energy and Environment, Vermont Law School, in a 2009 study 61 dissects costs of new nuclear reactors from three dozen projections. He reports that numerous studies by Wall Street and independent energy analysts estimate new nuclear cost to range from 12 /kwh to 20 /kwh 62. In comparison to these ranges, wind and biomass even at the original FIT rates of 13.5 /kwh and 14.7 /kwh respectively are extremely competitive compared to nuclear power. While revised solar PV FIT rates ranging from 34.7 /kwh to 48.7 /kwh are still high, the total capital costs for utility scale PV 60 Cooper. The Economics of Nuclear Reactors: Renaissance or Relapse? Institute for the Energy and Environment, Vermont Law School. (2009) Ibid. 62 Ibid. Lazard, 2008, Lazard, p. 2; Moody s, 2008, p. 15; Standard and Poor, 2008, p.11 22

27 facilities are projected to reduce by 40% by and are fast approaching rising nuclear rates. Unlike Renewable Energy Facts Ontarians Have a Good Deal the increasing costs of mature nuclear technology, renewable technology costs (wind, solar PV, solar thermal 64 ) have declined in a relatively short period of time and are reflected in the downward revision of FIT rates. The wind power FIT price reduced from 13.5 /kwh to 11.5 /kwh and that of >5M ground mount solar, from 44.3 /kwh to 34.7 /kwh 65. Another central concern about reliance on renewables in comparison to nuclear power to meet future low-carbon electricity needs is that the former may not be available in sufficient supply. However, based on analysis by the Rand Corporation, McKinsey and Company, the National Renewable Energy Laboratory, the Union of Concerned Scientists and the American Council for an Energy Efficient Economy, Cooper indicates that renewables, energy efficiency, and natural gas combined are a lowcost and technically-feasible option to both meet electricity needs and carbon reduction targets for three decades or more 66. Comparing Other Renewable Energy versus Large Hydroelectric Plants Ontario currently has over 70 hydroelectric generating stations. While large hydro plants might produce cheaper and equally clean electricity compared to other renewable generation, Ontario has already used most available, large and easy to exploit hydro sites 67. In summary, renewables are responsible for only a small portion of the price increase till date. After comparing costs of new natural gas, nuclear, and renewable generation, it is evident that the use of any of these technologies would have resulted in a price increase over the next 10 years, with renewable generation being the cheapest alternative of electricity over the next 20 years or even earlier in case of nuclear. Majority of the current and future price increase is due to investments in new capacity, nuclear refurbishment, and transmission infrastructure. In summary, this increasing price trend is common across Canada and reflects the inevitable costs of upgrading and replacing Ontario s aging electricity infrastructure rather than new renewable generation. 63 Melbourne Energy Institute. March Renewable Energy Technology Cost Review Ibid. 65 Ministry of Energy, Ontario Feed-in-Tariff Program: Two-Year Review Report Cooper. The Economics of Nuclear Reactors: Renaissance or Relapse? Institute for the Energy and Environment, Vermont Law School. (2009). 67Electricity in Ontario.Ontario Green News, Vol 1, Issue

28 Renewable Energy Facts Ontarians Have a Good Deal Renewable Energy as Source of Surplus Base-Load Generation As part of the Long Term Energy Plan, the OPA is mandated to reach installed wind capacity of 7576 MW by 2018, which would comprise 13% of annual production in The variable nature of wind power output has raised concerns about reliably integrating it with balance-of-portfolio generation technologies (natural gas, hydroelectric, or nuclear) in the Ontario grid. The Auditor General is partially correct in stating that renewable energy generation aggravates the challenge of surplus base load generation (SBG) 69 : The IESO informed us that increasing the proportion of renewable energy in the supply mix has exacerbated a challenge called surplus base-load generation (SBG), a power oversupply that occurs when the quantity of electricity from base-load generators is greater than demand for electricity 70. However, he does not comprehensively identify all the reasons behind this challenge. A review of Ontario s supply history demonstrates that SBG has occurred even prior to renewables becoming prominent in Ontario s supply mix. For example, SBG was a problem in the mid-1990s when there was an abundance of inflexible nuclear and hydro power, but no wind and solar energy in the mix 71. The IESO has been expecting SBG since April 2008, when wind capacity was a mere 470 MW in a system with a base load of 14,000 MW 72. In the 18-month outlook from April 2009 to September 2010, the IESO quantifies the expected SBG between 1500 MW and 2000 MW for 5 months (Figure 9). 68Ontario Ministry of Energy.Long Term Energy Plan. (2010). p. 2. Available online at 69 Surplus base load generation (SBG) occurs due to a large amount of inflexible supply that cannot be reduced in response to demand. In such events, system operators have to sell surplus power to neighbouring grids at a loss or shut down existing generators. 70www.auditor.on.ca/en/reports_en/en11/303en11.pdf p London Economics.(2001, 03 01). Retrieved 01 18, 2012, from 72 IESO, April 2008-September 2009; 24