Saturday, January 21, 2017

Ontario's IESO steps off the gas

On New Year's Day, 2017, Ontario saw lower total generation from natural-gas fired facilities that it likely has on any day in over two decades.

Over the first 20 days of the year electricity produced from natural gas is down 48%, leaving electricity generation producing about 1/3rd of the emissions it did during the first 20 days of 2014, following the end of coal-fired generation at Lambton and Nanticoke (as 2013 ended). The year-to-date average I estimate at 21 grams CO2 equivalent emissions per kilowatt-hour (CPIK).

Judged only on emissions, this is an impressive accomplishment. Those concerned with Ontario's electricity sector may wonder what it cost, and if there are negatives associated with the changes. I will explain why emissions are dropping, and although it's not possible for me to cost out the changes, or specify the negatives, I'll demonstrate why the IESO should reveal these.

The sudden drop in natural gas on New Year's day use coincided with the introduction of cap-and-trade, but only because of government direction timed to match that introduction. On December 16th the Minister of Energy directed the IESO (system operator):
Enter into negotiations with the OEFC NUGs regarding a new IESO Contract to change the incentive structure for supplying electricity or capacity so that the facilities operate in a manner that better aligns with the integrated power system's needs and that would satisfy all of the following requirements:
(i) Expected cost and operability benefits for the Ontario electricity system are greater than the cost and operability benefits afforded under the current OEFC Contract;
(ii) All I ESQ obligations under the I ESQ Contract end no later than the date on which the current term of the existing OEFC Contract expires 
This is bureaucratically entertaining. OEFC is the legal successor to Ontario Hydro (broken up in 1998), and NUGs are the non-utility generator contracts the governments of David Peterson (Liberal) and Bob Rae (NDP) burdened Ontario Hydro with. The Minister is directing one entity to redo the contracts of another (without adjusting the term). Because the OEFC is simply a shell entity run now only for the machinations of the Finance Minister, this isn't operationally nonsensical - but it demonstrates the OEFC is a nonsensical entity.

NUGs are the result of Ontario's first expensive foray into "green" energy theory. The idea was to combine electricity generation with other uses - either of heat (combined-heat-and-power), or in the case of sites recently changed, compressor stations for TransCanada's main pipeline. Over the course of decades, the other uses of heat changed, and/or disappeared, and the synergies with the pipeline similarly decreased. Many of the NUGs remained producing electricity after the efficiencies that first justified their existence ceased to exist.

Specific locations known to have had contracts adjusted following the Minister's December directive include a TransAlta generator in Mississauga (TADouglas in IESO jargon):
"The New Contract provides TransAlta a fixed monthly payment until December 31, 2018, with no delivery obligations and maintains TransAlta's operational flexibility to pursue opportunities for the Facility to meet power market needs in the Northeast, including Ontario. Additionally, the New Contract provides an immediate reduction in the Greenhouse Gas emissions in Ontario, and will reduce power costs for Ontario ratepayers. TransAlta has committed to working with the employees of the Facility during this transition."  -emphasis added
My assumption was this moved the contract from an OEFC one that paid for all generation (making the facilities operate as baseload generators), to an IESO one paying for a capacity resources - paid to be available to generate when required.  My opinion was strengthened by a report on the changes at a power plant in Iroquois Falls:
Northland Power confirmed Thursday that its Iroquois Falls cogeneration station has been given a “paid four-month curtailment” ...
The electricity system operator’s director of stakeholder and public affairs, Chuck Farmer, explained that they are trying to make the electricity production system in Ontario more efficient by having NUGs produce energy at certain times...“We have a need to be able to ramp energy up and meet peaking requirements. And the way the NUGs have been incentivised is to work flat-out. But that’s not what the system needs anymore,” said Farmer. “We want them to run when the system needs them to, and not run when it doesn’t.
...“When you get right down to it, running it as a dispatchable basis rather than a full-out basis, has a lower cost,” he said.
Other reports trickling out had more ominous terms, and seemed less supportive that capacity was being contracted - or any other "operability benefits" secured. A January 11th report from North Bay noted job losses and included language that didn't sound like a capacity resource was contracted:
...Atlantic Power Corporation announced it is closing its plant on Highway 11 N.
Atlantic Power is also mothballing a plant in Kapuskasing after subsidiary Atlantic Power Limited Partnership agreed to terminate its power purchase agreements with the Ontario Electricity Financial Corporation for both plants. The agreements were scheduled to expire in December.
“Based on its assessment of the Ontario power market, including the estimated impact on plant economics, the company has begun the process of mothballing both plants,” the company stated in a media release.
“The company is committed to working with those employees affected by the decision.”
Atlantic Power also announced operations at its plant in Nipigon have been suspended.
Well that doesn't sound like a capacity contract, and, tracking down Atlantic Power's release on the contract changes, it's clear they won't be providing anything under the new agreements:
The Enhanced Dispatch Contracts for Kapuskasing and North Bay provide a fixed monthly payment to the plants until December 31, 2017. The contracts have no delivery obligations and allow APLP to retain operating flexibility. Based on its assessment of the Ontario power market, including the estimated impact on plant economics, the Company has begun the process of mothballing both plants.The Enhanced Dispatch Contract for Nipigon provides fixed monthly payments to that plant through October 31, 2018. 
During that period, the plant's PPA with the OEFC will be suspended. At the conclusion of that period, or after that date should that subsequently be agreed to, the arrangement will revert to the existing terms of the PPA. The Company also has begun the process of mothballing Nipigon 
...The impact on 2017 financial results is expected to be positive as compared to the corresponding results under the previous arrangements for the three plants.
Good for the shareholders.
Not good for the employees who have, at the directive of the Minister, lost their jobs.

It appears contracts have been changed from requiring something to be produced to requiring absolutely nothing of the contracted party.
There are carbon emission reductions - in Ontario.

The following graphic displays the generation over the first 20 days of each year from generators displayed in the IESO's Generator Output and Capability reporting - with the 4 re-contracted sites already noted in this post in light red:

2017's generation from natural gas fueled generators is down 48% from 2016: 45% of that reduction is due to the cessation of production at Kapuskasing, Nipigon, North Bay and TADouglas (TransAlta Mississauga).

Additional NUG sites had previously secured new contracts - hopefully on an actual capacity basis - after their original term ended. Relevant to changes from 2016 to 2017 are West Windsor and TA (TransAlta) Windsor. Added to the 4 NUGs already discussed, removing these 6 sites from baseload operation accounts for 69% of the reduction in natural gas-fired generation.

Those numbers are impressive, but I think it's important to remember the reductions seem to come by contracting for absolutely nothing.

The IESO expects you to believe the contract for nothing provides a savings over the previous arrangement - although neither arrangement is revealed to the public.

I cannot believe the contract changes provide any value. In the month passed since I wrote Reliable Electricity Generation Capacity declining in Ontario the amount of reliable generation available to meet demand has been further reduced by the mothballing of sites due to these contract changes.

Another difference in January 2017's Ontario and January 2016's is the absence of Darlington's 2nd unit in active power production as it undergoes refurbishment. Adding the nuclear reactor's capacity to the capacity of the 6 gas units we've discussed, over 1500 megawatts of baseload generation has been removed in the past year.  Not surprisingly, net exports are down, on average, over 1200 megawatts (per hour). This indicates the output from the gas plants now being mothballed was, at lease partially, displacing other production elsewhere, in export markets. Emissions reductions in Ontario could be cancelled out by emissions increasing elsewhere.

The complex interaction isn't relevant to Ontario's carbon emissions accounting.
It appears to me contracts were bought out to reduce emissions in Ontario prior to the coming election of 2018, for solely political purposes.

The IESO provides no meaningful evidence ratepayers will benefit.

Should numbers be disclosed, the value of the IESO's employees in "conservation" roles could be established. The difference between the cost of not having supply from the four contracts redone/bought-out for 2017 and having that generation should benchmark the price of conservation to evaluate spending in that area.

If you're at the IESO and not providing the value a worker at the North Bay or Kapuskasing generator did, a termination notice should not surprise you.

That "do undo others" thing.

note: spreadsheet for this post.

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