Transcript AMPCO presentation CAMPUT 2005 Conference

Making Electricity Markets Work:
The Ontario Industrial Perspective
presented to
CAMPUT Annual Conference 2005
Mike Kuriychuk
Chair, Board of Directors
Association of Major Power Consumers in Ontario (AMPCO)
May 3, 2005
Who is AMPCO?
 The collective voice of large industrial electricity consumers
 Over 60 member companies with total load over 3000 MW
 size range: 5 MW to over 250 MW each
 wide range of industrial sectors
 Fundamental goal: to preserve and enhance industrial competitiveness
through appropriate electricity policy in Ontario
 Activities:
 provide policy advice to Ontario politicians on electricity issues
 provide technical and regulatory advice to the Ministries and electricity
organizations such as IESO, OEB, OPA, OPG, Hydro One
 provide a clearing house for technical and strategic information among
members
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Outline
 Attitude of large industry: market vs. regulatory solution
 Ontario electricity history from an industrial viewpoint
 Elements that create short-term risk in the hybrid market
 What should be the ultimate end-state of the system
 What mechanism can be used to get there
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What industry is seeking
 The lowest practical delivered price of electricity,
consistent with reliability, power quality, and
environmental sustainability
 The effects go beyond just an industrial consumer’s
bottom line:
Electricity cost escalation in Ontario is adversely
affecting profitability, as well as industrial
competitiveness, economic diversity,
employment, the balance of trade, and the
provincial standard of living
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Drivers towards a market
solution
 Experience with markets for manufactured products and
production inputs
 Preference for minimum intervention and the freedom to
creatively solve problems
 Belief in the economic efficiency of competition and choice
 Skepticism in the ability of government and its agencies to
solve problems
 Distrust of political interventions
 Memory of excesses under the previous, regulated Ontario
system
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Drivers towards a
regulated solution
 Realization that market dominance in generation has not
been resolved and probably will not be, in the short term
 Realization that electricity markets have some
characteristics that preclude pure competition
 Evidence from other jurisdictions that market solutions for
generation capacity do not work
 Evidence from other jurisdictions that open market regimes
do not necessarily result in lower prices
 Positive prior experience leveraging industrial capabilities in
the regulated Ontario environment, for example, various
interruptible rates
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May 3, 2005
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Outcome of this balance of
opposing forces
 Industry favours open market solutions as the preferred
choice, but tempered by practical considerations:
Market solutions where possible, with
minimum regulation where necessary
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Electricity history in Ontario
through industrial eyes (1)
 Relentless cost escalation under former Ontario Hydro
regime: went from second-lowest price jurisdiction in
Canada to second highest over 15 years
 Provincial utility had co-opted its shareholder and its
regulator and was effectively out of control
 With this history, the breakup of Ontario Hydro and creation
of an open market was seen as a welcome change
 But there were concerns over:
opening the retail market – would unduly complicate the transition
decision not to break up OPG into competing companies at the
outset – seen as a compromise and ultimately a problem
opening market during a supply shortage – a timing issue
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May 3, 2005
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Electricity history in Ontario
through industrial eyes (2)
 The market opening process went very well
planning, technology, and processes were almost flawless
 Short-term price predictability was an operational issue
pre-dispatch vs. dispatch prices
items hidden in “uplift” (surcharges)
Lack of generation transparency
 But companies were learning to live with the situation:
MPMA/BPPR provided an inherent hedge
forward products were available, even though market was thin
prices had moderated somewhat in the second year; more supply
was coming on stream from refurbished nukes
many companies learned to mitigate risks of the new market
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May 3, 2005
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Electricity history in Ontario
through industrial eyes (3)
 Intent to further decontrol OPG (the basis of the MPMA)
was abandoned, first informally by the PCs, then officially by
the Liberals with the creation of the “hybrid” market
 Cost overruns on OPG Nuclear are a continuing problem
 The issue of inadequate new supply needed to be
addressed due to the age of existing generation asset base
 However, too many decisions are now being driven by
ideology:
“coal is bad; natural gas is the answer”
“conservation/smart metering/windmills will save the day”
insufficient cost/benefit scrutiny of programs, development
processes, renewables technologies
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May 3, 2005
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Risks in the present situation
 Coal phase-out will come at the cost of significant price
escalation: expect to see additional 20-30% price increase
Classical rent-seeking behavior among prospective generators
apparent lack of appreciation of the impact of fuel on the margin -it’s not just an issue of percentage of generation
cost escalation may make removal of fixed prices/revenue caps
politically difficult
 Some moves have been made to limit OPG rate of return,
but upward cost pressure in that organization still needs to
be better controlled
 Tendency within government and its agencies to adopt
solutions with inadequate cost/benefit scrutiny
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May 3, 2005
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Risks in the present
situation (cont)
 Risk transfer from producers to consumers, through the Net Revenue
Requirement with lack of transparency: NRR will be aggregated with
other items in the Global Adjustment
 Apparent execution issues with the generation RFPs:
 delays, lack of major players, local opposition
 some projects don’t fit criteria; additional processes will be needed
 Realization in government that socioeconomic disruptions from
electricity policy are occurring; uncertainty about what to do about it
 Need to address longer term supply-side issues, e.g. next generation
nuclear, clean coal, natural gas depletion
 “Sovereign risk” (political/regulatory) in Ontario electricity industry is still
high by international standards, inhibiting investment
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May 3, 2005
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Desired end-state:
principles to follow
 A balanced generation portfolio
 by technology, geography, plant size, ownership, useful life
 Market liquidity on both the purchaser and seller side
 still room for more aggregation on the purchaser side
 long-term contracts need to play a larger role
 Avoidance of risk transfer
 generation investment and operational risks need to stay with the
generator’s investors
 Stable policy environment
 essential for sound investment planning on both the generator and
large consumer sides
 Balance of supply-side and demand-side solutions
 expanded role for industrial Demand Response
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May 3, 2005
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Desired end-state:
principles to follow (cont)
 Attention to cost causality
avoidance of cross-subsidies between producers and
consumers; between different classes of consumers, etc.
 Transparency
clear and unambiguous rules
disclosure of reasoning for decisions reached
opportunity for meaningful input
derivation of cost components identified
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May 3, 2005
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Some mechanisms to get
there
 Reconsider the off-coal decision
why create additional crises?
 Maintain and enhance the life of existing generation assets
generally less expensive to maintain than replace
will minimize NIMBY and BANANA
 Adjust the generation procurement process to include
opportunities that did not fit into the previous RFPs
examples: industrial cogeneration, district heating
establish an “evergreen” or open season process for projects
maintain environmental standards and verify proponent credibility on
all proposals
avoid arbitrary or ad-hoc solutions
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May 3, 2005
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Some mechanisms to get
there (cont)
 Monitor and control market power to avoid supra-normal
profit levels
 Maintain effective regulation of natural monopoly elements
 Provide minimum levels of incentives for new generation
 Assess the cost implications of fuel choices, technologies,
and other concepts and ideas
 Adopt the experience and best practices of others
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May 3, 2005
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Conclusions
 Original intention to deregulate Ontario electricity
market was the right move for its time
 Some execution problems got us into the present
“hybrid” state
 Long-term goal should still be as much competition as
possible, tempered by practicality
 In the short term, cost escalation is still a major concern
and must be controlled by addressing all components
 Attention to fundamental principles will help us manage
our way through this transition state
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May 3, 2005
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Contact Information:
Mike Kuriychuk, Chairman, Association of Major Power Consumers in Ontario
162 Cumberland Street, Suite 305
Toronto, ON M5R 3N5
Web Site: www.ampco.org
Direct Line: (807) 475-2432
E-mail: [email protected]
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