AMPCO presentation CAMPUT 2005 Conference
Download
Report
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
Presentation to CAMPUT 2005 Conference
May 3, 2005
2
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
Presentation to CAMPUT 2005 Conference
May 3, 2005
3
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
Presentation to CAMPUT 2005 Conference
May 3, 2005
4
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
Presentation to CAMPUT 2005 Conference
May 3, 2005
5
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
Presentation to CAMPUT 2005 Conference
May 3, 2005
6
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
Presentation to CAMPUT 2005 Conference
May 3, 2005
7
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
Presentation to CAMPUT 2005 Conference
May 3, 2005
8
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
Presentation to CAMPUT 2005 Conference
May 3, 2005
9
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
Presentation to CAMPUT 2005 Conference
May 3, 2005
10
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
Presentation to CAMPUT 2005 Conference
May 3, 2005
11
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
Presentation to CAMPUT 2005 Conference
May 3, 2005
12
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
Presentation to CAMPUT 2005 Conference
May 3, 2005
13
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
Presentation to CAMPUT 2005 Conference
May 3, 2005
14
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
Presentation to CAMPUT 2005 Conference
May 3, 2005
15
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
Presentation to CAMPUT 2005 Conference
May 3, 2005
16
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
Presentation to CAMPUT 2005 Conference
May 3, 2005
17
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]
Presentation to CAMPUT 2005 Conference
May 3, 2005
18