‘Cross-Threaded’ Govt. Policies Hamper Market Development
By Rich Heidorn Jr.
TORONTO — On April 8, 2014, the Thunder Bay Generating Station belched out the last kilowatt of coal-fired electricity in Ontario, a signature achievement for Canada’s most populous province. “The single largest climate change initiative in North America,” the Ontario Power Authority boasted.
While the province is far ahead of its U.S. counterparts in reducing its CO2 emissions, it is in other ways trying to catch up to the U.S. Provincial and local governments own most of the generation, and most of the non-government generation is under long-term contracts. Hourly prices are set province-wide with no locational pricing. It began regional planning in 2013 and is only now considering a capacity market.
It was against this backdrop that about 650 industry participants gathered here last week for the Association of Power Producers of Ontario’s (APPrO) 27th Annual Canadian Power Conference & Networking Centre.
Many of the discussions would be familiar to those in the U.S.: flat load growth; the threat and promise of distributed generation and storage; the need to improve coordination between generators and gas pipelines; and concern over the future of an aging nuclear fleet.
Speakers at the conference included Dan Dolan, president of the New England Power Generators Association, and Gavin Donohue, president of the Independent Power Producers of New York, who commiserated with their Canadian counterparts over what they view as government interference in the markets.
But “New York and New England don’t have as much political intervention in picking winners and losers” as Ontario, said Jason Chee-Aloy, former director of generation procurement at the Ontario Power Authority.
Like Moths to Light
Evan Bahry, executive director of the Independent Power Producers Society of Alberta, said the result has been “cross-threaded policies.” Government has “this reflexive instinct to jump in and solve it for us,” he said. “They can’t help themselves. They’re attracted like moths to light.”
Several speakers lamented the fact that Canada lacks FERC and the Federal Power Act to clearly establish independent regulatory control over the sector and limit tinkering by elected officials.
APPrO Executive Director Jake Brooks says Canada’s electric industry is operating under a fragmented governance structure, with each province and territory, as well as the federal government, having its own energy legislation, its own energy ministry and its own energy regulator. As a result, he said in an editorial, “many viable projects never get financed because benefits are viewed myopically by each level of government without considering the gains being delivered to other levels of government.”
The shortcomings are evident, speakers said, in policymakers’ consideration of a capacity market.
The Independent Electric System Operator (IESO), which has managed the grid since 1999, merged in January with the Ontario Power Authority, combining short-term and long-term resource planning for the province, whose electric market is about the size of ISO-NE. (See related story, Ontario: Clean — and Expensive.)
IESO inherited from the OPA fixed term contracts for about 19 GW of operating capacity for a region whose peak is less than 22 GW.
“Ontario is in an awkward spot,” said Linda Bertoldi, chair of the National Electricity Markets Group for law firm Borden Ladner Gervais. “[It’s] so heavily contracted [that] there’s little liquidity for a capacity market.”
“It’s really hard to be half pregnant on markets,” agreed Dolan. “If you do go down the path of capacity markets, you pretty much have to be all in. I don’t think you can say we’re only going to do it for this portion and not that portion.”
APPrO President David Butters said the province must address its governance issues if it is to adopt a capacity market. “How do we limit the ability of government to interfere in markets and to undermine the value of investments and contracts?” he asked. “That is the really big issue to me.”
Jasmine Bertovic, vice president and general manager for eastern energy at TransCanada, said the market’s current price signals are muted. And he’s not sure the changes being contemplated will be improvements.
“I’m worried that we may be introducing new signals that just add complexity without changing behavior, or have some purpose or some cost-benefit.”
He likened “bolt-ons” to the market to the “Whac-a-Mole” arcade game, with unintended consequences popping up. “These things have to be part of an overall framework,” he said.
Regarding a move to LMPs, he said: “Every little piece that’s connected to the grid has a separate price. It’s all nice to know that information, but if it’s not leading to improved transmission infrastructure or transmission does not participate in locational pricing, then why have that signal?”
Going to War Without a Target
Adam White, president of the Association of Major Power Consumers, also expressed reservations.
“Planning without a vision is like going to war without a target. What are we planning for? Market evolution is inexorable. It’s inevitable. Evolution is all the [stuff] that happens over time. But that’s not a plan. That’s not a vision for the future we want,” he said. “The Ontario market’s evolved quite a lot in the years since it’s been opened … but it’s still sort of a 1.0 version of the market.”
Version 2.0, he said, needs to acknowledge the shift to distributed energy systems.
JoAnne Butler, IESO vice president for market development, also cited the growth of distributed generation, along with solar power and storage, as drivers for the future. “The change we’re going to see in the next 10 years — going off coal pales in comparison,” she said.
The Ontario Electric Board, which regulates prices for small consumers, last week issued a Regulated Price Plan Roadmap that seeks to address those changes, calling for phasing in fixed distribution rates and decoupling for commercial and industrial customers.
“I’m confident that regulation won’t disappear, at least not in the short term,” said Rosemarie Leclair, chairman of the board. “But what we regulate and how we regulate will change. It has to.”
Some worry, however, that the OEB’s efforts to pursue its plan will be undermined by a bill the provincial legislature is considering.
George Vegh, former general counsel of the OEB, said Bill 135 would effectively give the province’s minister of energy IESO’s responsibility for electricity planning and procurement and the OEB’s authority for approving transmission. It also would extend the government’s procurement authority to energy storage and transmission.
“The net result of Bill 135 is therefore to ensure that the main energy institutions — the IESO and the OEB — are focused almost exclusively on implementing government plans and directives,” Vegh, now head of the Toronto energy regulation practice for law firm McCarthy Tétrault, wrote in a commentary. “The government has always been steering the direction of energy policy. It is now rowing as well: It is in direct control of every policy instrument available.”
Chee-Aloy, now a consultant with energy management firm Power Advisory, said the government is “doubling down” on its “command and control” oversight.
“Of course the government could say: ‘IESO, use a capacity market to procure those resources.’ But it’s kind of hard for a market to work as a market when you don’t have a lot of participants competing to build or to upgrade those resources,” he said.
IESO CEO Bruce Campbell said he disagreed with those who think the bill will constrain the ISO. “I’d like to argue the exact opposite — that with the directing authority being taken away from the minister and going up to the cabinet level, it will inevitably be a much more policy-oriented framework. I view us as having a great future within that framework in implementing policy in the best possible way.”
Jack Burkom, senior vice president of commercial development for Brookfield Energy Marketing, said that while he hopes for “more significant market price signals … we’ll also continue to use contracting mechanisms.”
He urged IESO to act more quickly.
“The IESO shouldn’t wait for a trigger. The trigger is here. There’s existing infrastructure in the province that should be given the opportunity to compete to provide services when they come off of contact,” he said. “As JoAnne [Butler] said, ‘it’s not either/or.’ We’re not going to turn into PJM overnight.”