Parker Gallant on Ontario’s Energy Ministry: aiding the fortunes of…Quebec
No, no, don’t confuse me with the facts!
No, no, don’t confuse me with the facts!
Here from Ottawa economist Bob Lyman, who specializes in energy issues, is what you need to know about the Auditor General’s report, and why the losses mounted up to over $1 billion for both the Oakville and Mississauga gas plants.
ONTARIO AUDITOR GENERAL’S REPORT ON OAKVILLE POWER PLANT CANCELLATION COSTS: SUMMARY AND BRIEF COMMENTARY
On October 8, 2013, Bonnie Lysyk, Auditor General of Ontario, released a Special Report on the costs that have been incurred and are likely to be incurred by the public as a result of the cancellation of a natural gas-fired electricity generation plant in Oakville Ontario. In the period leading up to a provincial election, the Liberal government announced the cancellation of this plant on October 7, 2010. As a result of the cancellation, the Ontario Power Authority (OPA) was required to negotiate arrangements for the construction of alternative power generation facilities in Napanee, Ontario. Thus, the objective of the Auditor General Office’s review was to determine the costs of both the cancellation of the Oakville plant and the relocation of the power generation facilities to Napanee.
The need for a natural gas electricity generation plant in the Southwest Greater Toronto Area was first identified by the OPA in its 2007 Integrated Power System Plan. In response to the plan, the Minister of Energy and Infrastructure directed the OPA in 2008 to procure a combined–cycle natural gas generation facility in the area with a capacity of up to 850 megawatts (MWs), to begin operating no later than December 31, 2013.
In September, 2009, the OPA awarded a contract to TransCanada Energy Ltd. (TCE) to build the facility in Oakville. There followed significant local opposition from groups in the Oakville area, including the Town of Oakville. The government cancelled the project. Soon after, OPA and TCE began to negotiate a settlement on a replacement project. TCE had already incurred significant costs and was facing the loss of revenues it would have received if the original contract had been honoured. The negotiations were difficult. The Premier’s Office intervened, without consulting OPA, to assure TCE that it would be compensated for the financial value of its contract for the Oakville plant. The Minister of Energy instructed OPA to contract with TCE to build a new plant in Napanee. Finally, the Province and OPA agreed to an arbitration framework (for determining damages to be paid to TCE if no settlement was reached) that favoured TCE and waived the protections that OPA had under the original Oakville contract. In December, a deal was reached to relocate the plant to Napanee.
The Special Report lists two types of costs that resulted from the plant cancellation -the costs already incurred and the estimated future costs.
The costs already incurred include reimbursing TCE for its initial purchases of gas turbines for the Oakville plant and the modifications made to them ($210 million), sunk operating costs relating to the Oakville plant ($40 million) and legal fees ($3 million).
The estimated future costs essentially relate to the cost of constructing the Napanee plant, of increased gas connections to get natural gas to the Napanee plant, the costs of new gas pipelines to move gas to Napanee and new electricity lines to move electricity from Napanee to the GTA, the penalty associated with the use of less efficient gas turbines, and the cost of replacement power to make up for the non-availability of the Oakville plant’s power for some time. The Auditor General’s Office estimates these costs to be $859 million.
The total costs incurred plus estimated future costs are thus $1,112 million (i.e. $1.1 billion).
Estimated Future Savings
In return for taking on a portion of the costs that TCE would have incurred, OPA was able to negotiate a lower price for the power from the Napanee plant than it would have had to pay for the power from the Oakville plant. This results in an expected savings of $275 million. There is also a delay in the commencement of payments to TCE compared to what would have occurred under the Oakville contract because the Napanee plant will come into operation later. The OPA and Auditor General disagree on both the dates when the Oakville plant would have come into operation and when the Napanee plant will come into production. As a result of these disagreements, the Auditor General estimates the present value of the savings to be $162 million, and OPA estimates it to be $539 million.
Using the Auditor General’s figures, the net cost to the public will be $675 million.
Impact of Potential Toll Increase
TCE’s parent company will also benefit from the fact that under the Napanee agreement a section of the pipeline route owned by TransCanada Pipelines Limited (TCPL) effectively must be used to transport gas to Napanee. This section does not now have the capacity to transport the amount of gas that will be needed by the Napanee plant. Accordingly, TCPL will need to make additional capital investments and recover these costs through increased toll charges, which will get passed on to electricity ratepayers. Tolls could increase by up to 50% in the first three years; if so, over the 20-year term of the contract for the Napanee plant, the cost of gas delivery would increase by $140 million.
The Special Report makes some observations that raise concerns about the way the Ontario government managed this issue.
I would also observe that the need for additional natural gas generating plants is closely linked with the Ontario government’s commitment to add significant additional generating capacity from “green” energy sources, mainly wind turbines and solar power equipment. These intermittent sources of power require much more conventional energy sources to back them up for periods when they produce little or no electricity.
In reality, Ontario already has significant surplus electrical generating capacity, a situation that seems likely to continue until 2018 at the earliest. The problem seems to be one that is entirely of the government’s own making.
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You’ve read Bob Lyman, an economist specializing in energy issues, on these pages before.
In his latest work, he has written an overview of the last 10 years of energy policy as it relates to electricity in Ontario, and come up with the very worrying conclusion: the whole thing has been grossly mismanaged.
The question now is, can Ontario ever get out of this hole? That’s tough when Ontario keeps approving big, expensive wind power projects on the order of one a week this summer, despite not having a current long-term energy plan.
Here is Bob Lyman’s latest:
Ten Years of Liberal Mismanagement of Ontario’s Electricity System
A Layperson’s Summary
On July 16, 2013, Parker Gallant, a retired banker who for about six years has written about Ontario electricity policies, wrote an article to mark the forthcoming tenth anniversary of the Liberal Party’s tenure as government of Ontario. Mr. Gallant’s article can be found at the following link:
This article is of great importance for Ontario residents who want to understand what has been happening to electricity supply, demand and prices over the past decade and, perhaps more importantly, how they should weigh these developments as they contemplate forthcoming elections in the province. Shortly, there will be five by-elections in different parts of Ontario that may swing the balance of power in the legislature. It is also likely that there will be a general election in Ontario within the next two years.
Voters need to understand what the fuss is all about and how it affects them. Unfortunately, Mr. Gallant’s article, as wonderfully insightful as it is, might be difficult to understand for the average citizen who does not follow electricity matters on a regular basis. The objective of this note is to offer a somewhat simplified version of the story people should know. …
Read the whole document here: Ten Years of Liberal Mismanagement of Ontario’s Electricity System
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