electricity conservation and supply task force (ecstf) - final report to the minister

7/31/2019 Electricity Conservation and Supply Task Force (ECSTF) - Final Report to the Minister

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TOUGH CHOICES:TOUGH CHOICES:Addressing Ontarios Power Needs

Final Report to the Minister

January 2004


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January 9, 2004

The Honourable Dwight Duncan, MPPMinister of Energy4

thFloor, Hearst Block

900 Bay StreetToronto, OntarioM7A 2E1

Dear Minister:

The Electricity Conservation & Supply Task Force (ECSTF) has thehonour of presenting its report to you in accordance with the mandate

and terms of reference set out for its creation on June 27, 2003.The recommendations in our report represent a broad consensus onchanges that need to be made if the Ontario electricity industry is tosuccessfully meet the challenge of a growing gap between futuredemand and supply. While not all members of the Task Force agreewith all the recommendations, all members concur with the basicfindings and the general directions that have been suggested.

The Task Force was privileged to have advice from over ninetyexperts, as well as access to staff in many organizations. We wouldlike to express our appreciation to the many participants andpresenters who contributed to our understanding of the issues andchallenges currently faced by the Ontario electricity sector.

Respectfully submitted,

Courtney Pratt - Chair of the Task Force


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Bruce AnderChair, Canadian Energy Efficiency Alliance

Bruce BolandSenior Vice President, Ontario Power Generation

John BracePresident, Association of Power Producers of Ontario

Gunars CekstersPresident and CEO, Enersource Corporation

Mike Crawley

President and CEO, AIM PowerGen Corporation

Don GibsonPartner, McCarthy Ttrault

Dave Goulding

President and CEO, Independent Market Operator


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Duncan HawthorneCEO, Bruce Power

Ed HoughtonChair, Electricity Distributors Association

Rebecca MacDonaldChair and CEO, Energy Savings Income Fund

David McFaddenChair, Stakeholders Alliance for ElectricityCompetition and Customer Choice

Paul NorrisPresident, Ontario WaterPower Association

Tom ParkinsonPresident and CEO, Hydro One Inc.

Jan PeetersChairman and CEO, Olameter Inc.


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Bryne Purchase

Deputy Minister of Energy

Mary-Ellen RichardsonPresident, Association of Major Power Consumers

Notes:

From July to November, the Task Force was co-chaired by Peter Budd(Powerbudd LLP) and Gunars Ceksters.

John O'Toole (MPP for Durham) was a member of the Task Force until Octoberand Ron Osborne (then President and CEO of Ontario Power Generation) was amember until November.

Michael Lio (Executive Director of the Consumers Council of Canada)participated on the Task Force starting in August.

Donna Cansfield (Parliamentary Assistant to the Minister of Energy) and RichardPatten (Parliamentary Assistant to the Minister of Education) participated startingin October.

Howard Wetston (Chair, Ontario Energy Board) participated in many Task Forcesessions, but was not a voting member.

Don MacKinnon, President of the Power Workers Union, was a member of theTask Force and supports much of its work, but based on his concern that therecommendations with respect to coal and gas fired generation wereinsufficiently strong, declined to sign the Final Report.


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Table of Contents

Executive Summary

1. Process and Recommendations

2. The Demand/Supply Outlook

3. A Plan that Works for Consumers

4. Delivering Sustainable Conservation

5. Ensuring Adequate Supply

6. Enhancing the Reliability and Responsiveness of OntariosElectricity Grid

7. Conclusion: A Framework to Address Ontarios Power Needs

Appendices:

A1. Desired Sustainable State

A2. Glossary

A3. Who We Met

OUR TERMS OF REFERENCE

The Electricity Conservation and Supply Task Force will:

Provide an action plan outlining ways to attract new generation and identifying mechanisms for demand side

management. The plan will be based on principles of security of supply, adequacy, affordability, reliability, environmental

soundness and the competitiveness of the Ontario economy.

Identify any barriers to the development of long-term electricity supply and conservation, and recommend solutions.

Make recommendations on how to enhance the reliability and responsiveness of Ontarios electricity grid.

TOUGH CHOICES:TOUGH CHOICES:Addressing Ontarios Power Needs

Final Report to the Minister

January 2004


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Table of Contents

EXECUTIVE SUMMARY........................................................................................ i

1. PROCESS AND RECOMMENDATIONS..................................................11.1 The Challenge............................................................................................. 11.2 What We Heard.......................................................................................... 21.3 Our Approach.............................................................................................. 41.4 Principles Underlying Our Action Plan........................................................ 51.5 A Plan that Works for All Electricity Consumers ........................................ 61.6 Encouraging Conservation ......................................................................... 71.7 Ensuring Adequate Supply ......................................................................... 91.8 Enhancing the Responsiveness and Reliability of the Grid ..................... 131.9 More Effective Institutions......................................................................... 141.10 Addressing the Future Role of OPG ........................................................ 16

2. THE DEMAND/SUPPLY OUTLOOK.......................................................182.1 Introduction ............................................................................................... 182.2 Demand Growth Trends and Outlook ...................................................... 182.3 Demand Growth and Conservation Scenarios ........................................ 202.4 Recent Supply Trends .............................................................................. 232.5 The Supply Outlook .................................................................................. 24

3. A PLAN THAT WORKS FOR CONSUMERS .........................................263.1 Stable, predictable, affordable prices ....................................................... 263.2 Options for stable prices in the medium term .......................................... 273.3 Retail Choice for Consumers ................................................................... 283.4 Communication with Consumers ............................................................. 293.5 Consumer Protection................................................................................ 303.6 Getting There............................................................................................ 30

4. DELIVERING SUSTAINABLE CONSERVATION...................................324.1 Introduction ............................................................................................... 324.2 What do We Mean by Conservation?...................................................... 334.3 The Rationale for Conservation................................................................ 344.4 Demand Response................................................................................... 364.5 Enabling Consumers to Better Respond to Prices................................... 38


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4.6 The Role of Local Distribution Companies............................................... 404.7 The Role of the Private Sector ................................................................. 414.8

The Role of the Voluntary Sector ............................................................. 41

4.9 Setting Standards: The Role of Government in Delivering

Conservation............................................................................................. 424.10 The Need for a Conservation Champion ................................................. 43

5. ENSURING ADEQUATE SUPPLY..........................................................475.1 Introduction ............................................................................................... 475.2 Roles of Baseload and Peaking Plant...................................................... 475.3 Renewable Energy.................................................................................... 495.4 Natural Gas-Fired Generation .................................................................. 515.5 Distributed Generation.............................................................................. 535.6 Nuclear Power .......................................................................................... 555.7 The Role of Imported Power .................................................................... 585.8 Coal-Fired Generation .............................................................................. 585.9 Implications of Alternate Supply Mixes..................................................... 595.10 Financing New Investment ....................................................................... 645.11 Stable Policy and More Effective Institutions ........................................... 665.12 Addressing the Future Role of OPG ........................................................ 67

6. ENHANCING THE RELIABILITY AND RESPONSIVENESS OFONTARIOS ELECTRICITY GRID ..........................................................746.1 Introduction................................................................................................ 746.2 Transmission Planning.............................................................................. 76

6.3 Upgrades................................................................................................... 76

6.4 Enabling New Supply within Ontario ......................................................... 77

6.5 Interconnections ........................................................................................ 77

6.6 Technology................................................................................................ 79

6.7 Regulatory Processes ............................................................................... 80

6.8 An Integrated Solution............................................................................... 817. CONCLUSION: A FRAMEWORK TO ADDRESS ONTARIOS

POWER NEEDS......................................................................................837.1 Coping with a Changing World................................................................. 837.2 What changed?......................................................................................... 847.3 Where are we now?.................................................................................. 857.4 The Task Forces Action Plan .................................................................. 867.5 Transitional Measures .............................................................................. 877.6 Conclusion ................................................................................................ 88


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APPENDICES

A1. DESIRED SUSTAINABLE STATE..........................................................89A2. GLOSSARY.............................................................................................91A3. WHO WE MET.......................................................................................102


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Executive Summary

Ontario faces a looming electricity supply shortfall as coal-firedgeneration is taken out of service and existing nuclear plants approachthe end of their planned operating lives. Early action is needed toensure that Ontarians continue to enjoy an affordable and reliablesupply of power and that electricity prices in the province remaincompetitive with prices in jurisdictions with which Ontario competes for

investment and jobs.

The Electricity Conservation and Supply Task Force was established inJune 2003 to develop an action plan for attracting new generation,promoting conservation and enhancing the reliability of thetransmission grid. The Task Force consisted of nineteen leaders fromall parts of the electricity industry, including representatives ofconsumers, workers and environmental groups. The Task Force metweekly, and heard presentations from nearly 100 experts representingdifferent companies and stakeholder organizations. We heard anddebated a wide range of options from stay the course to close the

market and go back to regulated prices.

The Task Force concluded that the market approach adopted in thelate 1990s needs substantial enhancement if it is to deliver the newgeneration and conservation Ontario needs, within the timeframes weneed them. Major changes in the energy economy and in public policyhave undermined the viability of the original market design.

The four most important changes have been (1) the demise of themerchant generation and related financial markets following thecollapse of Enron and other energy traders (2) the increase in the level

and volatility of natural gas prices, which many experts believe willcontinue to at least the end of the decade (3) the Governmentscommitment to phase out coal-fired generation by 2007, and (4) theGovernments commitment to keep all its generation assets in publicownership, which necessitates a review of the Market Power Mitigation

Agreement and the role of Ontario Power Generation.


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The Task Force determined that its action plan should be built from theground up, starting with a plan that works for consumers. The Task

Force heard that consumers want and need stable prices that reflectthe true cost of power, as determined by an independent regulator.The Government has already instructed the Ontario Energy Board toreport on an appropriate price determination process by early 2005.The Task Force recommends that the OEB and the Minister consider ablended price approach for default supply customers which takesaccount of the low marginal cost power from OPGs heritage assets,as well as power from long term contracts and the spot market.Greater price stability can be achieved by reducing the importance ofthe hourly spot market price in the calculation of final customer bills.

The Task Force recommends that consumers should continue to havethe option of entering into supply contracts with energy retailers andwholesalers. Choice of provider was an important reform introduced bythe Electricity Act of 1998. Retail competition will be helpful in drivinginnovation and conservation-oriented products and services.Consumer education and protection will be critical to the success of theretail market.

The Task Force calls for the creation of a conservation culture inOntario. Again, education and improved co-ordination among providerswill be critical. Specific recommendations include the adoption of newmarket rules that promote demand-side bidding by large volume

customers, the removal of rules that financially penalize localdistribution companies when they engage in conservation efforts, thepromotion of technologies and rate offerings that facilitate time of useshifting, and the creation of a conservation champion to monitor andco-ordinate conservation efforts across the province. The Task Forcebelieves that growth in peak demand can be reduced from 1.7 per centper year (the average over the past ten years) to 0.5 per cent per year,which is in line with recently announced Government targets.

A key concept, going forward, is that demand reduction should begiven the opportunity to compete with supply side alternatives, and be

evaluated on a level playing field.

On supply, the Task Force recommends that the Independent MarketOperator should determine adequate reserve margins and have theauthority to ensure they are met. The IMO should also haveresponsibility for developing an integrated planning framework toprovide more long-term certainty to investors and the marketplace.


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The Task Force recommends less reliance on the spot market as asignal for new investment. There should, instead, be greater reliance

on long term contracting between generators and large volume buyers.With the collapse of the energy trading business, there are few credit-worthy buyers willing to enter into long term contracts with newgeneration developers. There is therefore a need for a central agency,possibly the IMO, to take on the contracting function and ensure thatinvestment projects are financable. Prudently incurred costs would berecovered from consumers.

The Task Force envisions that, over time, centralized contracting withgenerators would give way to more decentralized contracting, as six toeight load-serving entities emerge to provide the default supplyservice and seek out procurement contracts with generators andothers.

The Task Force calls for quick action to implement the RenewablePortfolio Standard. Renewable generation will be a vital part of thefuture supply mix.

The Task Force recognizes the value of distributed generation andadvances several recommendations that either remove barriers tosuch generation, or encourage it where there is a net system benefit.

The Task Force notes that, even with strong pushes on conservation

and renewables, the demand-supply gap remains very wide. It willneed to be filled in a way that recognizes the physical requirements ofthe electricity system and the unique attributes of the differentgeneration types. Given the imperative of early action, there will needto be a certain amount of central co-ordination.

! Gas-fired plants can be operated as either peaking, intermediate orbase load plants, can be built relatively quickly, and are relativelyclean. However, with natural gas prices at current levels andexpected to remain high, gas-fired generation (with the exception ofcogeneration facilities and some distributed generation) isincreasingly seen as best suited to meeting peaking and

intermediate load needs. Using gas-fired generation to meet baseload needs would likely result in higher and more volatile prices inOntario than in markets with significant coal, hydro or nuclearbaseload production, especially under the market pricing rules nowemployed in Ontario.


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! Nuclear plants operate as base load facilities, with low operatingcosts. But nuclear investments, whether for refurbishment or new

build, could involve major performance and financial risks that wouldneed to be addressed.

! Imports from Manitoba, Quebec and Labrador could provide cleanhydro power for intermediate and peaking purposes, but building thenecessary transmission would be costly, and would take time.

The Task Force favours a diverse supply mix, and a balancedapproach to filling the gap. It recommends that a process be put inplace quickly to enable the negotiation and contracting of a range ofnew supply capacity to address the looming supply shortfall.

The Task Force finds that, to avoid major supply risks, coal plants may

need to be kept in operation until adequate replacement generationand demand reduction measures are in place.

The Task Force notes the recent appointment of the OPG ReviewCommittee chaired by the Honourable John Manley. It recommends tothe Review Committee, and the Minister, that OPG be restricted to aninvestor of last resort role in any contracting for new green-fieldgeneration.

Private investment and risk taking should be the mainstay of the futurepower system, following competitive principles. Generators who werewilling to make an early commitment to Ontario, either through NUGcontracts or more recent investments, should not be penalized by theproposed new approaches on resource adequacy.

It is recommended that the transmission system be planned andmanaged as basic public infrastructure, facilitating new supply andcompetition. Expansion would be planned on a pro-active basis andcost-recovery would be through transmission rates, subject to OEBapproval. Hydro One, as the principal transmitter, would be required toissue a long term plan for transmission development, and update itannually. The Task Forces recommendations represent a shift awayfrom the merchant transmission approach underlying the present

model.

The Task Force presents a number of recommendations that aim toclarify the roles and responsibilities of different players in the electricityindustry, notably the IMO, the OEB, and the local distributioncompanies. The report discusses the roles of OPG and Hydro One,


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and also suggests possible directions for the future evolution of certainprivate sector entities, such as retailers and wholesalers.

The report notes the importance of addressing the need for skilledworkers as the electricity industry goes through a major demographicshift. It also notes the need to support technological advance, andproposes that research and innovation be promoted through Centres ofExcellence in Electricity and Alternative Energy Technology, and othermechanisms.

The Task Force believes that its recommendations, taken together, willshepherd the Ontario electricity sector through its current supply anddemand challenges and lead to a sustainable electricity market in thefuture that enjoys adequate, affordable and reliable supply.

The Task Force made a number of tough decisions in arriving at therecommendations in this report. Much tougher choices will need to bemade in the near term as specific investment and policy implemen-tation decisions are made, within the improved framework we haveproposed.


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Process and Recommendations

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1. Process and Recommendations

1.1 The Challenge

Ontario faces a looming electricity supply shortfall in the yearsahead as coal-fired generation is taken out of service and existingnuclear plants approach the end of their planned operating lives.Current projections suggest that, without new supply and substantial

conservation efforts, Ontario could have insufficient power to meetits peak requirements by 2006. By 2014, the province would haveonly half the generation capacity it needs to ensure adequate andreliable electricity service.

FIGURE 1.A

The Electricity Conservation and Supply Task Force wasestablished in June 2003 and charged with developing an actionplan to address the provinces need for an affordable, reliable andenvironmentally acceptable power supply over the period to 2020.

Existing Generation vs. Peak Demand

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

Year

Capacity(MW)

Total Installed Capacity (MW) Assuming Existing Generation Assets and Planned Plant Life

Peak Demand - IMO Medium Growth Forecast (MW)Peak Demand + 15% Reserve (MW)


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More specifically, the Task Force was mandated to recommendapproaches to support conservation, attract investment in new

generation, and enhance the reliability and responsiveness ofOntarios electricity grid. Many dramatic developments haveoccurred in the North American energy industry in the past fiveyears. Given these changes, it became necessary to review theeffectiveness of the provinces existing policies and institutionalarrangements for electricity, and to consider broad-based optionsfor change.

Chapter 7 describes what has changed since the introduction of theEnergy Competition Act, 1998, and summarizes the Task Forcesplan to move the Ontario electricity sector toward a sustainablefuture.

During the course of the Task Forces deliberations, a blackoutoccurred that affected a significant area across the North Easterngrid network. A number of panels were tasked with investigatingthe event and making recommendations. While the present TaskForce has not been specifically directed to consider therecommendations of these other panels, we believe that theproposals we are making will result in the creation of a more robustOntario electricity network that will be able to better respond to suchexternal events should they re-occur in the future.

1.2 What We Heard

The Task Force met thirty times, and had detailed discussions withover 90 individuals and organizations representing all sectors ofsociety, including residential consumers, small business, the farmcommunity, large industry, environmental groups, voluntaryorganizations, labour organizations, members of the financialcommunity, energy producers, electricity retailers and wholesalers,electricity distributors and transmitters, regulatory authorities andgovernment organizations.

We found wide recognition that the province faces enormouschallenges as it attempts to maintain an adequate and reliablepower supply, while ensuring affordable and competitive electricityand a clean and safe environment.

The way in which the people of Ontario produce and use power willundergo a revolution within the next 20 years. In fact, by 2020,


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about two-thirds of the provinces existing electricity generatingcapacity will have reached the end of its planned operating life.

We found a wealth of talent and enthusiasm for meeting thechallenge. This is not a challenge the energy industry can meetalone. It will take a broad partnership that includes all consumers,producers and interest groups. And, as our report suggests, it willtake determined and consistent leadership from the Government.

We found support for an electricity sector that is based oncompetitive principles. While consumers want stable and affordableprices, they appreciate that competition is needed to ensure goodmanagement, and keep downward pressure on costs and prices.There is general agreement that the old Ontario Hydro monopoly

should not be recreated, and understanding among consumers thatartificially low prices are a major disincentive to investments in bothconservation and new supply.

Some of the people we met argued persuasively that what isrequired is a clear commitment from the Government to a market-driven electricity system. The Task Force recognizes that privateinitiative, driven by clear price signals, must play a central role inaddressing Ontarios power needs and our action plan providesadvice on ways to make those signals clearer and more effective.

However, we also heard that a market-driven system alone isunlikely to deliver the new generation and conservation Ontarioneeds within the timeframes we need them, and at acceptableprices. Major changes in the energy economy and in public policyhave undermined the viability of the market that was adopted in thelate 1990s.

Potential developers of generation are having great difficultyfinancing new investment. The merchant generation model was builton the assumption that energy traders like Enron would take onfinancial risks and provide the power purchase commitments that

generation investors need to be able to finance their projects. Thisinvestment model fell victim to the collapse of the energy tradingbusiness after 2001.

Equally important, there has been a shift in the prevailing view aboutnatural gas prices and availability. Prices have risen dramaticallyand continue to be volatile, and the adequacy of the North American


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gas supply over the medium term is being questioned. As a result,energy market experts no longer see natural gas as a stable and

affordable fuel that will increasingly be chosen for new baseloadgeneration. Natural gas-fired generation offers a number ofadvantages compared to other power sources, including shorterlead-times, lower capital costs, relatively few emissions and easiersiting. Despite these advantages, higher gas prices mean that gasfired generation will tend to be used primarily for meetingintermediate and peak power needs.

Changes in public policy also make it more difficult to rely on puremarket based solutions in the near term. The Government sees thehealth and environmental consequences of burning coal withexisting technology as unacceptable and plans to phase outOntarios 7500 MW of coal-fired generation by 2007. Consequently,the need for replacement power in the near term is immense. Somemembers of the Task Force believe that the phase out poses largeeconomic costs and that the environmental benefits can best beachieved by other means.

A second important policychange is the Governments commitmentto maintain public ownership of its existing generation assets. Thiscommitment makes it necessary to reconsider the plan to graduallyde-control the assets of Ontario Power Generation, and to re-evaluate the role of OPG in the evolving market structure.

Reliable electricity supply and competitive power prices areessential to the maintenance of the jobs and standard of living weenjoy in Ontario. We heard that, without a change in our approachto the electricity market, investment could go elsewhere, and thehealth of our economy could be put at risk.

1.3 Our Approach

The Task Force has identified a wide range of barriers to investmentthat need to be addressed. We have concluded, on balance, thatrelying on market signals alone is simply too risky an approach totake, given the potential consequences of failing to achieve theneeded early investments in new supply and conservation.

That said, we fully support the principles of competition andconsumer choice. Competition and choice are essential if we hopeto achieve an efficient and responsive electricity sector. Ontarians


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need comfort that the looming supply gap will be addressed, butthey also need comfort that the electricity system that is developed

going forward remains workable, fair and efficient.

The action plan we are proposing is designed to support andaccelerate the development of a competitive power supply market inOntario. Given the economic and policy changes described above,and the long lead times for supply side investments, we haveconcluded that Ontarios competitive electricity system will evolvemost effectively if there are complementary planning and oversightmechanisms to ensure that the needs of Ontario consumers aremet.

While many of our recommendations address the provinces

immediate requirements, we have also considered where Ontarioshould be heading in the longer term. Appendix 1 describes whatwe have called a desired sustainable state . It is a collection ofqualitative statements about the type of electricity system Ontarioshould strive to create in the long term. Our recommendationswere driven by the need to arrive at practical solutions, not by atheoretical model or vision. And our mandate did not permit us togo into all topics on the list. Nevertheless, Appendix 1 may provideuseful context and a general sense of how the Task Force looked atthe big picture.

1.4 Principles Underlying Our Action Plan

The Task Forces terms of reference establish the principles thatinform our action plan: security of supply, adequacy, affordability,reliability, environmental soundness, and preservation of Ontarioseconomic competitiveness. We have followed these principles inputting together our recommendations to attract new investment,promote conservation and demand shifting, protect consumers,provide reliable high quality power, improve air quality, and providecompetitively priced power for all consumers.

Several other principles became important as our work proceeded.It became clear that the Government would need to move quickly,and that, in a number of cases, the ability to implementrecommendations quickly would be an important criterion indeciding which option the Task Force should recommend.


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Second, we became increasingly aware of the need for acomprehensive approach that links, and balances, a number of

different issues. The electricity sector is an extremely complex one,and it is difficult to change one part of it without triggering a flow ofnecessary changes to other parts. For example, it would be difficultto address investment and conservation without also consideringthe structure and role of electricity prices. Changes must be clearand understandable, and they must add up to a consistent whole.This is one reason why we found our task so challenging.

Third, we believe that the action plan should draw all Ontarians intothe solution. The Government needs to move quickly to engage allconsumers, producers and interest groups. Everyone will need toplay their part. The supply gap is not something that can be left tothe government to solve. In recognition of this, we make a numberof recommendations on appropriate roles for different organizationsand groups, including consumers and the private sector. We alsostress the importance of developing new partnership models forprogram and service delivery.

The balance of this chapter summarizes our recommendations.

1.5 A Plan that Works for All Electricity Consumers

The Task Force met many experts and spent many hoursconsidering the nature of the electricity prices and offerings thatshould be available to consumers. We heard that consumers wantand need stable, predictable prices. We also heard that consumersrecognize the need to eliminate subsidies and to pay the true costof power, that they want the means to be able to understand andmanage their electricity bills, and that many consumers want to beable to choose their electricity supplier. Business customers made itclear they need reliable, affordable power in order to remaincompetitive.

Consistent with our long term vision, and as described more fully inChapter 3, we recommend as follows:

1) Consumers should have access to a reliable default supply ofelectricity at stable prices that reflect the true cost of power, asdetermined by the Ontario Energy Board.

Stableelectricityprices


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2) All consumers should continue to have the option of entering intosupply contracts with energy retailers and wholesalers.

3) As part of its mandate to develop new mechanisms for settingdefault supply prices in the future, the OEB should consider ablended price approach which reflects the cost of power fromOPGs existing generating facilities (also referred to as heritagepower) and long term contracts, as well as the costs of powerfrom shorter-term contracts and the spot market. Spot marketsshould not be the primary determinant of electricity prices formost consumers in Ontario.

4) Ontario should develop a comprehensive and coordinatedapproach to providing consumers the information they need tounderstand how the electricity market affects them and whatthey can do to control their energy costs. Government, localdistribution companies, retailers, non-governmentalorganizations and others will need to be involved. Theeffectiveness of this program should be monitored on an ongoingbasis.

5) In designing default supply prices, the OEB should ensure thatsuch arrangements do not unduly impede the development ofretail competition.

6) Consumers who invest in smart meters should be offered ratesthat reflect differences in the cost of power between peak and

off-peak periods.

7) Consumers want public institutions that vigorously defend andpromote the public interest and protect taxpayers dollars.Oversight agencies (notably the OEB) should ensure thatregulated entities (such as Hydro One and the local distributioncompanies) use processes, procedures and rate structures thatdeliver required investments and are accountable, transparentand fair across ratepayer groups.

1.6 Encouraging Conservation

Conservation measures are sometimes the cleanest and cheapestway to address Ontarios power needs. They can make ameaningful contribution toward reducing the need for newgeneration plants. We heard about a number of procedures andrules that work against conservation, and should be changed. Forexample, local distribution companies, despite being well placed to

Retail access

Consumerinformation

Default supplypricing

Peak and off-

peak rates

Accountability


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promote conservation, are in effect penalized for doing so. We notethat the Government has already terminated the 4.3 cents per kWh

price freeze, a move which we fully endorse. We heard that theremay be systematic underinvestment in conservation because thebenefits associated with conservation do not accrue solely to theindividuals and entities that carry out the conservation measures. Aswith supply initiatives, support needs to be targeted at conservationmeasures that deliver results in the most cost-efficient manner. Ourrecommendations on conservation and demand management areas follows:

1) Ontario needs to create a conservation culture that deliverscumulative and sustainable improvements in energy use anddemand response. Ontarios long-term plan for electricity should

include a comprehensive conservation strategy, with cleartargets, reflecting a full analysis of the costs and benefits ofconservation.

2) The IMO should introduce market rule changes and systems tofacilitate increased demand response in the wholesale energymarket.

3) The IMO market rules should enable demand response capacityto bid into, and be recompensed by, any capacity marketdeveloped in Ontario, on the same basis as supply capacity.

4) Consumers should be encouraged to shift consumption fromperiods of high demand and high prices. In order to achieve this,they will need both the incentives in terms of differentiated pricesand the technology in the form of smart meters.

5) Retailers, energy service companies and local distributioncompanies should be given benefit sharing opportunities toencourage them to invest in and market new technologies andservices in order to help consumers reduce consumption andshift their power use from periods of high demand and highprices.

6) Local distribution companies and transmitters should be

compensated under appropriate regulatory oversight wheneverthey invest directly in demand side management, or work withprivate sector companies to facilitate it. They should also becompensated for revenue loss resulting from conservation. Thisis currently done in the natural gas industry.

Conservationculture

Load shifting

Cost recovery

Wholesale marketfor demandresponse

Benefit sharing


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7) Local distribution companies should evaluate proposedconservation initiatives on an equal basis with new supply

options and distribution investments.8) The private sector has a key role to play in developing and

marketing conservation solutions and should be encouraged toprovide conservation services at both the retail and wholesalelevel. The private sector should be recognized by the OEB as analternative to LDC delivery of conservation measures.

9) The voluntary sector and other non-governmental organizationsshould have a role in delivering conservation solutions directly toOntario homes, farms and businesses.

10) Governments should contribute to enhanced conservation in a

variety of ways, including through tax incentives, thedevelopment of energy efficiency standards and reducing theirown electricity use.

11) Education is key to ensuring effective implementation of energyconservation programs. A consistent message needs to begiven across Ontario, encouraging conservation and providingall stakeholders with an understanding of available programsand how to use them.

12) A conservation champion should be created to monitor andcoordinate conservation activities and serve as the focal point

for a conservation culture in Ontario.13) The Task Force endorses the process currently under way at

the Ontario Energy Board which is expected to provide moredetailed advice to the Government in the spring of 2004 on theappropriate organization and funding of conservation in Ontario.

1.7 Ensuring Adequate Supply

Ontario urgently needs investment in new generation andtransmission capacity. In light of the major changes that haveoccurred in the North American energy markets in the past few

years, Ontario needs increased Government leadership and morecoordinated supply and demand responses if it is to secure theneeded investment.

There is currently a lack of credit-worthy power buyers and tradersable and willing to enter into the long-term contracts that generatorsneed in order to finance their investment projects. In addition, major

Private sectorand NGO roles

Governments

role inconservation

ConservationChampion

OEB review ofDemand SideManagement


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supply options often have long lead-times. The spot market cannotbe the primary mechanism for attracting investment in new supply to

the Ontario market.

Due to the severity of the situation, several transition measures arenecessary in the near term. These measures must be designed insuch a way that they support the development of a well-functioningcontract-based market over the longer term. These contractingissues, and the recommendations to which they lead, are discussedin Chapter 5. Our recommendations are as follows:

1) Ontario should move toward an electricity sector basedincreasingly on longer term contracts among multiple buyersand multiple sellers. Transitionmeasures, outlined below, will beneeded to accelerate the attainment of this ultimate goal.

2) The spot market should continue to operate as a balancingmarket to ensure efficient resource utilization and dispatch.

3) The market should be structured so as to provide efficientsignals for supply planning and demand response. The IMOshould proceed with work currently underway that could lead tothe introduction of a day ahead market. A spectrum of futuresmarkets should also be developed.

4) The Government should provide guidance to the IMO on thedesirable composition of supply and demand in the Ontario

electricity system, in terms of diversity of generation mix,environmental criteria, regional supply needs, the role ofimports, and other matters.

5) The IMO should develop a long-term integrated system planwithin the context of Government policy direction and inconsultation with the Government, the Ontario Energy Board,potential private investors, major load customers, transmittersand others, to guide development of the supply and demandresources needed to meet the power needs of Ontarioconsumers.

6) Given the long lead-times associated with some of the supplyoptions available to Ontario and recognizing the life expectationof certain major facilities, the IMO should project supply anddemand trends for 25 years, rather than the current 10 years.

7) The IMO should determine adequate reserve margins forOntario, consistent with international standards for adequacy

Transitionmeasures

Role of spotmarket

Efficient marketsignals

A diverse supplyand demand mix

Integratedplanning

Ensuringadequate reservemargins


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and reliability, and should be given the authority necessary toensure these margins are maintained.

8) As a transition measure, the Government should move quicklyto designate, or create, an agency to provide the cost recoverycertainty investors in new supply capacity currently require. Withthe appropriate governance and other safeguards to ensureagainst any possible conflict of interest, the IMO could beempowered to administer such measures. The measuresavailable to the contracting party must be flexible enough toaddress the diverse timing and financing needs associated withvarious new supply and demand options. Any costs associatedwith this resource adequacy activity would be recovered fromcustomers.

9) The portfolio of contracts developed pursuant to the previousrecommendation should reflect the short-term, medium-termand long term power needs of the market, as well as theGovernments guidance on desired supply mix, and should beachieved through open and accountable processes. Theseprocesses should encourage investors and generationdevelopers to bring forward a wide range of proposals toaddress Ontarios power needs, including conservationmeasures and distributed generation initiatives.

10) The OEB should approve procedures for the contracting agency

to use in carrying out its responsibility for ensuring adequateresources and should ensure that the process is in the publicinterest.

11) Over time, the Ontario market should increasingly be based oncontracts negotiated between multiple buyers and multiplesellers. To accelerate the development of a contract-basedmarket, work should commence toward the development ofparties (also known in the industry as load serving entities)who would take on responsibility for acquiring electricity forcustomers who do not contract with retail or wholesalesuppliers. We expect that there would ultimately be six to eight

of these load serving entities to serve the province. Partieswho might be able to play this role include wholesalers,retailers, and subsidiaries of local distribution companies.

12) As new load serving entities develop, the IMO should transferenergy contracting responsibility to them to as great a degree as

Ensuringnew supply

Appropriateoversight

Developingload servingentities

Diverse supplythrough an openprocess


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possible, while still ensuring adequate power supply, in accordwith the desired supply and demand mix.

13) The Task Force recognizes that the changes proposed in thisreport may commercially impact the private sector companiesthat were willing to make an early commitment to Ontario eitherthrough NUG contracts or more recent investments, and itconcludes that measures should be developed to ensure thatgenerators are not penalized as a result of the changes we haveproposed regarding resource adequacy.

14) The siting and approvals processes for new generation andtransmission projects should be streamlined and accelerated.Clear time limits should be built into approvals processes. Atask force should be established to complete a review of Ontarioregulatory and approvals processes, with a view to ensuring thatprocesses in this province match best practices elsewhere.

15) Ontario should move towards a market with rules that promoteappropriate investment in distributed generation.

16) The Ontario Energy Board should assess the public costs andbenefits associated with distributed generation solutions andensure that projects which reduce system costs benefit fromthese cost savings.

17) Hydro One and the local distribution companies should help

facilitate distributed generation. Any negative impacts caused byaccommodating the increased market share of distributedgeneration or the potential stranding of transmission anddistribution assets, should be taken into account by the OEBwhen considering rate applications.

18) Distributed generation facilities should be able to compete on alevel playing field with other supply and demand side initiatives.The level playing field should include consideration of systembenefits including security of local supply, energy efficiency andemission reductions, and local commercial and industrialcompetitiveness.

19) The construction of distributed generation facilities should notreduce the entitlement of a consumer to its share of anyheritage power from existing OPG facilities available at stable,regulated rates. Similarly heritage power should not impededistributed generation projects where they provide positivepublic benefits.

Fairness forexisting privateinvestors

Streamliningsiting andapprovalsprocesses

Distributedgeneration


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20) The IMOs market rules should be amended to encourage loadserving entities, when created, to purchase electricity produced

by DG plants connected to local distribution systems.21) Rate structures, market mechanisms and building codes and

standards should be put in place to encourage and facilitate theuse of emergency and stand-by generation as grid supportduring periods of high peak demand.

22) Ontario should expand its comprehensive tax incentive programto include a broader definition of distributed generationinvestment.

23) Renewable power technologies such as water, wind andbiomass can provide a significant amount of new supply. In

order to achieve the 2007 target of an additional 5% of theprovinces power from renewable resources (1350 MW), and its10% target for 2010 (2700 MW), the Government should movequickly to implement its Renewable Portfolio Standard.

24) The Government should maintain existing coal-fired generationunits as required until adequate new power supplies anddemand reduction measures are in place. Having made thedecision to close coal-fired generation, the Government shouldquickly develop generation, transmission and conservationalternatives including clean coal technologies, if the latter arefeasible within the target emissions levels.

1.8 Enhancing the Responsiveness and Reliability of the Grid

The Task Force was mandated to develop recommendations onhow to enhance the reliability and responsiveness of Ontarioselectricity grid. Adequate and reliable transmission and distributioncapacity will play a critical role in rebuilding the Ontario electricitysystem over the next 20 years. We are not convinced that amerchant transmission model based on congestion-based pricedifferences provides adequate planning or incentive to build the gridOntario needs. The August 14, 2003 Blackout has further focusedpublic interest on the reliability question and the need for robustconnections with neighbouring markets. Chapter 6 explains ourrecommendations, which are as follows:

1) The transmission grid should be treated as essential publicinfrastructure. Expansion and improvement of the shared grid,when determined by the OEB to serve the public interest,

Promotingrenewable

energy

Phase-outof coal-firedgeneration

Grid asessentialinfrastructure


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should be paid for by customers through transmission ratesdetermined by the OEB.

2) Ontario should continue to work with neighbouring markets toeliminate barriers to trade in electricity and ancillary services.Continued participation in the interconnected regional markethelps provide reliable and affordable power for Ontario.

3) The OEB should set and enforce transmission and distributionreliability and service standards, taking into account the IMOsresponsibility for overall system reliability and security, includingadministration and compliance enforcement for the IMO-controlled grid.

4) Within the context of the integrated system plan, Hydro One

should develop a comprehensive long-term transmissiondevelopment plan. In developing this plan, it should consultwith generation developers, load customers, the IMO, localtransmitters and other interested parties. The plan shouldextend out at least 10 years and should be updated annually. Itshould anticipate system expansion needs and address them ina proactive fashion.

5) In light of the urgent need to develop new provincial powersupply, transmission should be a facilitator of new generation,not a barrier to it. Costs for transmission enhancements toincorporate new generation should be recovered through

markets or through rates, to the extent justified by public interestbenefit as determined by the OEB.

6) The OEB should issue guidelines that encourage the timely andeconomic connection of distributed generation facilities. Anyresulting stranded transmission and distribution costs should berecovered from ratepayers.

1.9 More Effective Institutions

Ontario faces unique challenges and needs the institutions, people

and knowledge to address them successfully. The Task Force heardthat the roles and responsibilities of key players in the industry needto be clearly defined and respected if we are to provide a marketenvironment that can attract investment.

The industry is entering a critical phase where massive supplyadditions and ambitious conservation efforts will be required. At the

Regionalmarket

Ensuringreliability andservice

Proactivetransmissionplanning

Transmissionas enabler ofgeneration

Grid connectionfor distributedgeneration


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same time, the industry is facing a demographic challenge as manyof the skilled men and women who run the system approach

retirement. We believe that the electricity industry will be achallenging and exciting place to work. If we are to succeed inaddressing the challenges we face, we need to attract and train thenext generation of power workers.

Ontario also needs to be a leader in innovation. Other jurisdictions,most notably the United States, are making large investments indeveloping innovative approaches to conservation and theproduction of cleaner, reliable power, (including nuclear and cleancoal technology). We need to do likewise.

Our recommendations are:

1) The respective roles and responsibilities of the Government, theOntario Energy Board, the Independent Market Operator, OPG,Hydro One and local distribution companies should be clearlyand distinctly spelled out and communicated to the public.

2) Research and innovation are important aspects of building aleading-edge electricity sector in Ontario capable of developingcreative supply and demand solutions to the Provinces powerneeds. Government should work with industry and universitiesto support research and innovation in the electricity industrythrough Centres of Excellence for Electricity and Alternative

Energy Technology and other mechanisms.

3) Governments, corporations, educational institutions andemployees and their associations should work together toensure that Ontario continues to have the skilled workersneeded as the electricity sector goes through both majordemographic change and the rebuilding of the provinceselectricity system over the next 15 years. The electricity industryneeds to become a career path of choice for Ontarios youth.

4) The Government of Ontario should work with the federalgovernment and its agencies to ensure consistent, streamlined

and effective regulation. This applies in several areas, includingnuclear regulation, permitting of wind projects on the GreatLakes, Kyoto compliance measures, and inter-provincial andinternational transmission.

5) The Government should adopt internal procedures to ensurethat the importance of bringing on new generation and

Clearaccountability

Supportingresearch andinnovation

Addressingskills need

Streamlined

federalprovincialregulation

Eliminatingpolicy silos


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transmission, and of promoting conservation, are givenadequate recognition by all ministries and agencies.

6) Ontario should expand its electricity trade capabilities withneighbouring provinces and states, while maintaining its policyindependence.

1.10 Addressing the Future Role of OPG

The Task Force heard frequently that the position of OPG in theOntario market represents a serious barrier to investment andeffective competition, because of both its dominant market positionand its Government ownership.

The Government recently created the OPG Review Committee,chaired by the Honourable John Manley, to report to the Minister ofEnergy by March 15, 2004 on the role of OPG in the Ontarioelectricity market, the appropriate future structure of OPG, itscorporate governance and senior management structure, and thepotential refurbishing of Pickering A Units 1, 2 and 3.

The Task Force presents a number of recommendations whichaddress the role of OPG in the evolving Ontario market, recognizingthat the OPG Review Committee will also provide advice to theGovernment on some, or all, of these issues.

1) OPG, as a Government owned entity, is perceived to enjoy anadvantage in the market over other generators. As long as OPGremains the dominant generator, it should be limited to aninvestor of last resort role for projects that the private sectorcould undertake economically.

2) OPG should partner with private investors to further develop itsexisting facilities where practical and economic.

3) The current Market Power Mitigation Agreement can not beeffectively implemented given the Governments commitment toongoing public ownership. It is necessary to develop a simplerapproach to address market power and provide price stability.The Government should initiate a process to develop a suitablesubstitute arrangement to address concerns over OPG marketpower. Long-term regulated contracts for heritage power,reflecting the costs of power generated from most of OPGswaterpower and nuclear assets, may provide a means to reduceprice volatility for all consumers and effectively remove that

Primacy ofprivateinvestment

Partneringwith privatecapital

Replacing the

Market PowerMitigationAgreement

Policyindependence ininterconnectedmarket


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supply from potentially unfair competition with private supply.Complementary measures would be needed as well to ensure

OPG does not exercise market power with respect to its assetsnot covered by such contracts.

4) The Governments approach to stranded investment should bere-examined in the context of the development of mechanismsto replace the Market Power Mitigation Agreement.

5) OPGs existing assets have a major role to play in maintaining adiverse, cost-competitive supply of power in Ontario. Inconsidering the best use of OPGs assets, the ReviewCommittee and the Government should take account of theimpact of decisions about the future use of OPGs nuclearcapacity, hydro assets and coal fired generation on Ontariospower supply mix and on the resulting supply and cost of powerin Ontario.

In summary, our action plan provides:

! Ambitious measures to build a conservation culture.

! Reduced dependence on spot market prices to determineconsumers power costs and to attract the needed investmentin new supply and conservation.

! Continuing retail choice.! New contracting mechanisms for additional power supply

capacity.

! The opportunity for a wide range of supply and demandinitiatives to compete on a level playing field to meet Ontariospower needs.

! A diverse supply mix that is likely to include new renewables,natural gas fired generation, waterpower and nuclear power.

! A new emphasis on the transmission grid as essential publicinfrastructure connecting power producers and consumers.

! Clear accountability.

Addressingstrandeddebt

Supply andprice impactsof OPGrestructuring


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The Demand/Supply Outlook

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2. The Demand/Supply Outlook

2.1 Introduction

This chapter summarizes recent trends and the outlook for thesupply of, and demand for, electricity in Ontario, in the absence ofmajor new supply and conservation initiatives. While there is awide range of opinion on specific issues, there is broadconsensus about the fundamentals of the Ontario outlook.

The starting point for all projections is the IMO 10-year forecast,

released most recently in March 2003. The IMO forecasts usesophisticated models which relate demand to weather, economicconditions and calendar events (such as holidays). The IMOmodel is based on 30 years of historical weather and demanddata, as well as a consensus forecast of economic conditions.Where appropriate, it has been updated to reflect recentdevelopments and policy decisions.

For some discussions, the forecasts have been extended afurther 10 years, using straight-line trend calculations, asrecommended by the IMO.

Chapter 5 addresses supply options in more detail.

2.2 Demand Growth Trends and Outlook

Ontarios thriving economy and growing population base havemeant constant growth in the need for electricity. For the past tenyears, the provinces average annual growth in electricity demandhas been approximately 1.4%. Peak electricity demand, which iskey to determining capacity needs, grew at an average annualrate of 1.7% over the same period.

There has also been a swing in the timing of the highest peaks,

with greatest demand now being found during the hot weather ofsummers, rather than as formerly, during cold winter months.Over the past decade, Ontarios summer peak increased 2.2%per year while its winter peak increased 0.4% per year.

The IMOs median demand forecast projects that energyconsumption will continue to grow 1.1% per year, with peaksummer demand increasing by 1.3% per year to 2013. By that

The demand forenergy in Ontariocontinues to grow...


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time, summer peak demand in Ontario will exceed the winterpeak by about 1,200 MW.

FIGURE 2.A

Highest Hourly Consumption (1994-2003)

20000

21000

22000

23000

24000

25000

26000

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

Year

Load(MW

Winter Peak Summer Peak

Even though the growth in energy demand does represent achallenge, it could have been worse. While peak demand grew by1.7% annually over the last 10 years, Ontarios economy (asmeasured by GDP) grew by 4.3% per year in the same period.This means that Ontarios electricity intensity has been steadilyimproving; it now takes less power to produce the same value ofgoods and services.

Many factors have contributed to this improvement: consumershave shifted to natural gas for home heating, and purchasedenergy efficient appliances; many industries have improved theirenergy efficiency; builders have built or retrofitted buildings thatare more energy friendly, and the provincial economy hasundergone a shift from manufacturing to services.

Despite these improvements, Ontarios appetite for electricityremains typical for North America, which means quite highrelative to many other advanced economies.

but at a slower ratethan the economy isgrowing.


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FIGURE 2.B

Net Electricity Consumption per Capita (in KWh), 2000

4,956

5,788

6,118

6,879

7,450

12,967

16,448

12,541

0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 18,000

Italy

UK

Germany

France

Japan

United States

Canada

Ontario

2.3 Demand Growth and Conservation Scenarios

The IMO medium growth projection shows that annual peak

demand will rise from just over 24,000 MW in 2004, to almost27,000 MW in 2013. Including reserve requirements for the sametime span, the figures rise from under 28,000 MW to over 30,000MW. At the same pace of growth, peak demand would reach32,000 MW in 2020 and, with required reserves, Ontario wouldrequire nearly 37,000 MW of capacity.

By 2020, Ontariowould neednearly 37,000 MWof supplycapacity at itscurrent pace ofgrowth.

Source: US Energy Information Administration and UN World Population Prospects, Population in 1999 & 2000.

(Net consumption is defined as generation, plus imports, minus exports, minus transmission and distribution loss.)


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FIGURE 2.C

Demand reduction offers some of the cleanest, cheapest andleast risky ways to address our growing supply-demandimbalance. Ontario must take advantage of the manyopportunities to do better.

What is attainable in Ontario? The answer depends on what mixof demand reduction and demand side management is employed,and how well it is supported.

As a baseline for comparison, the US Energy InformationAdministration projects that, over the period to 2025, electricityconsumption in the United States will continue to grow at anannual average rate of 1.8%, roughly in line with recentexperience. With GDP projected to grow at 2.5-3.0% per yearover that period, that implies about a 1% improvement inelectricity intensity each year.

Californias conservation effort, initiated by wild fluctuations in theeconomics of electricity at the start of this decade reportedly,saved the citizens of that state over $600 million (US) in spotelectricity purchases in the first 6 months of 2001 alone, when

wholesale prices surged to over 30 cents (US). For 2002,weather-adjusted energy consumption was 6 per cent lower thanin 2000, while average peak demand was down by almost 8%.Even with extensive conservation efforts, electricity consumptionin California still grew 1.1% per year on an average annual basisover the last decade, only marginally slower than Ontarios recordover the same period.

Californiasexperience showshow difficultobtaining long-

term reductionscan be.

Demand reductionprovides a clean,cheap way to helpaddress the energygap power needs.


0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

Year

Capacity(MW)


Peak Demand: IMO Medium Growth Forecast (MW)

Peak Demand + 15% Reserve (MW)


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The U.S. National Association of Regulated Utility Commissionershas estimated that up to 40-50% of peak load growth over thenext 20 years could be met by energy efficiency, price-response,

and load management.

A recent study by Navigant Consulting estimated that anemergency demand response program in Ontario could expect toproduce 500-600 MW of demand reduction response. If theProvince were to institute participation payments for large volumeconsumers willing to reduce demand when requested to do so, upto 750 MW could be achieved.

Other initiatives, including improved energy efficiency standardsfor equipment, appliances and buildings, smart meters combinedwith smart appliances, thermal storage systems and energy

audits can make major contributions to improved energyefficiency and demand management.

At the same time, there are forces pushing in the oppositedirection. As our resource base gets increasingly depleted, minesget deeper and require more energy. Homes continue to getlarger and summers hotter.

The Ontario government has committed to conservation gainsequal to 5% of peak energy demand (1,350 MW) over the next 4years. This initial target will help to raise the efficiency bar inOntario. The Task Force heard from several groups that

suggested, with correctly designed market structures andincentives, conservation can contribute considerably more toreduce overall energy usage during peak periods and shiftconsumption to off-peak hours.

For the sake of illustration, the figure below shows the effect ofreducing summer peak demand growth in Ontario to 0.5% peryear from the recent growth rate of 1.7% per year, roughly in linewith the Governments target for the next four years.

Otherinitiatives will havea permanent

impact.

The Governmenthas set an initialconservation

target that willhelp to raise theefficiency bar inOntario.

In Ontario, demandreductionprograms couldeliminate up to1,350MW of peakdemand.


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0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Year

Capacity(MW)


Peak Demand Reduced by 1% Annual Demand Management Gain

Peak Demand +15% Reserve (MW)

FIGURE 2.DDEMAND/SUPPLY BALANCE

2.4 Recent Supply Trends

In 1997, the Ontario government decided to take seven nuclearreactors off-line to address critical maintenance and repair needs.This represented approximately 5100 MW of capacity withdrawnfrom the market. Before the removal of that capacity, nuclear

generation accounted for roughly 48% of the provincial totalelectricity consumption. Following the lay-up, that figure droppedand stood at 40% at the start of 2003. Two of the laid up unitshave now been returned to service and the return of a third isimminent.

FIGURE 2.E

Note: Other includes gas, wind, solar etc.

RemainingSu l Ga

AggressiveConservation

The removal ofnuclear capacityfrom the market in

1997 meant amarked increase inthe use of coal tomeet requiredlevels of energyproduction.

1997 Supply Mix (Energy in TWh)

48%

17%

26%

7% 3%

2003 Supply Mix (Energy in TWh)

40%

23%

22%

8% 7%Nuclear

Coal

Water

Other

Imports


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Currently, Ontario imports power to meet peak demand. TheProvince has approximately 4,000 MW of interconnectedtransmission capacity with other provinces and states. Imports

were very low from 1991 to 1996 but then climbed again with thenuclear lay-up. In 2003, the province imported about 7% of itselectricity supply.

FIGURE 2.F

While oil and gas and non-hydro renewables provide a growingshare of capacity, their contribution to energy supply is much

smaller, reflecting the fact that some of this capacity is used aspeaking and intermittent power sources.

2.5 The Supply Outlook

The supply outlook has deteriorated significantly over the last 10months. The IMOs 10-year outlook, released in March 2003, hadindicated that the Province should have adequate supply to meeteven high demand growth scenarios up until 2007, based on thefollowing assumptions:

! 26 planned projects would come on-stream as planned,

totaling over 8700 MW of capacity;

! 300 MW of price responsive demand would become available;

! all four Pickering A units would be returned to service; and

! the Lakeview coal-fired plant would be retired in April, 2005,but all other coal-fired plants would continue to run.

Imported power iscurrently importantto the mix

The IMO reported inMarch, 2003, thatsupply should beadequate to meetdemand until at least2007

Current Supply Mix in Ontario

12%

12%

25%

23%

28%

8%

7%

22%

23%

40%

0% 5% 10% 15% 20% 25% 30% 35% 40% 45%

Other

Imports

Water

Coal

Nuclear

Capacity (in MW) Energy (in TWh)


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Specific supply increases were to include the addition of 4generation plants between 2003 and 2007 (Bruce A units 3 and 4,and gas-fired plants being constructed by Atco and Imperial Oil),

which would increase the systems capacity by almost 3,000 MW.In addition, nearly 600 MW of wind power was expected.

The IMO report also highlighted the increasing risk of relying onan aging generation infrastructure, and the fact that half of theexisting capacity will need to be replaced or refurbished over thenext ten to fifteen years.Since that report, many of the proposed gas-fired and wind powerprojects have been put on hold. While three nuclear reactorshave returned to service, the findings of cost overruns andmissed deadlines at Pickering have increased doubt about thetimely return of the three remaining Pickering A units.In addition, the Government has committed to eliminate all coalfired generation by 2007. Coal accounts for 26% of the provincesgenerating capacity. Since some coal plants are located close tomajor loads (such as Lakeview in the GTA), their replacement bymore distant sources will create potential transmission problems,including congestion.By about 2020, virtually all of the Provinces existing nuclearplants will reach the end of their planned operating lives, andneed to be refurbished, replaced, or retired.

Adjusting the IMO forecast with this information shows aprojected shortfall in 2007 of 5000-7000 MW. If no new capacityor demand reduction measures are taken, the Province will becritically dependent on external sources of electricity, energycosts will be higher and more volatile, and reliability could bereduced.

Beyond 2007, the need continues to grow. Other thanwaterpower assets, the entire generation asset base will have tobe rebuilt. This is both a challenge and an opportunity. Given thelead times involved, action is required now.

but there havebeen significantchanges since then...

so that a majorshortfall is nowexpected.


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A Plan that Works for Consumers

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3. A Plan that Works for Consumers

The Task Force believes that a plan that works for all consumers(residential, commercial, agricultural or industrial) is one that

! provides fair pricing to consumers

! supports mechanisms which allow for predictable and stablerates

! ensures reliable and adequate supply

! gives consumers the right to choose rate plans and

electricity providers! allows for a full flow of information to users of electricity

! ensures that consumers are protected from unethical orfraudulent behavior

The Task Force feels that price caps or freezes do not work in theconsumers best interest, since such solutions tend to discourageconservation and investment in new generation. As a result, thetrue price of electricity will rise and be absorbed by the either thetaxpayers or, after the freeze is lifted, ratepayers.

3.1 Stable, predictable, affordable pricesOn May 1, 2002, Ontarios electricity market opened to bothwholesale and retail price competition. Over the following 6months, consumers faced an unforeseen and unacceptable levelof price volatility. In response, the Government introducedlegislation in December 2002, which created a 4.3c/KWh pricecap on approximately 50% of the electricity used in the Province,retroactive to the market opening date.

On November 25, 2003, the Minister of Energy announced a planto set more realistic prices covering the period to April 2005. He

also announced that the Ontario Energy Board would develop alonger-term plan to set regulated power prices for defaultelectricity customers (those who continue to purchase electricityfrom their local distribution utility and do not sign on to a particularplan offered by an independent retailer).

Ontarios recentexperiment with anopen retail marketfailed

but the imposedrate freeze is only a

temporary solution.


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0

20

40

60

80

100

May-0

2

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Jan-0

3

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

$/MWh

FIGURE 3.A

Source: IMO

3.2 Options for stable prices in the medium term

The Task Force was charged with developing an action plan toattract new generation and identifying mechanisms forconservation; the way electricity is priced is a key factor in bothareas. We therefore began by recognizing consumers need forstable and affordable electricity prices, and by reviewing some ofthe medium-term pricing options. The options we consideredincluded:

1. Resumption of the spot price pass-through, with varioussmoothing approaches to shelter consumers from the monthto month impact of spot price volatility;

2. Continuation of a provincially determined price, with theProvince absorbing the associated risk;

3. A fixed rate, determined through a centrally run auction;

4. Local rates, determined by the load serving entities costs ofprocuring their default supply.

Letting the spotmarket determineprices is not theanswer.

Frozen Retail Price

Average Wholesale Price

ONTARIO WHOLESALE ELECTRICITY SPOT PRICES(May 2002 December2003)


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The Task Force has concluded that each of the options canensure price stability, but that the options involving contracting(options 3 and 4) are superior, as they also strengthen the

market. Under these options, the buy side of the market becomesmore organized, and there are counterparties who are able tosign longer term supply contracts with generators.

Such contracts would provide the collateral which investors needto secure financing for investments in new supply and demandmanagement.

As our Recommendations make clear, we believe there is a needfor a central agency to organize the procurement of default supplyin the short term, and to offer a price to consumers that reflectsthe cost of the power. Over time, we believe there is anopportunity for other entities (load serving entities) to emerge totake on the responsibility for default supply, leaving the centralagency as the default supplier of last resort. These load servingentities could be local distribution companies, energy wholesalersor new commercial partnerships.

We also see a need to continue to offer all consumers the pricestability currently provided through the Market Power Mitigation

Agreement. That protection should be provided through a simplerand more direct mechanism; such as Heritage Contracts similarto those in place in British Columbia and Quebec.

3.3 Retail Choice for ConsumersThe Task Force considered the role retailers play in electricitymarkets. As intermediaries between the wholesale market andconsumers, retailers can offer a wide range of products andservices, including innovative pricing offers, green power andconservation incentives. They also provide risk capital andmanage risk on behalf of the consumer.

Based on the experience of similar jurisdictions, only a minority ofresidential consumers are likely to choose retail electricitymarketers in the near term. Even so, we believe that choice is an

important principle and should be retained as part of the Ontariomarket design.At the same time, the Task Force recognizes that large,unanticipated movements into and out of the default market couldpose risks to the financial capacity of those who supply defaultcustomers. We therefore see a need for some restrictions on

Electricity retailersplay important rolesin the energy market.

Long-termsupply contracts

provide the bestmechanism forensuring pricestability

The Task Forcerecommends thatload servingentities beestablished.


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movement by consumers between default supply and thecompetitive market, particularly for large users.

3.4 Communication with ConsumersWe support a coordinated program that provides consumers withpractical information on how the evolving electricity market affectsthem and what they can do to manage their electricity costs.There have been well-intended efforts in the past to provide suchprograms. Among the problems encountered:

! Lack of coordination among organizations involved

! Lack of resource commitment

! Lack of transparency

! Complicated and even contradictory messages.

To be effective, a communication program must provide theinformation consumers need in order to make effectivedecisionsinformation about:

! The true cost of power

! The options they have, such as choosing an independentelectricity retailer, or investing in smart meters

! Their own consumption, and about how different pricingarrangements would affect their bills

! The importance of conservation

! Who they can go to for help, if needed.In addition, electricity suppliers (retailers or default suppliers)must develop simple and easy-to-understand billing systems, asrecommended by the Review of Ontario Electricity Bills.(presented March, 2003)

Such a program must involve, and be supported by, allstakeholders. That said, Local Distribution Companies shouldplay a leading role in delivering this kind of program.

Achieving success will require clear definitions of the roles of thevarious organizations involved, committed resources, and

transparency. The program must be sustained. Whileconsideration should be given to having different strategies fordifferent groups, the key messages must be consistent province-wide.

A long-term approachto consumer

communication isrequired.

Giving consumersthe information tounderstand thenew market iscritical.


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3.5 Consumer Protection

Experience with the transition to competitive energy markets inOntario and elsewhere points to the need for effective consumerprotection measures, as well as effective education. Consumers:

! Need to be assured that energy contractors meet acceptedstandards

! Need to be assured that energy retailers are licensed andregulated and that this is enforced

! Need to know where to turn when they have a problem

! Need fair and efficient responses

3.6 Getting There

A plan that works for consumers will depend on the alignment ofprivate sector interests with public needs, and the responsibleoperation of public institutions. In particular, certain changes toregulatory organizations need to be put into place. These arediscussed in a later chapter.

Related Recommendations

1. Consumers should have access to a reliable default supply ofelectricity at stable prices that reflect the true cost of power,as determined by the O

electricity conservation and supply task force (ecstf) - final report to the minister

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