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Single Buyer and Ontarios

Electricity Supply Structurepresented by

Jan Carr, CEO, Ontario Power Authorityto the workshop on

Reforming Electricity Industry in Saudi ArabiaRiyadh, November 6, 2006


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Ontario at a Glance

population 12 million

40% of Canada

GDP US$500billion/year 40% of Canada

main industries

mining and forest products automotive parts and assembly

financial services


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Supply Types by Capacity (MW)

20%

1%

16%

38%

25%

Supply Ty

19%

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Electricity Use by Sector (TWh)

Residential

Commercial

Industrial

Ontario Electricity System

31,000 MW 155 TWh


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Electricity Industry Structure

1905 2002 provincial government owned monopoly utility

generation, transmission and rural distribution

300+ municipally owned distribution utilities

2002

restructured to introduce competition provincial utility split into separate companies generation transmission/rural distribution system operator

all municipal utilities and provincial companies (except system operator)converted to commercial corporations with share capital

transmission and distribution prices regulated (by Ontario Energy Board a quasi-judicial tribunal)

prices for electricity established in competitive market


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Electricity Industry StructureResult

market effectively closed 6 months after it wasopened through imposition of a retail pricefreeze government reaction to public unrest due to volatile

and opaque pricing interests and needs of small retail consumers were

ignored in restructuring resulting in them being serveddirectly from the wholesale spot market

2004 passage of additional restructuring legislation

removed price freeze and substituted a price smoothingmechanism for small retail consumers

established Ontario Power Authority


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OPA Mandate

long range planning prepare and keep updated a 20-year plan for generation and

transmission

ensure adequate investment in generation

procure generation through contracts (the single buyer aspect) conservation

procure conservation and demand management

promote a culture of conservation

sector evolution facilitate changes that reduce the dependence on procurement

contracts (supply and conservation) i.e. enhance competition


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OPA Procurement Processes

OPA procures generation, conservationand demand management

following discussion focuses only on

generation procurement

procure only if investment activity is notforthcoming due to action of market forces

buyer of last resort, not first resort


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OPA Procurement Processes

3 broad approaches: Request for Proposals (RFP)

to date has covered gas-fired generation and

renewables Standard Offer Contracts (SOC)

starting November 2006

will initially cover only generation from small

renewables projects (less than 10MW) sole source negotiations

time urgency or unique situations only


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RFP Procurement First Process

3 RFPs within 1 year 2 for renewables 1 for gas-fired generation

rationale - supply/demand imbalance and local transmission constraints locational credits for projects in constrained areas

evaluation and selection of bids based on: a targeted maximum capacity cost (gas plants)

bid to a financial contract based on deemed dispatch operating cycle total cost based on proxy for capacity payment, and energy payment project Heat Rate was major driver for energy cost evaluation based on 2 years of historical gas and electricity prices

cost (renewables)

$/MWh for production based on assumed capacity factor price discontinuity concept

compared ratio between average bid and next highest bid projects priced too far beyond average could be rejected


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First RFP Process LessonsLearned

locational credits insufficient to award projects in mostcritical locations awarded locations resulted from minimizing other development

costs especially natural gas costs

proponents had put limited effort into obtaining land and

environmental approvals resulted in significant construction delays

lack of prequalification process prevented avoiding: projects in non-preferred locations projects with high probabilities of delays

consumers benefited from low hanging fruit, forexample: grey-market generation equipment locations with simplest gas supply


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RFP Process Next Round

similar process with several refinements:

specified transmission facilities to which plant mustconnect

in effect, prescribed the general location of acceptable plants preliminary prequalification round before allowing

submission of priced bids experience of developer

community relations management plan and actions to-date

reduce risk of delays from approvals

results very satisfactory but very recent so notfully tested


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RFP Process - Future

procurements to-date have been addressing chronic backlog of newgenerating capacity needs

future procurements will be less urgent and will be based on a long-termpower system development plan now being prepared

therefore, anticipate future procurements will: give 12-36 months notice of intent to issue RFP

give priority to sites that are more advanced in local and environmental approvals be increasingly specific on required characteristics

base load, intermediate, peaking, high efficiency etc.

parallel electricity sector development efforts by OPA will also reduce levelof support and general attractiveness of contract provisions, for example: increased market-based options for hedging fuel and electricity

development of forward electricity markets

reduced contract term perhaps in the front-end rather than back-end incentive to develop merchant component of plant in conjunction with contracted

capacity


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Standard Offer Program

for small scale projects only 10 MW or less

must connect to distribution system and nottransmission system

intended to reduce disproportionate cost of RFPprocess for localized generating projects will be administered by local distribution companies

on behalf of OPA

launching in November no experience to-date

very high level of interest


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Standard Offer Contract

initially only available for renewable sources

20 year term but program may be modified (orsuspended) for new entrants at any time

pricing based on most recent renewables RFPplus: allowance equivalent to avoided transmission losses

allowance for small-scale (as noted from RFP results)

a special incentive rate for solar voltaics hasbeen put in place to determine the value anduptake rate in the Ontario context


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Summary

single buyer negatives without extraordinary effort, brings neither the

precision of a centralized monopoly (match of projectsbuilt with system needs) nor the risk transfer of amarket based system (contract results in moving risksonto consumers)

single buyer positives ensures investment happens and therefore useful in

situations where:

ensuring supply reliability during the transition toward acompetitive electricity structure a competitive electricity structure is not feasible (small or

isolated system) and it is desired to use private capital andnot public capital


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Appendix: RFP Contract Summary

gas-fired generation: 20-year financial contract gas price risk pass through to buyer deemed dispatch provides financial incentive for operating when

market economics so dictate dispatch price determined from heat rate and market price total economics to plant = plants contracted Net Revenue Requirement

(proxy for capacity payment) some or all of economics gained from market buyer tops-up when market economics are insufficient however, Buyer claws-back economics when market economics exceed Net

Revenue Requirement

renewables: 20-year physical contract Buyer resells into market no obligation to operate paid only for actual production

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