$30-$40 billion to be spent on OPG infrastructure...

[afransen TO]

From the star...

Ontario to spend billions on power
Government confident it can replace coal-fired power and keep prices competitive


CANADIAN PRESS

Ontario will embark on what Energy Minister Dwight Duncan today called the largest peacetime investment in Canadian history in order to keep electricity rates competitive when the province's coal-fired power plants are shut down by 2007.
Duncan said it will likely cost between $30 billion and $40 billion to refurbish Ontario Power Generation's trouble-prone nuclear power program and build enough generating capacity to replace the polluting coal-fired plants.

"We are looking at a massive investment of capital going forward," Duncan told a news conference the day after OPG reported a $491-million loss, wrote off the value of its coal-fired plants and released a damning audit of its operations.

"Suffice to say that it could well be one of the largest peacetime investments in the history of this country."

Critics have insisted that the plan to shut down the plants will result in soaring electricity rates, but Duncan insisted today that the opposite is true.

"If we don't respond, prices will go up," he said. "Our plan, when I unveil it, will be designed to take what we've found here and move forward in a way that manages price."

Consumers are already bracing for higher prices as of April 1, due to changes put forward by the government in the fall.

Duncan said it's impossible to predict what the province's electricity prices will be down the road. But they'll have to remain competitive with neighbouring provinces and U.S. states, he added.

What is clear, though, is that there are serious problems at Ontario Power Generation, which owns most of the province's electricity generating stations.

The audit, conducted by financial firm KPMG, said the company has been caught between the soaring costs of its troubled nuclear program and an increasingly expensive reliance on fossil fuels.

Without a dramatic change of course, OPG is on the verge of financial collapse, the audit warned.

The Power Workers' Union, which represents workers in the electricity sector across the country, expressed doubt Wednesday that the province will be able to close the plants in the next three years, as the Liberals promised during the fall election campaign.

Any new power brought online, such as natural gas, will likely be more expensive than coal, the union said.

Natural gas plants, the least expensive option to replace coal, would increase electricity prices by 15 per cent, said Don MacKinnon, the union's president.

Natural gas prices are volatile and have risen sharply in the past few years, he noted.

In addition, if the supply of electricity doesn't meet the province's demand, that will put upward pressure on prices as well, he added.

That would hit industry hard and likely result in a loss of jobs, MacKinnon said.

On April 1, the province's electricity prices will rise to 4.7 cents per kilowatt hour for the first 750 kilowatt hours consumed by a household in any month. After that threshold the price will rise to 5.5 cents per kilowatt hour.

The top price is about 30 per cent higher than the price freeze of 4.3 cents per kilowatt hour imposed by the previous Conservative government.

"I believe it's the right price," Duncan said of the April 1 rate. "It's an interim price and that will get rid of the loss that has occurred (at OPG) if that price is met."

OPG will surely suffer more if the price proves too low, "but we believe we set it right," Duncan said. "But if we set it too high then there will be a credit back to people so they don't pay too much."

The average weighted price of electricity in Ontario in March has been 4.97 cents per kilowatt hour.

 

[Are Be]

The ugly rebirth of Ontario Hydro

By ERIC REGULY

UPDATED AT 1:20 PM EST &nbsp &nbsp &nbsp &nbsp Tuesday, Mar. 23, 2004

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John Manley's 101-page report on Ontario Power Generation can be summed up in one sentence: Stick it to the consumer.

The report, officially called Transforming Ontario's Power Generation Company, released last week, has almost nothing to do with "transforming" and almost everything to do with keeping the whole sorry mess intact. OPG, 100 per cent government-owned and responsible for about 70 per cent of the province's electricity supply, would remain largely as it is, although Manley & Co. would have you believe that wholesale change is both needed and coming. The report even advocates throwing another half billion dollars or so at the Pickering A nuclear station, whose overhaul is a textbook case on how to botch an overhaul.

The problem with leaving OPG alone is that it would mark the end of the brief experiment with market forces as a discipline on electricity investment and use. The Tories designed an open market that was clamped shut before it had a chance to prove itself. The new Liberal government could have reopened it. Instead, it looks like they will pay homage to the Tories' reversal by encasing the open-market concept in lead and dumping it in an unmarked grave. The Manley report gives them the political support to do so.

So long as OPG remains the centrepiece of the province's electricity strategy -- the "steward of public assets," as the report puts it -- there will never be a real market. Such a thing would be impossible with one player -- OPG -- controlling most of the output. Note that independent generating companies, such as Sithe Energies of New York, abandoned plans to build generating plants the moment the Tories dropped the free-market agenda. Instead, it appears the "market" will consist of regulated prices under a newly empowered Ontario Energy Board. But regulated at what price?

Here's where the consumer could get whacked. Ontario desperately needs new electricity supply (the report warns of a supply "crisis," partly because of the government's commitment to scrap the coal burners). But potential suppliers won't enter the market because no market exists. So they will have to be bribed to come in. That can only mean offering them contracts, probably 10 to 15 years long, at high prices. The price would have to be set well above the current fixed retail price of 4.3 cents a kilowatt-hour (rising next month to 4.7 to 5.5 cents, depending on the quantity used) because of the enormous capital cost of the plants and the high risk associated with long-term contracts.

Note that the price of natural gas, the preferred fuel of any new plant, has been soaring and is likely to remain high because many old wells are depleting at 25 per cent a year.

A long-term contract price of 6 to 7 cents, or about 50 per cent more than the current price, is not out of the question. If that's what an independent generator is getting, it's natural to expect OPG to demand a similar treatment. The consumer will pay and Ontario, whose electricity rates were among the continent's lowest only a few years ago, will be known for the opposite.

There is a precedent. In the late 1980s and early 1990s, Ontario Hydro, the predecessor company of OPG and Hydro One, wanted to diversify sources of supply and stimulate alternative generation. With the government's blessing, it signed long-term contracts with private companies, among them TransAlta, at extremely high prices. As it turned out, electricity prices did not reach anywhere near the price paid to the private suppliers. The liability -- the difference between the price of the contracts and what they are worth based on current prices -- is about $6-billion, which has been shunted onto the province's stranded debt. Private generating companies hope history will repeat itself.

The failing of the Manley report is its lack of economic good sense and creativity. Economic good sense says that competition, even if it creates volatile pricing for some time, will lead to lower prices as inefficient plants are retired and new plants striving for market share replace them. But how to get there?

This is where creativity can come in. Just because the government wants to remain the owner of OPG doesn't mean OPG has to remain in one piece. Splitting it into several baby companies, each with a similar mix of hydro, fossil fuel and gas plants, would allow the Baby OPGs to compete with one another. Putting all the nuclear plants in a separate company, possibly one associated with Bruce Power, the private consortium that leased the Bruce units from OPG, makes sense because the technology and costs associated with them are unlike the rest of the generating plants.

The Baby OPGs would have to become more efficient to survive. Eventually, they could be privatized, transferring the risk of plant development on the shareholder instead of the taxpayer, as the old empire-building Ontario Hydro did to devastating effect. You will find nothing like this in the Manley report. In essence, it looks like the electricity market is going back to its regulated, centrally planned self, with an emphasis on nuclear development. Pickering will be rehabilitated at vast expense. Expensive long-term contracts will be signed with independent generators. Prices will rise.

Worse, the politicians will still be in charge because OPG, intact and dominant, will remain in public hands. This is the supreme irony of the Manley report. It noted that OPG and its predecessors "were too often used as the vehicle for carrying out public policy goals" and said this sort of behaviour has to stop. But how, with the government ownership at 100 per cent?

ereguly@globeandmail.ca



© 2004 Bell Globemedia Publishing Inc. All Rights Reserved.

 

[afransen TO]

"This is where creativity can come in. Just because the government wants to remain the owner of OPG doesn't mean OPG has to remain in one piece. Splitting it into several baby companies, each with a similar mix of hydro, fossil fuel and gas plants, would allow the Baby OPGs to compete with one another. Putting all the nuclear plants in a separate company, possibly one associated with Bruce Power, the private consortium that leased the Bruce units from OPG, makes sense because the technology and costs associated with them are unlike the rest of the generating plants."

Ummm, are they pretending that this is their idea? This is proposed in the Manley report.


I agree that engaging in long term contracts with the private sector would come at a high price given the risk involved. What I would suggest is for OPG to borrow whatever is required to build its new generating capacity through the provincial government (ie, the province borrows at a better rate than OPG with its uncertain future), while raising electricity costs to cover the true cost of generating, and then slap a debt servicing charge on top of that to cover OPG's debt servicing costs. Yes, our rates will rise, but someone has to pay. We can't get electricity for free, even from the magical private sector. Anyone who has the fantasy that privatising electricity will lead to lower rates in a rapidly growing economy like Ontario's is obviously blinded by ideology. EVERY example of such privatisation has gone sour. Electricity is a public good, one that cannot be efficiently provided by the private sector. To say that government can do something more efficiently than the private sector is enough to make some conservatives choke, but isn't even a matter of discussion for most economists; it's taken as a given.

While it may seem that taking such a move may lead us to have high energy rates relative to North America, that is merely a short term situation and not a major concern in terms of competitiveness. What the forget to factor in is that the USA is heavily reliant on fossil fuels for electricity generation, far more so than Canada. When the prices for those fuels rises drastically over the coming decade or two, so too will electricity rates. We will be extremely relieved we spent all those billions on nuclear.

Another consideration is that if we allow rates to rise, renewable sources of energy will become more practical. Ontario has huge potential for windfarms, especially on the Great Lakes (where the majority of our population lives). If we develop the infrastructure and the technology for a thriving wind power industry, as the Danes are currently, we will be better positioned to rapidly increase our generating capacity when the time comes. Wind is also convenient in that it is a much more easily scaled than virtually any other form of generation, like nuclear which carries a massive price tag ($10 billion or more) and a long lag in implementation (8 years). With wind, we could have new capacity coming online every year without huge expenditure or having a large unused/excess capacity.