Coal Phase-Out: Its Impact on the Global Adjustment

April 2009

• Natural gas-fired generation plants have the same attributes as coal-fired generation facilities and so will be counted on by the Ontario Power Authority to replace coal.
• The estimated total impact of 6,457 MW of natural gas-fired generation replacing an equivalent amount of coal-fired generation is an increase of approximately $6/MWh in the Global Adjustment.
• When combined with the estimated impact of the coal phase-out on spot market prices, the total increase in the typical price of $100/MWh for commodity and non-commodity items is $12 to 19/MWh.

Ontario Power Generation's 6,457 MW of coal-fired generation is scheduled to be phased out by the end of 2014. The Ontario Power Authority is tasked with offsetting this phase-out by adding new generation and implementing conservation and demand management measures.

In the March newsletter, we discussed the coal phase-out's potential impact on future spot market prices. Over a narrow range of natural gas prices ($7.50 to 8.50/MMBtu), we estimated that the coal phase-out would cause average hourly electricity prices to rise by $6 to 13/MWh.

When coal is phased out, output from the plants will have to be replaced with either new generation or reduced load. Future options include output from natural gas-fired and renewable energy generators as well as conservation and demand response programs.

Coal-fired plants are relatively dispatchable and reliable. Natural gas-fired plants have the same attributes and so will be counted on by the OPA to replace coal. Based on this reliance and to simplify our analysis, we assumed natural gas-fired plants will replace coal on a one-for-one basis.

On a total megawatt basis, the vast majority of these plants will be larger; that is, 200 MW and higher. Therefore, they will fall outside of standard offer programs and under OPA procurement processes for larger projects. Most of these have been completed or are underway.

These processes start by providing generators with a monthly net revenue requirement. Based on parameters provided by developers and market prices for electricity and natural gas, each project will then have an assumed or deemed hourly dispatch, resulting in a monthly deemed energy market revenue. The deemed energy market revenue will then be "clawed back" from the net revenue requirement, resulting in a net monthly contingent support payment.

The contingent support payments will be the net cash outlay for the Ontario Power Authority, which they will then recover from customers through the monthly Global Adjustment.

Net Revenue Requirement

Using information from the OPA's Integrated Power System Plan (IPSP), we can calculate the gas-related net revenue requirements that will be in effect in 2015.

Using IPSP performance assumptions for the different generation types and actual electricity and natural gas prices from 2003 to 2008, we can calculate historical deemed energy market revenues. We then need to adjust these values to arrive at estimates for what will take place in 2015. The estimates in the table below for 2015 are equal to 50 % of the average values.

Deemed Energy Market Revenue

The fact that the deemed energy market revenue values are less than the lowest value achieved during the 2003 to 2008 analysis period begs the question, "Why ?". Our response is that a number of factors will contribute to suppressed spot market prices driven by limited ability to earn revenue beyond marginal costs. In our view, this situation will arise because of the OPA's strong bias towards having more on the generation shelf than less, and more specific factors such as the addition of renewable resources that will be indifferent to price signals and so tend to force price-responsive resources up the price stack.

Contingent Support Payment

We then subtract the deemed energy market revenues from the net revenue requirements to arrive at the contingent support payments.

Impact on Global Adjustment

The last step in the analysis is to assume 6,457 MW of natural-gas fired generation will replace 6,457 MW of coal-fired generation. Using estimated market shares and a total 2015 Ontario energy market demand of 140 TWh, we arrive at the following component contributions and total impact on the Global Adjustment.

The estimated total impact on the Global Adjustment of about $6/MWh represents an increase of approximately 6% over the typical all-in (commodity plus non-commodity items) price of $100/MWh.

Coupled with the projected spot price impact of $6 to 13/MWh, the total increase is $12 to 19/MWh or 12-19%.

In future articles, we will continue to explore cost issues related to the coal phase-out.

Impact of Coal Phase-Out on Ontario Consumers Read more»

Coal Replacement - Implied Carbon Cost Read more»

Explaining the Global Adjustment Read more»