Coal Phase-Out: What's the Net impact on Costs?

May 2009

• Generation supply contracts falling under the Global Adjustment will moderate the net impact of spot price increases arising from the coal phase-out.
• Over 70% of spot price changes will be dampened.
• Once coal is completely phased out, the net impact of a $6 to $13/MWh spot price increase will be a $2 to $3/MWh average cost increase, or about 2 to 3%.

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.

Over a narrow range of natural gas prices ($7.50 to $8.50/MMBtu), the coal phase-out will cause average hourly or spot prices to rise by an estimated $6 to $13/MWh. Most of the cost of new replacement natural gas generation will appear in the Global Adjustment, with the increase to that charge being in the order of $6/MWh. The combined cost of $12 to $19/MWh looks menacing to electricity buyers, but at least part of the total increase will not be fully realized.

The natural gas generation-related Global Adjustment cost will be like death and taxes - unavoidable. That leaves the hourly or spot market increase as something that may or not may effectively materialize on one's bill. Electricity consumers will pay the spot prices on purchases and then also pay/receive the Global Adjustment (usually a charge but in higher-priced months it will be a credit).

The generation-related components of the Global Adjustment make up the difference between the fixed prices embedded in the Ontario Power Authority's generation contracts and actual hourly or spot market prices. The majority of Ontario electricity consumers' consumption falls under these arrangements. Prices include $37/MWh for OPG's baseload hydro output, $58/MWh for OPG's nuclear output, $74/MWh for Bruce Power's Bruce 'A' output and $90 to $135/MWh for most of the province's renewable output. When the hourly spot price is below this basket's weighted price, the Global Adjustment will tend to increase. When the hourly spot price is above this basket's price, the Global Adjustment will tend to decrease.

The complicated part of the analysis then is to try to project how much energy will be generated from each of these sources and what spot prices they will offset. Another approach is to look at which generators will not be receiving effectively fixed pricing for their output. Once OPG's coal generation is completely phased out, this group will be largely comprised of the output from OPG's peaking hydro plants and output from Bruce Power's Bruce 'B' plant. (Bruce 'B' has an arrangement whereby it receives an average indexed floor price of $45/MWh, however in this analysis it is assumed this is not a factor). In 2008, these sources produced 17.6 TWh and 24.7 TWh, respectively, for a total of about 42 TWh. This represents about 28% of the province's total 2008 energy use of 148 TWh.

This means that about 72% of Ontario generation will receive the spot price but then receive/pay an amount so that in total they receive their net contract price. As a result, when spot prices are higher the Global Adjustment charge will drop correspondingly, and vice versa. Only 28% of the spot price increase attributed to the coal phase-out will then impact consumers' net (spot price + Global Adjustment) commodity cost, so the $6 to $13//MWh impact mentioned earlier will have a net impact of about $1.70 to $3.30/MWh (or 1.7% to 3.3% on an all-in electricity cost of $100/MWh).

Finally, we need to be mindful that in working through this analysis, we're talking about projections for a period six years from now and so the numbers may change. However, what we do know for certain is that if natural gas prices are anything but low, coal replacement will cause spot prices to rise. We also know that the percentage coverage provided by the Global Adjustment will rise, moderating variations (up or down) in the spot price.

Coal Phase-Out: Its Impact on the Global Adjustment Read more»

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

Coal Replacement - Implied Carbon Cost Read more»