Impact of Coal Phase-Out on Ontario Consumers

March 2009

• Replacing coal-fired generation with natural gas-fired generation, which generally has a higher marginal price, will put an upward pressure on spot prices for electricity.
• When coal is taken out of the supply mix, it will no longer set the price of electricity. Prices will be set by oil/gas and peaking hydro.
• Under certain assumptions including a coal market clearing price of $48/MWh, natural gas prices ranging from $7.50-8.50/MMBtu would produce an average spot price increase of $6-13/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.

The final end date for the use of coal to generate electricity in the province is enshrined in Ontario Regulation 496/07 of the Environmental Protection Act. The interim coal phase-out timeline will be further dictated by arrangements related to Ontario Power Generation's allowable carbon dioxide emissions. At OPG's coal-fired CO2 emissions rate of roughly one tonne/MWh generated, the annual emission and effective generation caps are:

In Aegent's April 2008 newsletter, we discussed the coal phase-out's very high implied carbon dioxide offset cost. In this article, we'll begin to address the overall impact on consumers' pocketbooks.

The ultimate cost to consumers will be driven by three factors:

• upward pressure on spot prices, arising from coal-fired generation being replaced by natural gas-fired generation that generally has a marginal price higher than that for coal;
• added capacity costs for new gas-fired generation and higher energy prices for renewable generation, paid for by the Ontario Power Authority and passed through to consumers through higher Global Adjustment charges; and
• the mitigating effect that OPG's base load hydro component of the existing Global Adjustment basket of generation will have on a portion of the spot price increase.

In this newsletter, we discuss the first factor.

Impact on price-setting share by fuel type

In spite of the low efficiency of coal-fired generation, coal is cheaper on a relative basis, leading to a comparatively low marginal price. When coal is taken out of the supply mix, it will no longer set the price of electricity. Prices in those hours will then be set by oil/gas and peaking hydro.

Using data from the most recent report of the Ontario Energy Board's Market Surveillance Panel, coal was the price-setting resource about 60 % of the time, with oil/gas at 15 % and hydro at 25 % (based on the12-month average, November 2007 - October 2008).

For 2015, the first year without coal-fired generation in Ontario, data related to the Ontario Power Authority's Integrated Power System Plan estimates that natural gas will be on the margin about 45 % of the time. This suggests that half of the price-setting slack will be taken up by oil/gas and half by hydro. A more price-bullish view would see oil/gas taking two-thirds of the slack and hydro the remaining one-third.

The table below summarizes the price-setting shares by fuel type, for these scenarios and an additional mid-point scenario for 2014.

Impact on spot prices

For a range of current coal-setting prices and by making certain assumptions, these changes in price-setting shares can be translated into projections of the final impact of the full coal phase-out on spot prices, as shown in the graph below.

The notes and assumptions underlying the graph are:

• mid-point outcome; i.e., margin increases are oil/gas = + 35 %, hydro = + 25 %
• natural gas prices are burner-tip; current 2014 Dawn price ~ $ 8.60/MMBtu
• blended simple- and combined-cycle heat rate = 7.5 MMBtu/MWh
• blended simple- and combined-cycle marginal maintenance = ~ $ 4/MWh
• incremental price-setting hydro achieves 50% of natural gas premium over coal

The last item to determine is the reference coal market clearing price.

If we take the price-duration curve for 2008, assume the 15% of highest-priced hours were set by oil and gas and the next 60 % of highest-priced hours (i.e., percentiles 16 through 75) were set by coal, we arrive at an average coal-derived market clearing price of just under $48/MWh.

For this reference coal market clearing price, it can be seen that natural gas prices ranging from $7.50 to $8.50/MMBtu would produce an average spot price increase of $6 to $13/MWh. The breadth of the resulting range of spot prices shows how sensitive they could be to future natural gas prices.

It should be noted that this is a projection of the total change in spot market prices, arising from the complete coal phase-out and with everything else remaining equal. A more detailed, staged analysis using the emission cap data would estimate annual spot market price changes between 2009 and 2014.

Future articles

In future articles, look for us to discuss the following related coal phase-out cost factors:

• the impact of replacement capacity costs on the Global Adjustment, and
• the impact on the spot market rise of OPG's Global Adjustment-related base load hydro output.

The former of these factors will further increase prices while the latter will mitigate them.

Coal Replacement - Implied Carbon Cost Read more »

Explaining the Global Adjustment Read more »