Managing Rising Electricity Costs with Load Displacement Generation

April 2013

• Building a power plant without an OPA contract to guarantee revenues is uneconomic given current market conditions.
• However, under the current regulatory framework and market conditions, certain load displacement generation projects are economically feasible, even without the Clean Energy Standard Offer Program.
• Determining the best plant configuration and operating regime is integral to optimising the economics of a load displacement generation project.

Prospective combined heat and power (CHP) project proponents may have been disappointed by the failure of the Ontario Power Authority’s (OPA) Clean Energy Standard Offer Program (CESOP) after seven years of confusion. While many lessons can be learned from CESOP, some proponents are wondering if there is still a case that could be made for behind-the-meter load displacement generation projects.

Distributed CHP projects offer a number of advantages to both project proponents, who enjoy the economics of efficient fuel use and avoided charges, and the broader power system that incurs less line loss from distributed generation. But does it make sense to build a CESOP project in Ontario without an OPA contract to guarantee revenues?

Power plants injecting electricity into the Ontario grid receive the Hourly Ontario Energy Price (HOEP) for the electricity they produce. Low natural gas prices, stagnant electricity demand, and increasing electricity supply have depressed HOEP, making gas-fired generation without an OPA contract uneconomic in Ontario. With behind-the-meter load displacement generation, a power plant offsets the electricity consumed by the host facility so that less power is withdrawn from the grid. With this configuration, the host facility avoids certain electricity charges on their bill. A natural gas-fired load displacing power plant could also provide the host facility with hot water, steam, waste heat, compressed air, or cooling that could be used for industrial processes or space heating and cooling.

Determining the best configuration and optimal operating strategy for a load displacing generator is a complicated process with many variables. Some considerations include:

• Metering arrangement – Some metering arrangements can cause complications in terms of avoiding certain charges and adhering to Measurement Canada regulations.
• CHP or strictly power – Depending on the requirements of the host facility it may or may not make sense for the project to provide products such as steam and hot water.
• Dispatching and operation strategy – Depending on the plant configuration, Global Adjustment treatment, host needs, and market conditions, a lot of consideration should be put into optimising the operating strategy.

A load displacement generator serially connected behind the load can avoid a number of charges including the HOEP for electricity that would have otherwise been consumed. Under certain conditions, the host facility can avoid paying the Global Adjustment, transmission connection and network charges, and the Wholesale Market Settlement Charge. For natural gas-fired generation, the only charge that can never be avoided is the Debt Retirement Charge.

Global Adjustment treatment is a complicating factor – the preferable class selection before and after the project may change. For Class A consumers, a case could be made for building a power-only project that runs to avoid the high-five intervals. With the capacity value of avoiding a megawatt of high-five demand exceeding $300,000/MW this could be quite lucrative for the host facility.

Load displacement generation projects will also incur additional natural gas costs and possibly stand-by charges from their local distribution company. Currently, the Ontario Energy Board is reviewing stand-by charges with a view to standardising the methodology applied to calculating the rates across all applicable local distribution companies in Ontario.

While a case could be made for behind-the-meter generation, determining the optimal plant configuration and operating and dispatch strategy is a complex process with many moving pieces. Performing a thorough financial analysis of the project under an array of assumptions and conditions combined with a thorough understanding of the applicable regulations and legislation pertaining to avoided charges and metering configuration is integral to optimising the economics of a behind-the-meter project.

Whatever Happened to CESOP? Read more »