Ontario's Near-Term Electricity Shelf Well-Stocked

September 2008

There are a number of factors to consider when thinking about hedging your future price for electricity. Understanding existing market coverage from the Global Adjustment and OPG Rebate mechanisms and risk management considerations should be paramount.

The supply-demand picture, because of its potential impact on pricing, is also a consideration.

The Ontario picture has evolved a great deal over the last ten years or so. Little happened on the supply side leading up to market opening in May 2002. Post-opening, the "energy-only" spot market didn't seem to be able to spur much generation development. With the advent of the Ontario Power Authority (OPA) and its mandate to stock the shelves, things are changing.

Reserve Above Requirement

"Reserve Above Requirement" (RAR) is a key supply-demand indicator. It takes into account available resources (installed generation less planned outages), demand (including conservation and other reduction measures) and operating reserve requirements. The more time this metric is greater than zero, the healthier the supply-demand outlook. A healthier outlook in turn leads to forward and eventual spot prices lower than they would otherwise be.

There are four scenarios for this metric, derived from the combinations arising from normal and extreme weather and planned and firm resource scenarios. Weather is self-explanatory. Planned resources are those currently in place, adjusted for scheduled changes. Firm resources only consider changes to existing generation, commissioning and near- term generation and existing demand reduction measures. The planned resource scenario therefore paints a rosier picture than does the firm resource scenario.

In June 2008 the Independent Electricity System Operator (IESO) issued its latest 18-month Outlook, covering the period from July 2008 to December 2009. As well, in August they issued updates to this Outlook.

The IESO's RAR outlook under the planned resource scenario was as follows:

IESO (June 27, 2008) 18 Month Outlook. Retrieved September 18, 2008 from http://www.ieso.ca/imoweb/pubs...

For the calendar year 2009, the RAR outlook was very favourable. Assuming normal weather, the outlook was above 2000 MW most weeks and assuming extreme weather in only 3 weeks was the RAR expected to dip just below zero. This contrasts with the June 2007 outlook, when the calendar 2008 RAR outlook with extreme weather called for about 19 weeks below zero.

The IESO's RAR outlook under the firm resource scenario was as follows:

IESO (June 27, 2008) 18 Month Outlook. Retrieved September 18, 2008 from http://www.ieso.ca/imoweb/pubs...

For 2009, the firm scenario has a downward shift of roughly 1,500 - 2,000 MW, relative to the planned resource scenario.

(Note: In August 2008 the IESO issued an update to their June 2008 Outlook. Only planned-resource details were made available. The most notable change was a June RAR reduction of ~ 500 MW.)

Risks

Weather is the major demand side risk, particularly in the cooling season when extreme weather can cause air conditioning load to spike and thereby greatly erode the RAR. Somewhat non-intuitively, the greatest weather-driven RAR swings occur in the months of May and September, when the difference between normal and extreme weather is greatest. In those months extreme weather can cause RAR swings of almost 3,000 MW, compared to potential mid-summer swings averaging well under 2,000 MW.

On the supply side, planned versus firm resource risk arises from the potential for scheduled projects that are not commissioning or near-term to not come into service as planned. Specific planned 2009 capacity additions that fall into this category include these generation types: ~ 900 MW of gas-fired, ~ 600 MW renewables and 750 MW of nuclear. Of these, major projects to keep an eye on are the St. Clair Energy Centre (570 MW, 2009-Q1) and the Bruce Unit 2 (750 MW, 2009-Q3). For 2009, the planned versus firm RAR swing averages about 1,200 MW.

While the magnitude of weather-driven RAR swings exceeds those for resource-driven swings, the latter can produce more sustained price increases because generation delays can sometimes be lengthy while extreme weather comes and goes.

Coal-fired Generation

With coal-fired generation slated to be completely phased out by the end of 2014, the Ontario Government also passed regulations that limit the amount of emissions/output from these plants. For 2009, all coal-fired generation will be available but Ontario Power Generation will have to start to be selective about when it runs these units. Look for us to talk more about this in a future article.

Summary

The 2009 supply-demand outlook is much more favourable than it has been in years past, particularly under the planned resource scenario. Some risks exist, more likely resource- than weather-driven. If you have questions about how these factors might affect your hedging decisions or would otherwise like to explore issues related to your energy purchasing, please contact Bruce Sharp at bsharp@aegent.ca or John Voss at jvoss@aegent.ca.