Samsung Renewable Energy Deal: An Update

August 2011

• In early August, the Ontario Government announced further details of the January 2010 deal with Samsung to build 2,500 MW of wind and solar electricity generation.
• If all the Samsung generation were to start at once, the gross amount paid for all output in the first year would be $996 million, resulting in an average unit price of $170/MWh (17 cents/kWh).
• Currently, Ontario is a substantial net exporter of energy, so if the Samsung generation came online tomorrow, most or all of it would be exported. This would result in an additional annual cost to the province of about $786 million. For a typical residential consumer, the annual bill impact would be $65.
• The annual economic adder of $14.7 million that is part of the Samsung deal is less than 2% of the cost to Ontarians.

In January 2010, the Ontario Government announced a deal with Samsung C&T Corporation and Korea Electric Power Corporation (referred to in this article as "Samsung") to install 2,000 MW of on-shore wind generation and 500 MW of ground-mounted solar generation. Samsung will be paid Feed-In Tariff (FIT) rates of $135/MWh (13.5 cents/kWh) for the wind power and $443/MWh (44.3 cents/kWh) for the solar. As well, in return for building supporting manufacturing facilities in Ontario, it will be paid an economic adder and given preferential access to the electricity grid.

Recent news

Further details of the deal were released in early August of this year.

Previously, the net present value of the economic adder was reportedly $437 million. That number has been revised downward to $110 million. Exact details have never been released but we estimate that the original unit rate for the adder was $10/MWh and that it was reduced to $2.50/MWh.

Also announced was a one-year extension to the deadline for the projects to come online, for 1,000 MW of the total 2,500 MW of generation.

Reduced economic adder a "distraction"

Some news reports have referred to the reduced economic adder as reduced "incentive payments". This raises the possibility that readers will conclude that the added cost of the deal was originally $437 million and that it has now gone down to $110 million.

This is incorrect. The economic adder is a small part of the cost of the Samsung deal, so discussion of the adder and its reduction is just a distraction and takes away from peoples' understanding of the true costs of the deal.

Deal statistics

Assuming capacity factors of 30% for wind and 14% for solar, the 2,500 MW of generation will produce about 5.9 million MWh or 5.9 TWh annually.

For the wind portion of the deal, the initial price will be escalated at 20% of CPI. Assuming an annual relative change in CPI of 2.5%, the resulting annual escalator is 0.5%. Including the estimated economic adder, the year 1 price will be about $138/MWh (13.8 cents/kWh). Applying the annual escalator to the nominal FIT rate and assuming a fixed unit price for the economic adder, the year 20 price will be about $151/MWh (15.1 cents/kWh).

The solar price will remain constant over the course of the deal. The constant price paid, including the economic adder, will then be about $446/MWh or 44.6 cents/kWh.

If all generation were to start at once, the gross amount paid for all output in the first year would be $996 million, resulting in an average unit price of $170/MWh (17 cents/kWh). In year 20, the gross annual amount paid for all output will rise to $1.066 billion, resulting in an average unit price of $182/MWh (18.2 cents/kWh).

Over the course of 20 years, the gross amount paid for all output will be $20.6 billion, that is, an annual average of just over $1 billion. The average nominal price paid for all output will be $176/MWh (17.6 cents/kWh).

Interestingly, the economic adder, which we assume to remain constant at $2.50/MWh, amounts to $14.7 million per year.

Cost increase dynamics

A number of factors will affect how the injection of Samsung's generation into the grid will ultimately affect the cost of Ontario electricity, including the demand-supply picture, internal transmission flows, net export levels, what generation is avoided and possibly dispatched off and, finally, the extent to which the Samsung output drives incremental exports. The latter two dynamics have the potential to be particularly costly.

In the current market environment, Ontario supply exceeds demand, and Ontario is a fairly consistent exporter of power. This condition is expected to continue for at least the mid-term.

For new power produced by Samsung in this environment, output would be purchased from Samsung at an (initial) blended price of $170/MWh (17 cents/kWh) and then sold in export markets at a price equal or close to the spot market price. At the current spot market prices of about $35/MWh (3.5 cents/kWh) for wind (baseload pricing) and $42/MWh (4.2 cents/kWh) for solar (at an estimated 20% premium to baseload), the blended spot market sale price for all output would be about $36/MWh (3.6 cents/kWh), resulting in a loss of $134/MWh (13.4 cents/kWh). To emphasize then, there would be export revenue, but it would be greatly overshadowed by the expense incurred in purchasing the output from the generator.

Potential dispatched-off costs are more complicated and have the potential to cause cost increases that are even higher than those that arise from subsidized exports. In the analysis that follows we chose to make it more conservative by ignoring this dynamic.

Aegent's analysis

The average price paid for the basket of contracted and uncontracted generation output that makes up the Ontario electricity market is currently about $70/MWh (7 cents/kWh). As well, the current forward, one-year price for baseload electricity is in the order of $35/MWh (3.5 cents/kWh).

Our analysis used all of the data and assumptions noted earlier and also looked at 5 different export scenarios, where 0%, 25%, 50%, 75% and 100% of the Samsung generation was exported. In each case, it was assumed that for the complement quantity (i.e. 100% less the exported portion), the province avoided purchasing incremental, new resources at the basket price of $70/MWh (7 cents/kWh).

The graph below shows the subsidy or additional cost arising from the different export scenarios.

Currently, Ontario is a substantial net exporter of energy, so if the Samsung generation came online tomorrow, most or all of it would be exported. At 100% exported and a reference or spot market price of $35/MWh or 3.5 cents/kWh (indicating export sale prices of $35/MWh for wind and $42/MWh for solar), the total annual subsidy or Ontario electricity cost increase would be $786 million. For a typical residential consumer with loss-adjusted consumption of 10,000 kWh per year, the annual bill impact would be $65.

Following the 100% export scenario, as the reference/spot price or sale price for the exports increases, the subsidy or additional annual cost naturally decreases. Also noteworthy is the "pivot point" at the reference spot price of $70/MWh, the current basket price and assumed price for new supply.

At reference/spot prices below the pivot point, for the same reference/spot market price, less exports means less energy sold at a price below the basket price, resulting in a lower subsidy or additional annual cost.

At reference/spot prices above the pivot point, for the same reference/spot market price, less exports means less energy sold at a price above the basket price, resulting in a higher subsidy or additional annual cost.

Also of note is the unlikely near-term scenario where none of the output serves to drive exports but rather allows the province to avoid purchasing other, new supply. In this case, the annual subsidy or additional cost would be $586 million.

Any way you slice it, the economic impact of the Samsung deal is driven by its premium price for power, and the extent to which the power is surplus to Ontario needs. The economic adder is but a minor consideration in any evaluation of the contract.

Samsung's Renewable Energy Deal: Assessing the Cost Read more »

Are Ontarians Subsidizing Exported Power? Read more »