Samsung's Renewable Energy Deal: Assessing the Cost

February 2010

• In January, the Ontario Government announced a deal with Samsung and Korea Electric Power designed to add 2,000 MW of wind and 500 MW of solar power, thereby tripling Ontario's current fleet of renewable generation. The consortium is to invest $7 billion, build manufacturing plants in Ontario, and earn an Economic Development Adder (EDA) of $437 million.
• The Province has indicated the EDA will increase the typical residential bill by $1.60 per year, over the length of the contract. This article presents Aegent's analysis of the cost of the deal.
• There is clearly a growing interest in and demand for renewable energy. But large scale procurement of renewables implies a cost, and informed discussion about those costs needs to be part of the policy debate.

On January 21, 2010, the Ontario Government announced that Samsung C&T Corporation and Korea Electric Power Corporation will triple Ontario's current fleet of renewable generation by adding 2,000 MW of wind and 500 MW of solar power. In doing so, the consortium will invest $7 billion, build manufacturing plants in Ontario, and earn an Economic Development Adder of $437 million (net present value, as valued by the Province). They will also "jump the queue", meaning they bypass many already-declared projects and get priority treatment related to transmission and/or distribution systems access.

The Province has stated that the EDA will add $1.60 per year to the typical residential bill, over the length of the contract. But the EDA only speaks to one element of the deal's cost. Aegent's analysis addresses the several areas where the deal will impact power costs.

Background

In September 2009, as first reported by Tom Adams, a noted energy analyst, the Ontario Government was rumoured to be in talks with Samsung, for a substantial renewable generation development that would include Ontario manufacturing. The initiative was spearheaded by then Minister of Energy and Infrastructure, George Smitherman. Clearly, the deal was seen as a key building block in the Province meeting the 50,000 "green jobs" promised to result from its Green Energy Act.

Context for Aegent's Analysis

Beyond the capacity quantities and EDA noted above and a projected total of 110 million MWh of energy generated over the contract term, information on the deal is somewhat sketchy. The unit rate for the EDA for the wind portion of the deal could be $10/MWh while the unit rate for the solar portion could be higher - up to $ 30/MWh. Some initial reports and the government's EDA cost assertion referenced a 25-year deal, out of step with the Ontario Power Authority (OPA) Feed-In Tariff (FIT) program's 20-year contract standard. Aegent's analysis assumes a 20-year contract.

In addition to the cost of the deal itself, other costs to be accounted for relate to back-up for renewables and enabling wires investment.

Summary of Analysis

Click here for details of analysis

Aegent's analysis compares the total cost of the Samsung deal with a natural gas-fired reference case.

The table below compares the Samsung deal total cost, including additional costs for back-up and enabling wires investment, with the natural gas-fired reference case.

Summarizing the results of our analysis, we offer the following insights:

1. The net present value of the EDA could be as high as $673 million.
2. Over the course of the 20-year contract, the annual impact of the EDA on a typical household could be in the order of $3.50 to $4.25.
3. The net present value of total payments to Samsung and Korea Electric Power for their plant output could be $12.1 billion.
4. The net present value of the additional investment that might be required to facilitate the deal (back-up plus enabling wires) could be $776 million.
5. The net present value of the increment paid over the natural gas-fired generation reference case could range from $4.9 to $5.7 billion; i.e., 7.3 to 8.5 times the cost of the EDA.
6. The year 1 increment paid, relative to the reference case and for a typical household, could range from $36 to $41.
7. The year 1 unit cost impact, relative to the reference case, could be $3.33 to $3.78/MWh.

The EDA is not insignificant, but it is dwarfed by the total price paid for output from the deal, including the substantial incremental cost over the natural gas reference case. It should also be noted that the natural gas reference price is quite high relative to the current market price for energy.

There is clearly a growing interest in and demand for renewable energy. But large scale procurement of renewables implies a cost, and informed discussion about those costs needs to be part of the policy debate.

Ontario Government News Release