In the late 1980’s and the early 1990’s a quiet revolution shook the North American energy industry. Abundant, low-cost and relatively clean natural gas entered the market and started to displace other fossil fuels, forcing fundamental rethinking in many parts of the power sector. One effect was significantly increasing the pressure to move to competitive electricity markets, and many consequences followed from that.
Ontario came a bit late to the party, finalizing most of its deals for long term gas-fired power generation in 1994 or later, when prevailing prices for long term gas had started their historic climb, and restructuring in 1999. Although gas fired power generation was usually chosen for a combination of reasons including technical, environmental and price, the installation of gas-fired power plants slowed down noticeably as gas prices rose during the 1990s.
While Ontario debated the future of Ontario Hydro, New England and other parts of North America were busily building gas fired power generation, many fueled with gas from the Western Canadian Sedimentary Basin (WCSB). Those jurisdictions subsequently enjoyed the benefits of low cost new capacity, relatively responsive generation, agile new entrants with a mindset ready to embrace competition, and permanent cost savings as competition became the norm after FERC instituted a number of rules mandating open transmission access in competitive markets.
Low-cost gas was not the only reason that competition came to the power sector, but it was a key enabler, and a key driver. It certainly helped reduce the cost of capital asset replacement for a number of utilities at a time when many were struggling with cost control.
Unfortunately, despite being home to a major gas trading hub, and perfectly positioned to use gas for power generation, the growth in gas’ share of the supply mix in Ontario trailed that of other jurisdictions during the critical period when long-term low-cost Canadian gas was most affordable. Had it not been for the NUG contracts of the mid-1990’s and OPG’s conversion of its Lennox station to gas, Ontario’s gas portfolio would have been miniscule, and the province would have been totally bypassed by the economic opportunities of which its competitors were taking much greater advantage. Arguably, Ontario under-invested in gas generation at the time, and missed a significant opportunity.
In terms of plentiful low cost gas, today’s conditions very much resemble those of the late 1980s and as a result Ontario faces an important decision about how to respond to the potential of large amounts of relatively affordable gas on its doorstep. Will the province once again continue on its predetermined path, set by policy drivers established before the latest gas deposits were understood, or will it be agile enough to recalibrate, adapt to changing reality, and find ways to take advantage of unexpected opportunities?
As outlined in articles starting on page 19, recent advances in gas extraction technology, combined with the discovery of reserves unexpectedly close to major markets, promise to make large amounts of relatively clean and low cost gas available to Central Canada for decades. Up to 100 years of natural gas reserves are thought to exist now in the US as a result of these recent finds. Similar reserves exist in Canada, although it’s not clear what proportion of these will ultimately prove attractive.
Environmentally, when cogeneration or extremely high efficiency gas generation displaced coal fired power, society benefited from major emission reductions coupled with cost savings, a win-win situation. In a scenario without much coal in the supply mix it is still a net emission reducer as long as it’s set up to displace fossil fuel that would otherwise be used for heating, replacing relatively “dirty” imported power, and facilitating the greater use of renewables.
Taking a fresh look at the opportunities for gas fired power is a sound complement to a green energy strategy. Committing to buy large amounts of variable generation, as Ontario is doing, creates a number of technical issues to address. They include the following:
a) Ensuring the system has adequate capacity that can be quickly ramped up to replace lost energy when wind, solar or other intermittent supplies drop off suddenly, at an affordable cost;
b) Maintaining voltage levels across the province, as output from renewables may not always be ideal for voltage purposes;
c) Correcting power factor imbalances (Some of the small scale invertor-based generation at the distribution level requires the system to do a little shoring up in a technical area called reactive power).
These technical problems create not only barriers for the adoption of renewables, but also economic costs for corrective measures in various parts of the system. To the extent that new natural gas fired generation can alleviate these problems, it moderates the cost of using green energy. As Europeans have demonstrated (See article referenced below) gas fired capacity can increase the system’s ability to accommodate renewables and thereby enlarges the total amount of renewable energy that can be installed on the system. Using gas to replace energy lost when intermittent renewables are non-productive will reduce the need for imported power as well.
In addition, there are planning and development benefits to well-located high efficiency gas fired generation. As groups like the Toronto Atmospheric Fund have been saying, many cities don’t have a lot of non-intermittent renewables close at hand and therefore need high efficiency gas generation if they are to avoid major new transmission or other unpopular power system infrastructure developments.
Gas-fired power generation serves as a convenient swing resource on the system. In fact it has already provided significant value in offsetting the variability of renewables. However its ability to provide such service could be developed much further. A number of European countries have been working to devise more focused approaches for several years. Cogeneration in Denmark, for example, has been developed with a clear objective of facilitating the transition to a greener energy system. (For more information, see “A new meaning for smart grids in Europe,” and our special report in the April issue of IPPSO FACTO, “Profile on Danish energy technology and policy.”)
With a clearly defined public policy designed to get the most out of new gas fired powergen, opportunities exist not just to be a world leader in green energy technology itself, but in the technologies necessary for managing a prudent transition to a greener system, while maintaining reliability and cost consciousness.
Well-developed energy policy of course has several components:
1. Clear: Clearly-articulated objectives and priorities and well defined distinctions between the roles of the actors, particularly between the political and non-political agencies, so that policy debates can focus on appropriate areas and to minimize uncertainty in non-political areas
2. Enduring: Long term perspective, matching the term of the required investments, to increase stability and confidence
3. Flexible: Ability to adapt while respecting the above principles, usually with the help of long term senior civil servants with standing in the sector and professional accountability to the industry as well as to government.
There have been problems with local approvals and delays for some of the OPA’s most recent contracts for new gas-fired power generation. Given the critical role these projects play in reliability, and the likelihood that they will now cost less to run than originally projected, this would be a good time to take a close look at how the impediments to development can be addressed. Policymakers, local stakeholders, planners, and developers all have a lot to gain from resolving the difficulties - and should waste no time in coming together to find solutions.
Probably the lowest cost source of non-intermittent incremental capacity in Ontario is also close at hand – in the NUG plants, most of whom are coming to the end of their contracts with no clear policy on renewal. (They are about 1400 MW of gas fired generation capacity signed up by Ontario Hydro in the mid 1990s.) Without getting into a numbers game, it stands to reason that a good place to look for inexpensive capacity is with seasoned power plants that need to refurbish but not completely replace their equipment. In such cases, there should be minimal cost for permitting, civil engineering, interconnection, etc. and low risk for investors. It would make sense in the context of the FIT program and the latest prospects for gas, to renew negotiations now with the NUGs to take advantage of these factors.
Other forms of gas fired power generation offer many of the same benefits as NUGs. With low cost long term gas at hand, a number of well-located existing facilities coming off contract, and pending capacity problems for the grid, what could be more convenient than an updated policy on the supply mix, including new gas-fired power generation, facilitated approvals, and NUG contract renewal, adapted to facilitate the green energy era? A balanced supply mix, regularly updated and employing the full range of generation technologies in their most appropriate roles, has long been part of APPrO’s policy.
As many in the industry know, there have been a number of scurrilous statements in the press about the cost of the NUG contracts. These are typical examples of presenting the public with incomplete information: NUG contract prices at 5-8 cents per kWh were compared with market prices of 3-6 cents per kWh, and the conclusion drawn that the NUGs are expensive. In fact, compared to new capacity additions at the time the contracts were signed, the NUGs were a bargain. The same holds true today: Incremental NUG capacity is probably the least expensive of any non-intermittent option. The anti-NUG editorialists seem to compare new investments against the cost of output from heritage assets – an impossible test to pass. If any of those editorialists can explain where to get more of that 3-cent power on a long-term basis, especially load-following power, I’m sure the OPA would be all ears. Nowadays the realistic costs for power are much higher than heritage plants. NUGs can almost certainly provide relatively flexible long-term supply at prices below the average for new resources providing comparable services. No one is asking to be paid above-market rates – recognizing that in most parts of North America there are effectively two markets: one for consumer rates and another for producer rates. Neither market is perfect, but arguably, producer rates are more reflective of actual costs than are consumer rates, partly because they are differentiated between heritage and new. Rate debates aside, some important lessons in public relations can be gleaned from how the NUGs were treated, lessons that will be important for holders of all new power purchase agreements to bear in mind.
Gas fired generation is well-suited to competitive environments and to meeting cost containment objectives. It is low capital, easily dialed up or down, amenable to endless variations in its application, can be easily hybridized with other technologies, likely to benefit from further technical advances in the near future, and the list goes on.
With all these factors at work it’s timely to consider a renewed “smart gas strategy” (as the OPA originally dubbed it). The OEB has already outlined plans to look at the related regulatory issues. There would need to be consideration given to the full range of gas-related capacity issues including the facilitation of stalled projects, the long-delayed CESOP (Clean Energy Standard Offer) program, larger CHP, reliability-driven gas facilities, RFPs like those already completed by the OPA, and more.
As the province of Ontario faces the challenge of integrating increased variable power and refining its policy framework under the Green Energy Act, it would do well to look at how adaptive and economic new gas-fired generation technology is, and how well it can be used to meet the energy, environment and economic needs of the province.
— Jake Brooks, Editor
Please see the following related articles, including a special feature by John Wolnik on the Marcellus Shale deposit, in this issue of IPPSO FACTO:
* How shale gas is redrawing the map for Canadian power generators
* Marcellus gas — a game changer, feature article by John Wolnik
* The Marcellus Shale and gas production (backgrounder)
* Environmental considerations impact shale gas options
Note to readers: APPrO does not represent NUGs or gas fired generators in contract negotiations. The editorial opinions above are purely those of the author, are restricted to questions of public policy, and are not binding in any way on any parties to contracts or negotiations.