It’s an easy whipping boy. Whenever something seems amiss in the electricity system, there’s a temptation to look for villains outside our borders and ask if Canadians are giving sweetheart deals to our American cousins. And it’s even easier to point fingers at the nameless traders who make a business out of facilitating exports and imports of power with other provinces and countries. Aren’t they just profiting from our home-grown good will, selling off our natural bounty to the highest bidder?
In fact, nothing could be further from the truth. The business of importing and exporting power from Ontario is not just an economically sensible practice, but one that plays a key role in compensating for physical imbalances in our system, improving efficiency in both the short and long term, and reducing emissions on both sides of the border. In short, exports are a crucial part of our system, for reliability, environmental and economic reasons. Communicating this message however, may be a major challenge in the coming round of public debates.
Perhaps because it operates at the margins and outside our borders, the electricity export business is not well understood. It can be a difficult if not futile exercise to ensure its true character is appreciated in the few brief moments when exports become the subject of a public policy discussion. However, in the run-up to Ontario’s provincial election, and as the grid struggles to cope with renewables integration and related issues, the export business is likely to become the target of choice for any number of commentators.
Examples of discussions in which exports and exporters have become the latest supposed scoundrel are not hard to find. For example:
1. A group of consultants have suggested that a portion of Ontario’s system costs (the Global Adjustment) should be tacked on to the price of exported power, despite the unquestionable negative impact on trade and reliability this would cause.
2. The Ontario Power Authority (OPA) is proposing that its revenue base should be supported through new charges on exports, even though the agency does nothing in or for the export or import business.
3. The latest hearing at the Ontario Energy Board on provincial transmission rates, effectively acknowledging the absence of any generally-accepted principle on which to base the design of the export service rate, produced another tentative decision. The placeholder charge applied to export sales was doubled – replacing one placeholder with another – while renewing efforts to identify a more defensible basis for defining export rates going forward.
4. News stories on negative price episodes in Ontario are cropping up, appearing to throw the entire market system into question, by effectively demonizing the very idea that Canadians might ever pay Americans to use surplus power, without explaining the purpose of negative pricing, or why it’s so important to our system.
There is a very important story behind the export question. Exports, and imports for that matter, are intimately tied to the question of renewables integration. The link between the two is far from intuitive, but must be understood if policy debates are to be untangled. Since the FIT program was first announced, the question of how to integrate renewables into a system that’s long on energy has been highly pertinent. It is widely accepted that generator contracts with the OPA need to be adapted to reduce output during times of surplus supply – without reducing the value of the generation contracts in the eyes of their investors. Unfortunately, two years of discussions have not produced any sign of imminent resolution. And with an election months away, the likelihood of any resolution receiving political blessing this year is looking remote. Ontario’s IESO has warned that it may be forced to curtail generators for reliability reasons, an outcome that would have seriously unfortunate consequences for the province. (Lenders would likely see this as a risk applicable to all non-dispatchable generation going forward.)
The grid operators have to deal with real-world conditions. Ontario has made a number of supply mix choices which, with the notable exception of recent gas-fired power generation contracts, have contributed to an excess of energy at certain times. Surplus Baseload Generation (or SBG) is one of the most serious management challenges for the Ontario grid, and the addition of large volumes of intermittent or variable renewables only complicates the problem. How do you maintain even voltage levels across the province if you have more baseload generation than you really need, combined with large volumes of non-dispatchable, intermittent renewable generation that can inject more power into the system at will? The value of being able to readily export power to neighboring jurisdictions at such times is unquestionable. Not only does it help stabilize Ontario’s grid, but it means that baseload generation in Ontario doesn’t have to shut down – shut-downs that would create both reliability and economic problems. Prices will generally be low under such conditions, so consumers should be happy – as long as exports aren’t impeded.
There is little doubt that the system is facing serious challenges in dealing with surplus baseload generation, renewables integration, and designing supply contracts that better recognize market conditions. Whatever solutions are found for this mix of operational and commercial issues, the costs will certainly be lower if both imports and exports are allowed to operate freely, based on economic dispatch.
To be fair to all concerned, when the rates charged in Ontario for export transmission service have been discussed, it has been difficult to settle on a principled approach. For example, let’s look at the cost principle: The physical infrastructure required to provide export service is minimal in the overall scheme of things: With minor exceptions, every bit of the grid required to facilitate exports is also used to facilitate imports or internal power transfers, and needs to be paid for by Ontario consumers even if export levels were zero. So it’s not very satisfactory to base export rates on the amortized cost of grid infrastructure required by exporters. Alternatively, rates could be based on the principle of the beneficiary paying. However, it’s hard to say with precision who the beneficiaries are: the recipients of power, or those at home whose system is better balanced because of the exports, or some combination? If there were significant long term firm exports from one producer to one customer, then hypothetically at least, the cost of dedicated capacity could be calculated and paid for based on the value of the firm transmission space reserved. However exports from Ontario are almost always short term, based on real-time decisions related to the economics of supply and demand. More to the point, exports arguably make use of grid capacity that is built for non-export purposes, and which would sit idle at the opportune moments if it were not used for export. All of which is a long way of saying that neither the principles of cost-based nor beneficiary-based rates works very well in this context.
In fact, Ontario’s transmission rates are premised on the assumption that transmission infrastructure is analyzed, designed, and built to meet the peak needs of Ontario consumers, without consideration of imports and exports. By that logic, the export tariff should be zero, as the end consumer will pay a transmission charge set according to Ontario needs. It’s not hard to see why after all this time there is little agreement on the principle to be used for design of export rates.
The IESO, whose primary responsibility is maintaining the reliability of Ontario’s grid, has underlined the importance of exports for system reliability: “surplus conditions ... have potentially adverse operational, reliability and economic consequences ... Surplus conditions can be mitigated by exports.” Higher export rates, the IESO has argued, would interfere with this function: “Conversely, by increasing the (Export Transmission Service) tariff, export transactions become more expensive thereby dampening their ability to respond to and alleviate surplus conditions.”
Certain environmental groups have compounded the problem by picking on exports of coal fired power. Exported power generated at Ontario based coal fired stations has ostensibly created short term profits while elevating smog levels in Ontario, particularly during periods of high consumption. However, this problem is largely passé given the phase-out of coal fired power generation in Ontario. Moreover, exports can significantly green the supply mix: The ability to freely export power from Ontario will greatly expand the potential for renewable power contribution to the grid. In general terms, given Ontario’s supply mix, if power is being exported it’s probably pretty green. Typically, exports occur because wind power has revved up, while Ontario’s hydro dams are full of water, against a backdrop of solid output from carbon-free nuclear generation. All of which, when exported, will displace power produced in coal-fired stations in the Ohio valley, eliminating a good deal of the smog and other pollution that finds its way to Ontario. Frankly, whenever you have lots of low-emission baseload and variable generation, the environmental case for exports is much stronger than the environmental case against exports.
Maintaining an open market for imports and exports is one of the most effective ways of ensuring that market forces continue to provide accurate signals and discipline the Ontario power system. Free movement of power across borders makes it much more difficult for players, no matter how big and powerful they may be, to exert influence over the market (one of the reasons the Market Design Committee recommended increasing import/export capacity and keeping the export tariff low). Exports set up real and meaningful rewards for making the kind of investments that have long term benefits to the system. They also establish clear penalties for actions that would exacerbate physical imbalances. These rewards and penalties are reasonably well-known, stable and predictable, creating continual pressure for investors to make economically sensible choices in the domestic system.
Regardless of whatever else Ontario may do, the market-based free flow of imports and exports drives economically efficient behaviour. If we build too much or not enough generation, the import/export market will encourage adjustments. If our prices start to rise or fall out of line with the value of the product, the signals created by ready access to imports and exports will exert pressure on all players to come back to reality. And it does all this in a predictable way, acting even-handedly with all players, like the perfect regulator.
In fact, the only beneficiaries of depressing power exports are those consumers who expect to use power today and leave for other jurisdictions tomorrow. Long-term Ontario-based consumers would not benefit from a system that operates at an inefficient level of exports, or which avoids making the physical investments to correct long-term imbalances.
Unimpeded access to imports and exports from Ontario is one of the best opportunities to balance the system physically, green our supply mix, and set up incentives to do more of the right thing in the future.
One has to ask, if exports are one of the easiest ways to drive greener performance and more efficiency from the system, why wouldn’t we make it easier for exports to grow?
— Jake Brooks, Editor