Edited January 10, 2012 with addition of a revised Ontario Feed-in Tariff Costing Model v3-5a.xls incorporating IESO 2011 market prices.
The Green Energy Act Alliance’s (GEAA) proposed long-term renewable energy supply plan adds approximately 15,000 MW of new renewable capacity in steady, sustainable, annual increments for seven years. We estimate that in 2018 total generation from our proposal would contribute about 32 terawatt-hours per year (TWh/yr) or nearly 21% of the province’s electricity supply. Added to existing new renewable generation in the province, this target could bring total new renewable generation to 25% of consumption by 2018.
While this target is more conservative than that of California, which has a 33% target for new renewable energy by 2020, it is substantially greater than current Ontario policy that seeks only 15% of new renewable electricity supply through 2030.
The government and ratepayers are justifiably concerned about the cost of such plans to steadily expand the role of new renewables in Ontario’s electricity mix.
We have commissioned Robert Freehling, an energy policy consultant from California, to prepare a spreadsheet model that performs thousands of individual calculations to evaluate the approximate cost to ratepayers of our proposal. The Ontario Feed-in Tariff Costing Model is a spreadsheet examining the costs to ratepayers of a long-term plan for sustainable development of new renewable generation in Ontario. The model shows that the net effect on ratepayers depends on several factors.
Important factors affecting the cost to ratepayers are the pace of development per year and the mix of renewables added to the system, the tariff paid for each renewable technology and the annual generation from each technology, and-most significantly–the cost of energy that the new renewable generation would replace or offset. The latter, known in the trade as the “avoided cost”, varies widely, depending on a host of assumptions about the energy sources that would otherwise have been used in the future.
Avoided Cost
The cost of generation avoided in Ontario varies with the projected cost of natural gas-fired generation, the cost of out-of-province purchases, and the cost of generation from existing, refurbished, and new nuclear generation. Thus, there is no one avoided cost for Ontario. There is, instead, a range of possible future costs. We’ve chosen to represent this uncertainty as three different scenarios.
The spreadsheet allows the user to weigh three alternative scenarios for the avoided cost where the feed-in tariff program is:
- Displacing relatively low-priced electricity from natural gas-fired generation costing from 5.5 to 6.5 cents per kilowatt-hour, assumed to be natural gas-fired generation purchased from short-term contracts,
- Displacing mid-priced electricity at an average cost of about 10 cents per kilowatt-hour, assumed to be natural gas-fired generation purchased from long-term contracts, and
- Displacing new nuclear power at a cost of 16 cents per kilowatt-hour.
Further, we have discounted the avoided cost of wind generation by 1 cent per kilowatt–hour below the cost of baseload power–effectively reducing the value of wind to the system–to account for the minor cost of providing backup generation for wind to improve reliability. Note, however, that this assumption has only a minor effect on the overall net cost of the program.
Generation from solar photovoltaic (PV) generation is assumed–in all but the nuclear case-to have a higher value, since it tends to be delivered during the day when power demand is greatest, and prices for conventional generation are also higher. More of solar generation is delivered predictably during periods of high demand than that of wind generation.
We have chosen to present the spreadsheet with the Mid-Cost case for the default Avoided Cost Scenario. We believe this is a likely scenario through 2018, although government policy to reduce reliance on new nuclear generation would reduce the net cost of the proposed FIT program to an almost negligible amount relative to new nuclear capacity.
Average Annual Yields
We have chosen annual average energy yields for each technology based on experience in Ontario and elsewhere. These values should be treated as reasonable approximations, understanding that the performance of individual projects can vary significantly from fleet-wide averages.
Line Losses
The spreadsheet calculates the percent penetration of new renewables from the proposed FIT program relative to retail sales. Much of the new renewable generation is delivered distant from the load and thus the loss of electricity in the lines must be accounted for when compared to retail consumption. The 6% loss assumed is slightly lower than the Ontario average to reflect that some of the solar PV generation will be on customer rooftops and the energy from these installations will be consumed on site.
Annual Degradation
Annual degradation of the generation from solar PV of 0.5% per year is accounted in the spreadsheet. This is based on worldwide experience. Degradation of generation from the other technologies is derived from industry and public sources.
Degression Rates
Degression is the annual reduction of the tariff paid for generation as a percent of the initial tariff. A range of values are selectable from a pull-down menu in the spreadsheet. The cost of generation from solar PV is dropping dramatically. Because the GEAA has proposed an annual degression of -9% per year for solar PV, the table uses this value as the default.
We are also recommending dramatic cuts in the solar PV tariff rates in the first year of the revised FIT program from 11% to more than 30%. These new tariffs coupled with our proposed annual degression rate offer substantial savings to Ontario ratepayers as the program progresses.
We have not seen dramatic drops in the cost of the other technologies used in this analysis. Thus, the default degression value for the other technologies is set to zero. However, these degression rates can be changed by the user.
Inflation Adjustment
Tariffs are increased annually as in the current FIT program with the exception of solar PV, which is excluded.
Summary of Results
The spreadsheet calculates the “gross cost” of total annual payments, as well as the “net cost” of the proposed FIT program. The net cost of the proposed FIT program depends primarily upon what specific generation sources the FIT program generation displaces or “avoids”.
In the worse case where electric generation from the feed-in tariff program displaces low-cost, natural gas-fired generation, we estimate the net effect on ratepayers is approximately 16% percent increase in retail rates by 2018.
The January 6, 2012 release of Ontario’s IESO 2011 market price illustrates that the original cost estimate for the low-cost natural gas scenario was conservative. Using the 2011 market price adjusted for when the generation is most likely available reduces the cost impact substantially of the low-cost natural gas scenario for a year when natural gas prices were at an historic low. The potential worse-case impact of the low-cost natural gas scenario with actual 2011 market prices reduces the impact on rates from 16% to 13.4%.
On the other hand, if the program displaces power from new nuclear plants that would have otherwise been built, then the net effect would be about 2% increase in cost. This is well within the margin of error for an exercise such as this and it can reasonably be assumed that the costs of the expanded FIT program are equivalent to the development of new reactors through a provincially-owned enterprise with access to public financing.
However, if the roll-out of new renewables envisioned by the GEAA offsets generation from new nuclear plants built by the private sector with private financing, the renewable program might offer substantial savings. In 2010, the California Energy Commission estimated that a new nuclear plant built in 2018 would cost $0.167 USD/kWh if developed by a publicly-owned entity, but as much as $0.273 USD/kWh if built by an investor-owned utility.
We have chosen the mid-cost case as the default. This case assumes construction of new natural gas power plants, either with the electricity purchased through long-term contracts, or where the plants are owned by the utility that has the full cost embedded into customer bills. Under these conditions, the proposed program may increase costs to ratepayers by approximately 10%. New conventional power plants have skyrocketed in cost over the past decade, in turn increasing the cost of the electricity they generate. This has significantly narrowed the gap in cost between conventional and renewable energy, a factor that is reflected in this scenario.
Further Ratepayer Savings
Our costing model does not take into account any monetary benefits to ratepayers from hedging natural gas prices or minimizing natural gas price volatility through 2018 and beyond. Both effects due to adding large amounts of renewables are substantial.
Nor does the model account for any merit-order effects, where renewable energy reduces the demand-and thus the price-for conventional generation. This effect has been found to offer substantial savings to utility customers as renewables are brought on to the system. In some cases, the merit-order effect alone pays for the apparent increase in costs due to the addition of new renewable generation.
There is an extensive literature on the merit order effect. For more information, see
- Merit Order Effect: Impact of Wind Generation on Wholesale Electricity Costs in 2011 in Ireland,
- The Merit Order Effect: A detailed analysis of the price effect of renewable electricity generation on spot market prices in Gemany by the Fraunhofer Institute (2007), and
- Arne Kildegaard on the Merit Order Effect (Univ. of MN).
Ontario Feed-in Tariff Costing Model v3-5.xls–Spreadsheet model examining the costs to ratepayers of a long-term plan for sustainable development of new renewable generation in Ontario. Note that this version is superceded by the following version v3-5a.
Ontario Feed-in Tariff Costing Model v3-5a.xls–Spreadsheet model examining the costs to ratepayers of a long-term plan for sustainable development of new renewable generation in Ontario. This version incorporates Ontario’s IESO 2011 market prices.