We are a net exporter of energy and sell to neighbouring jurisdictions for less than it would cost Ontario rate payers to consume it
Here is where the economics become contentious. There are two views of the financial impact of exports on Ontario’s electricity cost – we win, or we lose.
Importing and exporting power is a daily routine for interconnected jurisdictions on the electricity grid. The flows are essential to ensure the reliability of the grid.
Ontario is a net exporter of electrical energy. Exported energy is priced lower than what Ontario customers would pay. At first glance it would seem that we lose money on exports, however its not that simple. There are cost and reliability implications associated with reducing or curtailing generation to avoid exports.
Curtailment as a mechanism to reduce exports
Curtailment refers to the reduction of generator output by the Operating Authority. Curtailment of generators is directed by Ontario’s Independent Electricity System Operator (IESO) in accordance with their authority under the Market Rules.
Ontario may incur costs when generation is curtailed. There are specific terms which determine cost based on the underlying driver of the curtailment. Typically, the IESO will curtail generation due to system constraints (congestion) or surplus supply. The Market Rules and contractual terms applicable to curtailment are exceptionally complex and have changed many times since the market opened (i.e. the 2013 dispatch agreement with renewable generators).
The concept of curtailment to reduce exports to zero may seem straightforward, however it is technically impossible. Ontario has 14 interties with adjacent jurisdictions. It is normal for Ontario to be importing and exporting at the same time.
Revenue reporting
Revenue from exporting power is determined by either the Market or contractual agreements with adjacent jurisdictions. Exported energy may be surplus to Ontario’s demand or purchased through the Market by other jurisdictions. It is the IESO that has the data and expertise to report on net export revenues.
Case 1 – Ontario loses money
In the 2015 Auditor General Report it was estimated that exports between 2009 and 2014 Ontario lost $3.1 billion dollars by selling energy for less that the cost of production.
According to a report by the Ontario Society of Professional Engineers it cost rate payers more than $500 million[1] in 2016 alone.
Really?
Neither the Auditor General or Ontario Society of Professional Engineers report provide specific references which account for the cost of constraint, dispatch, regulatory or contractual obligations to generators as an alternative to exports.
The bottom line is that the reports do not provide citations from sources with the necessary expertise to substantiate their claims of lost revenue. The claims are impossible to validate.
Case 2 – Ontario makes money
In basic terms, the net financial outcome is the difference between the revenue from exports and the avoided cost to constrain that energy. If Ontario receives more revenue from exporting power than it would pay to constrain it, they make a profit.
The Independent Electricity System Operator (IESO) has the data and expertise to report this information. In 2018 the IESO reported $300 million in revenue from exports.
Which case is true?
Without being able to validate Case 1, the reporting by the IESO supports Case 2.
We aren’t losing any money as long as we cover the avoided cost associated with constraining generators.
In the case of wind generation, if the IESO directs a facility to reduce its output… they get paid the full amount which they would be paid if they did generate (ref. Auditor General 2011 Report Section 3.03). Any revenue received for their output is a benefit compared to full payment for nothing.
Determination of constraint costs depends on the underlying cause, the Market and contractual agreements. Reporting financial outcomes is the responsibility of the IESO.
Look to the IESO for financial reporting.
Is there a problem?
Yes, there are challenges associated with compensation for exported power. In Ontario we have a mixed bag of generator contracts, complex Market Rules and agreements with adjacent jurisdictions.
It will require Market reform to sort out the issues associated with compensation for power exports. Existing contracts with generators will also need to time-out before any significant changes can be introduced.
It remains in our best interest to become more creative with our energy contracts and work with neighboring jurisdictions to ensure equitable treatment for all entities involved.
[1] The Ontario Society of Professional Engineers, https://blog.ospe.on.ca/advocacy/ontario-lost-500-million-exporting-clean-energy-2016/