Ontario nuclear power subsidizes gas and renewables: an inquiry into the price of political correctness

November 17, 2010
By

I recently participated in a very interesting discussion on Tyler Hamilton’s blog. Tyler as you may know also covers energy for the Toronto Star, and is generally anti-nuclear—especially when it comes to the CANDU. As you can see in the comments, I and others suggested that revenues from Ontario’s nuclear-generated electricity are actually subsidizing the competition. To me this is a fairly simple conclusion once you look at even the meagre public data that’s out there.

What do the data say? First, nuclear energy provides more than half Ontario’s electricity most of the time. Go to www.ieso.ca any time of the day, and look at the pie chart under the heading “Generation by Fuel Type”; it shows data from two hours ago. Nuclear is always the single biggest contributor, and most hours of the day it contributes well over half Ontario’s power.

This by itself proves my point. Ontario rate payers, as you’ll see below, are paying for all sorts of policy initiatives related to electricity. The mechanisms through which they are paying, the Global Adjustment and Debt Retirement Charge, are tied to every kilowatt-hour that is consumed in Ontario (outside of Cornwall, which gets its power from Hydro Quebec). If the nuclear plants generate the bulk of those kWhs, then nuclear power also generates most of the add-on revenue. As one of Tyler’s other commenters said, that’s not speculation. It’s math.

The second thing the data tell us is that most nuclear-generated electricity comes with an average price of roughly 5.8 cents per kilowatt-hour. How do I get that number? The output from Bruce units 3 and 4 (the “A” station) fetches something like 7.1 cents per kWh according to Ontario’s Auditor General. Bruce units 5 through 8, a.k.a. Bruce B, fetched 5.8 cents per kWh in the first 9 months of 2010, according to Cameco (which has an interest only in units 5 through 8). Output from Pickering and Darlington gets 5.5 cents per kWh according to Ontario Power Generation.

From IESO data, I estimate that the average Hourly Ontario Electricity Price (HOEP)—the market price—in the first 9 months of 2010 was roughly 3.77 cents per kWh. This means that on average the price of nuclear output was something like just over 2 cents per kWh above the market price. Broken down among the stations, Bruce A’s price was 3.4 cents per kWh above market, Bruce B’s 2.1 cents, and OPG’s was 1.8 cents above.

Anti-nukes will point to that as proof that nuclear is too expensive. The problem is, their preferred generation types—wind, solar, and of course natural gas—demanded far more than 2 cents per kWh above market. You’ll get an idea how much later on; you may be shocked.

This is plain if you look at the Global Adjustment figures for 2010. The Global Adjustment is a cost recovery mechanism that covers the gap between the market price of power and the price promised to certain contracted and regulated generators. The GA applies to all consumers, but unless you use at least 250,000 kWh per year or have signed an electricity contract with an energy retailer, you won’t see “Global Adjustment” (or “Provincial Benefit”) as a line item on your power bill; it is included in the “Electricity Charge” line item.

If there is any difference between the market price of electricity and the price the Government of Ontario has promised to pay certain generators, then the Global Adjustment makes up for it. If the market price is higher than the contract price, then customers receive a credit; if the market price is lower, customers are charged.

Looking at the 2010 GA figures, you’ll see that they have been negative in almost every month in every category. That means that the market price was lower than the contracted and regulated prices, and that the eligible generators needed a top-up to cover the difference between what they were getting in the market and what the Ontario government promised them.

As you can see, the biggest amounts belong to a combination of “non-utility generators” (NUGs), with a total of 1,652 megawatts of primarily gas-fired capacity (according to a Macquarie report), and OPA contracted suppliers. (The latter also include conservation and demand efforts.) These two categories easily outweighed the amounts due to OPG. Though the OPA contractees include Bruce Power, by far most are in the so-called “clean energy” category, i.e., also natural gas.

Think about this for a second. Gas has been very cheap for most of this year. The mix of politically correct gas and renewables contributes around 12 percent of Ontario’s electricity in a given year—most of it gas, which emits huge amounts of carbon dioxide. These sources are on track to receive an average of 66 percent of the Global Adjustment payments so far this year. In absolute amounts, that’s over $1.7 billion. (I got to that amount by adding the NUG total to that of the OPA, then subtracting my estimate of Bruce A’s top-up from January to September—8.8 billion kWh at 3.4 cents per kWh.)

By my estimate, those sources—the NUGs plus OPA excluding Bruce A—have generated around 13 billion kWh so far in 2010. If they required a top-up of $1.7 billion, that works out to 17 cents per kWh.

And that is during a time of cheap gas prices.

Good thing these sources provide only one-tenth of Ontario’s electricity. Can you imagine what our power would cost if they provided even one-fifth?

It is really clear from this that OPG and Bruce Power are the only reason Ontario electricity costs haven’t gone completely out of control. While it is true that OPG’s hydro generators provide the lowest-cost power in the province, it is also true that the nuclear generators, which provide twice as much power as hydro, are the next cheapest.

Up to the end of this year, all electricity customers will, through the GA, cover the $2.6 billion top-up. As mentioned, 66 percent of that top-up will go to the politically correct energy sources that provide 12 percent of Ontario’s electricity. Only 34 percent will pay for purely carbon-free power, which was the whole idea for phasing out coal in the first place. Beginning January 1, 2011, there will be a time-of-use formula for consumers whose peak demand is more than 5 megawatts. That is, those big consumers will get a price break. Meaning, the rest of us will cover that gap. Is the “Ontario Clean Energy Benefit,” a soon-to-be-announced measure to provide $1 billion relief on Ontarians’ hydro bills, intended to address this?

I’m not saying that the big consumers shouldn’t pay lower prices. I’m saying we should all pay lower prices. And that means we should stop paying for political correctness. It’s too expensive, and reduces too litttle carbon dioxide.

19 Responses to Ontario nuclear power subsidizes gas and renewables: an inquiry into the price of political correctness

  1. November 17, 2010 at 9:40 pm

    Heavens Steve! The subsidies are so complex in Canada! Here in Vermont, when Vermont Yankee wanted to put some fuel rods in dry cask storage, the legislature made them an offer they couldn’t refuse. (No horses were harmed in the course of this offer.) Pay money into the Clean Energy Development Fund. Pay a couple million a year into this fund. And then you can have your dry casks! A very simple nuclear-to-wind subsidy scheme.

    So. Vermont Yankee got its dry casks, the Clean Energy Development Fund takes nuclear money and subsidizes wind energy, and everyone is happy. Sort of happy, anyway.

    Rod Adams did a great blog post on this, based on Vermont Tiger investigative reporting.
    http://atomicinsights.blogspot.com/2010/10/following-money-that-is-backing-peter.html

  2. November 18, 2010 at 9:32 am

    Meredith, thanks. VT makes offers that VY can’t refuse; ON makes offers that Ontarians can’t refuse or understand. I can neither confirm nor deny that no horses have been harmed.

    Following OPG money since OPG was spun out of Ontario Hydro trail also reveals references to the fund for used nuclear fuel. That fund is either in good shape or not, depending on whether you are pro- or anti-nuke. I may tackle that when my stomach settles.

  3. Tim
    November 19, 2010 at 12:07 am

    Just to provide a little more color as I understand many of the OEFC non utility generator contracts within the Global Adjustment date back as far to the days of Peterson and Rae governments when natural gas prices were even lower than they are today and the pricing terms are still above today’s market price. The one positive I think is that many of them run out in 2011 unless of course the Ontario government renew them which unfortionately I would not count out. If they don’t all of these generators will essentially have to sell into the market like everyone else with no price support.

  4. November 19, 2010 at 8:56 am

    Tim,

    Yes, a lot of the NUG contracts expire soon. And I’d say you are right that they will be renewed—the provincial government, while it is promising to cut 10 percent off every rate-payer’s electricity bill, is also saying that investment in “clean energy” will continue and that the electricity price will continue to rise.

    I’m not opposed in principle to renewing these, since we’re talking about less than 1,400 MW. But the terms should be somewhat different, if you catch my drift. Here we are with a very low gas price, and the GA for 1,400 MW of NUGs has been $663 million from January to September this year. That’s more than the GA for OPG’s 9,800 MW over the same period.

    The NUGs used to receive Debt Retirement Charge revenue; now they get topped up from the GA. As you point out, they entered the Ontario system back in the Peterson/Rae days, i.e., in the late 80s and early 90s. Here we are today with cheap gas, and they still require a top up.

    Yet APPrO, the association that represents the NUGs, still claims they produce cheap power (http://magazine.appro.org/index.php?option=com_content&task=view&id=999&Itemid=44). Tough to square that with the GA figure.

  5. Tim
    November 19, 2010 at 1:31 pm

    A few other things buyers of electricity in neighboring markets don’t have to pay the Global Adjustment just the market price. In most days of fairly moderate temperature ssuch as today the new HVDC connector between Quebec and Ontario which many think brings power from Quebec to Ontario is actually running in reverse often in amounts well over 1000MW. The thing is Quebec can be buy power off of Ontario without paying the Global Adjustment and then resell it through its own interties to New England and New Brunswick at a substantial markup all the while they can let their own hydro resevoirs fill back. On the otherside of Ontario in Michigan there has become a big fight between large industrial consumers and the utilities. Why: The Michigan utilities have been iddling their coal plants and again buying power off of Ontario without paying the GA. The thing Michigan is most customers are still paying for these iddled coal plants through rate base and a limited in their ability to access the wholesale market.

    Now to be fair other provinces have made similar mistakes. Hydro Quebec contracted a couple years back for new gas fired plant in Becancour down the road from Gentilly nuclear plant that has been described as almost a white elephant. Dehumidifiers have had to be installed to keep the machinery from rusting all in a time of low gas prices. Again though Hydro Quebec which even though has a almost brand new completely unused gas plant they would rather buy power off the Ontario wholesale market which has to show the price uncompetitiveness of gas.

  6. November 20, 2010 at 11:09 am

    Tim, I had not considered the Quebec angle to this, thanks for pointing it out. Whatever else you say about Hydro Quebec, you can’t call them lousy businessmen.

    Good point about the economics of gas-fired power.

  7. Peter John
    November 20, 2010 at 1:12 pm

    The problem with nukes is not the cost when things go right, it is the cost when things go wrong. One question, why is the market rate lower than the cost of nuclear power when the article is trying to sell the idea that nuclear is cheaper. What you need to do is get copies of the contracts and review them. And get comments from the people who approved them.

  8. November 20, 2010 at 2:46 pm

    Peter, yes at this time the contract/regulated price for nuclear is higher than the market price. That’s actually my point. Though nuclear is on average 2 cents per kWh higher than market, the other sources that are slated to take over from coal are much higher—17 cents higher, by my calculation.

    There is simply no arguing that gas and renewables, in whatever combination, are far more expensive than nuclear.

    As for how much it costs when things go wrong, we really should be asking that question about gas-fired power. I can point to actual recent events, right here in North America (e.g. Middletown CT in February) in which there were human casualties resulting from gas explosions. They happen all the time. Try putting a dollar figure on that.

    Commercial nuclear power, on the other hand, has yet to see its first fission-related casualty in any OECD country—and the industry is close to 50 years old.

  9. Tim
    November 21, 2010 at 3:34 am

    Interestingly enough you can find all of the contracts Hydro Quebec has signed for “green” power projects at the website below. I do happen to notice the same information or lackethereof being available online from GO, OEFC, OPA etc.

    http://www.hydroquebec.com/distribution/en/marchequebecois/contrats.html

    You can even see the contract HQ signed for the Trans Canada Becancour Gas Fired plant that has essentially been mothballed even with the most recent decreases in the price of natural gas.

    http://www.regie-energie.qc.ca/audiences/3515-03/Requete3515/HQD-1_doc3_20juin03.pdf

  10. November 21, 2010 at 9:45 am

    I believe there is an unholy alliance to new nuclear power seem as expensive as possible.

    Today’s nuclear power industry is booming and want to get maximum benefits as long as possible.

    All those in the so-called renewable energy systems would have maximum contribution and get investors to believe in eternal increases in electrical energy.

    Anyone who somehow lives of CO2 threat would obviously not that the cheapest energy is CO2 free. (Actually, it might be worthwhile to take CO2 from the atmosphere to produce synthetic fuels, with the upcoming high-temperature reactors).

    An example of how our leaders acted to avoid new nuclear actual cost will be public. World Bank gave South Africa a loan for a very large coal-fired plants, although the APR-1400 is cheaper and now can be purchased for operation on 5-6years depending on how many are ordered at the same time.

    None of the oil, gas or coal want more people to realize that APR-1400 provides electrical energy to 3us cents / kWh.

    Therefore, Russia tries to blow up their projects and the United Arab Emirates was careful not to disclose what nuclear power plant with the four APR-1400 reactors have cost without including aluminum smelters and a host of infrastructure ….( how difficult it is to count backwards?).

    But China’s capacity for mass production by factory-made modules developed at maximum speed, so Korea must be fast to sell the 80st APR-1400 they are planning …

    The coming years will be very interesting China probably has the pebblebedsreactor on the world market to about 1,5-2 $ / We already 2013th

    South Korea will probably sell 30 reactors over the next four years and China will be on the world market with two large reactors that could come down to $ 1.2 / We ….

    Uranium production will increase even more, and China’s monopoly on the rare earth metals leads to the uranium will be a side product, as well as thorium.

    Even in a year, India has fully operational in its fast breeder reactor which is driven by what is called waste and simultaneously producing U233 by Th232.

    I feel that India alone play with open cards.

    What if there was a general accepted truth in the U.S. that nuclear will convert nuclear energy from today’s waste into electrical energy for $ 0.02 / kWh in 2020 already?

    Quickly, the whole CO2 threat-based industry to get rid of its subsidies, rapid long-term expensive project for the extraction of oil to decline in attractiveness.

    Just think how decisions would change if everyone now knew what I know and they will know within five years.

  11. November 22, 2010 at 12:13 pm

    Gunnar, you are right—this is a business competition in which the prevailing belief is that renewables will just continue to produce energy more and more efficiently. The natural gas lobby has managed to create that belief, with the collusion of the self-styled “green” lobby. These two lobbies are working together to put the notion into people’s minds that since new nuclear plants take too long to bring online, it’s better to go with renewables (since their efficiency will magically go up) with plenty of gas of course.

  12. Lynne
    November 26, 2010 at 9:32 pm

    Isn’t this article by Wayne Lilley a terrific summary of the energy situation here in Ontario? He pretty much covers all the bases.

    http://www.thestar.com/news/insight/article/897359–green-goals-bigger-bills

    • Anatoli
      December 8, 2010 at 6:28 pm

      One who will care to read this article carefully will notice that it consists of political speculations, ungrounded conclusions and ambiguous quotes.

  13. Anatoli
    December 8, 2010 at 6:20 pm

    Anybody can play as they wish with officially published numbers underlying calculations of nuclear power. We will never find the truth anyway. Instead I would like to ask proponents of nuclear energy a couple of questions:
    1. When was the last time a privately funded nuclear power generator was built in North America? How comes that cheap and reliable energy source does not attract crowds of private investors?
    2. Why private insurance companies do not underwrite reactors and a special law was required to allow a mere existence of nuclear power generation industry in North America?
    3. Who finances construction of the only permanent nuclear dump in North America? Who is going to pay for its operation and maintenance for the next 10,000 years?
    4. Would nuclear energy generation industry sign on a 20-year fixed rate feed-in-tariff contracts?

    This is THE elephant in the room. The rest is politics.

  14. Steve Aplin
    December 8, 2010 at 7:35 pm

    Anatoli, thanks for your comment. I’ll respond to your points in the order you made them.

    1. There is a privately funded nuclear project happening right now, in Georgia (U.S., not the former Soviet republic). Don’t confuse the U.S. federal loan guarantee for this project with a subsidy: subsidies are for renewables, which cannot survive without artificial price support. Why is the ability to attract private investors so important? Private sector investors flocked like lemmings to attractive investments like credit default swaps, and look what happened. Nuclear doesn’t attract private investors because of the long lead-time for projects (hence uncertain investment payoff periods). But you are right, it is cheap. Therefore a capital-market failure exists. Government created that, and only government can address it.

    2. There is private insurance for reactors. Check http://www.cna.ca/curriculum/cna_safety/insurance-eng.asp?bc=Insurance&pid=Insurance.

    3. American rate payers who use nuclear-generated electricity have paid for Yucca Mt. Nuclear-generated electricity is among the cheapest electricity in the U.S. As for who pays for the next 10,000 years, how about asking who will pay for the next 100,000 years as fossil-origin CO2 swirls around in the atmosphere? As you know, CO2 gets dumped freely into the air from gas-fired power plants. Nobody pays a dime for that.

    4. I don’t think the nuclear industry needs feed-in tariffs. It needs more streamlined regulations and a more certain policy environment.

  15. December 16, 2010 at 10:44 pm

    I just found your blog via a link Steve – I am the scott from that Tyler Hamilton thread.

    Anatoli should know that OPG has a fund of about $10 billion for decommissioning and storage in perpetuity. I’ve argued it belongs elsewhere, as that fund hugely impacts the financial reporting of OPG.
    http://www.opg.com/power/nuclear/waste/future.asp for more information on that.

    I’d also note private insurance hasn’t always be found desirable – for instance the private fire departments in Gangs of New York were replaced with public fire departments.

    On the Global Adjustment mechanism, I blogged on the values at http://morecoldair.blogspot.com/2010/11/supply-groups-impact-on-global.html
    I would not the collapse of the market price inflates the GA, so the value is meaningful primarily in the context of exports – the only place the price received is the market price.

    • Steve Aplin
      December 19, 2010 at 2:00 pm

      Scott, welcome! I had a look at your blog, and I think we arrived at the same conclusion—most of the GA absolute dollars so far this year have paid for a sliver of the generation. Not what I call value for money.

  16. Peter Smith
    September 5, 2013 at 9:26 am

    There is so much missing from this analysis that I don’t know where to start. Firstly the author has forgotten the $30+ billion of debt that we are paying off largely to cover the cost of our initial nuclear costs. He also failed to mention that the nuclear plants can’t adjust their output. Electricity must be generated at exactly the same rate at which it is consumed, but nuclear plants just sit there generating the same output hour after hour. It’s much more expensive to stop and start generators and then to continually vary output. In addition we need plants that only run a few hours a year, to meet peak demands. They cost the same to build, but don’t generate many MW over the year, so they are costly per MWh, but we need them to avoid blackouts. The nuclear plants do the easy stuff, just generate the same hour after hour. If they trip off they often can’t restart for several days. It’s the gas fired plants that now provide most of the variable generation required, the ramping up and down to meet demand, the frequent stops and starts – our nuclear plants just can’t do this. So this type of simplistic analysis fails to include these costs.

    Finally I challenge the CO2 emissions calculation. Modern gas-turbine combined cycle or co-generation plants emit about 1/3 tonne of CO2 for every MWh generated.

    • September 5, 2013 at 10:07 am

      “$30+ billion of debt… .” Are you sure it’s not $30 zillion?

      I never stop being amused by how readily anti-nukes will throw out fabricated numbers to buttress their weak case. What else can you do with a weak case than make up numbers.

      You are wrong about nuclear’s flat-only output. Bruce B varies its output by up to 20 percent, using steam bypass to condenser. The new CANDU EC6 can run at full power while entirely disconnected from the grid.

      And after all the talk of peak output you challenge my numbers on gas? Peak output in your perfect world will come from peaker plants, i.e. simple cycle turbines. Not combined cycle.

      Combined cycle in your perfect world will stand in for zero-carbon nuclear as a baseload provider, dumping millions of tons of CO2 into my air.

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Item 1: if Ontario did not have its nuclear generating fleet, last hour’s CO2 emissions would have been AT LEAST:

5,433 metric tons, and the CIPK would have been 372.8 grams

Item 2: Since prorogation of the Ontario legislature on October 15, 2012, provincial gas-fired generating plants have dumped this much CO2 into our air:

14,379,539 metric tons. This is a running total. Every hour, the total increases by the amount of Gas CO2 given in Table 1.

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