Opening the Electricity Grid for Competition
How “opening the grid” works in theory
There is a worldwide trend to encourage more competition within the electricity industry, which until very recently has been controlled by government utilities. This move to deregulation, or competition, is prompted in most cases, not by environmental goals, but by economic and political goals. Governments expect that this move to “open up the electricity grid” to the private sector, allowing small independent power producers — or “non- utility generators” (NUGs) — to sell electricity on the existing transmission grid, will result in more efficient, cheaper and cleaner electricity production. This is because most government utilities rely on large, capital-intensive power plants, whereas NUG power tends to be more energy- and cost-efficient to operate.
The following list ranks various types of electricity production, from those with the least greenhouse gas emissions to those with the highest greenhouse gas emissions per unit of energy created. This ranking does not consider other factors such as technical feasibility, cost, or other environmental impacts.
Greenhouse Gas Emissions from Different Types of Electricity Production
No or negligible GHG emissions
- Wind, hydro, solar, nuclear, geothermal
Minor GHG emissions
- Biomass (including woodwaste and fuels such as ethanol produced from corn)
- Landfill gas
- Municipal solid waste
Major GHG emissions - fossil fuels
- Fuel cells (varies depending on the fuel mix and whether cogeneration is involved)
- Combined cycle natural gas plants (turbines) - with cogeneration producing usable heat
- Simple cycle natural gas plants (turbines)
- Older natural gas plants
- Conventional natural gas plants (boilers)
- Coal and oil-fired plants retrofitted with more efficient engines
NUG power provides other environmental, economic and social benefits beyond reducing greenhouse gases. For example, renewable energy produces less SOx, NOx, and mercury than coal-fired generation, reducing local and regional air pollution. Energy-from-waste (creating power by burning garbage or woodwaste, for example) diver ts waste from landfills. Cogeneration (the simultaneous production of electricity and useful heat or the capture of wasted heat produced in the generation of electricity) allows energy consumers such as large factories to reduce their demand for electricity from the grid and even sell excess power to other customers.
The largest reductions in greenhouse gases would be achieved by replacing the province’s coal-fired electricity with renewable energy. Even replacement with natural gas would have a significant impact, as CO2 emissions per unit of electricity from natural gas-fired cogeneration are about two-thirds less than emissions from Ontario’s existing coal-fired generating stations.
NUG power provides other environmental, economic and social benefits beyond reducing greenhouse gases. For example, renewable energy produces less SOx, NOx, and mercury than coal-fired generation, reducing local and regional air pollution. Energy-from-waste (creating power by burning garbage or woodwaste, for example) diver ts waste from landfills. Cogeneration (the simultaneous production of electricity and useful heat or the capture of wasted heat produced in the generation of electricity) allows energy consumers such as large factories to reduce their demand for electricity from the grid and even sell excess power to other customers. The largest reductions in greenhouse gases would be achieved by replacing the province’s coal-fired electric- ity with renewable energy. Even replacement with natural gas would have a significant impact, as CO2 emis- sions per unit of electricity from natural gas-fired cogeneration are about two-thirds less than emissions from Ontario’s existing coal-fired generating stations.
Where and how is this approach used in other jurisdictions?
Many countries are opening their grids to competition, including the UK/Wales, Argentina, Australia, New Zealand, Norway, and Japan. In addition, many American states and five Canadian provinces have opened their grids for wholesale competition, including California, New York, New Hampshire, Massachusetts, Maine, Alberta, British Columbia, Quebec, Manitoba and New Brunswick. In Canada, only Alberta and Ontario are currently moving to full competition at a retail level.
As they open the grid to competition, these governments are also setting rules and offering incentives to influence the private sector to produce cleaner energy. There are many different tools being tried out by governments deregulating the electricity sector. They include:
- emission cap and trading systems (limits on the maximum amount of pollution allowed from a source, with tradable credits or pollution allowances)
- renewable portfolio standards (legal requirements for electricity generators to provide a certain percentage of their energy from renewable energy)
- generation performance standards (regulated limits on the pollutants emitted per unit of energy from a source)
- generation source disclosure or labelling (a requirement for energy retailers to inform consumers of the source and environmental impacts of the electricity they sell)
- taxes or subsidies (to offset capital costs of investment in renewable energy)
- green power marketing (allowing energy providers to offer customers “green” energy for higher prices)
- research and development funding.
Many jurisdictions worldwide have used a mix of tax incentives, emission standards and access to power markets at fixed or special prices to increase the production of renewable and cogeneration electricity. For example, the U.S. government has proposed a renewable portfolio standard of 8 per cent. A few states have exceeded that goal already, including Maine, which set a renewable portfolio standard of 30 per cent when it passed a utility deregulation law in 1997. More than 10 U.S. states and several countries have established some form of systems benefit funds — or wires charges — essentially an energy tax to fund conservation programs. Allowing electric utility customers to produce cogeneration and renewable energy for their own use and to sell electricity through the utility transmission grid is common to all of the exercises in opening the grid to competition.
Current Status in Ontario
The Ontario provincial government has complete jurisdiction to regulate the energy industry. Since 1906, the government-owned monopoly, Ontario Hydro, has controlled the generation and sale of electricity for commercial distribution. While non-utility generators have existed in Ontario for many years, their use of Ontario Hydro’s transmission grid was possible only under contract with Ontario Hydro. Hydro started an interim market experiment in 1995 to allow NUGs to compete against it, but the experiment was tightly controlled by Hydro and accounted for less than 1 per cent of provincial energy requirements. Very recently, Ontario Hydro has begun to purchase electricity from NUGs and to allow some cogeneration facilities. By 1998, 8 per cent of Ontario Hydro’s power was supplied under contract by NUGs.
When the current government came to power in 1995, it began to explore electricity restructuring, including consideration of how best to manage the environmental effects of such deregulation. In 1996 the Advisory Committee on Competition in Ontario’s Electricity Sector (The Macdonald Committee) reported that “the process of restructuring Ontario’s electricity system must be accompanied by consideration of the most appropriate regulations or other instruments to secure the protection of the environment and specifically, to support energy efficiency and the introduction of renewable energy technologies.”
In 1997, the government released a “White Paper,” which contemplated an emissions cap and trading program, and emission performance standards for all generators selling power into the Ontario market.
In February 1998, Ontario Hydro began operating the Ontario Interim Market to replace power lost from the shutdown of half its nuclear operations, and star ted to open the market in preparation for full competition in the year 2000, as recommended in the White Paper.
The Ontario Market Design Committee (MDC) was established in January 1998 to advise the Minister of Energy, Science and Technology on the structure of Ontario’s proposed electricity market, including the need for new environmental programs. In its second interim report, released on June 30, 1998, MDC acknowledged that “market failures . . . will continue to have an impact on the environment. For example, pollution currently causes harm that is not properly accounted for in the price of electricity.” The MDC considered a wide range of potential tools to address this problem, but ended up recommending two customer-driven tools — green power marketing and generation source disclosure — and one market-based tool, an emissions cap and trading program.
The MDC rejected regulator-driven mechanisms such as a renewable portfolio standard or new taxes, surcharges or subsidies to increase demand side management programs and renewable energy, believing that the market mechanisms would take care of emissions for the least cost.
Bill 35, the Energy Competition Act (ECA), was passed by the Ontario government in October 1998.
Will CO2 emissions increase?
Unless Ontario moves to set rules and offer incentives to the private sector to produce cleaner energy, as other governments have done, the most serious environmental downside of opening the grid to competition in Ontario is the risk that CO2 emissions and other pollutants will actually increase. In jurisdictions that have been using mainly coal-fired power plants, competition forces will tend to phase out coal and phase in less polluting natural gas. In these areas, opening the grid may well lead to emissions reductions.
The Organisation for Economic Co-operation and Development’s Report on Regulatory Reform (1997), pointed out that for systems that are largely non-fossil (i.e., hydro- and nuclear-based) competition threatens to increase CO2 emissions. A 1998 issue paper prepared for the Ontario Market Design Committee confirmed that the Ontario system would fall into this category, and could potentially be faced with an increase in emission levels under deregulation. Any new fossil-based NUGs, even high efficiency natural gas-fired plants, will release more CO2, SOx and NOx than the nuclear power they are replacing.
An even worse outcome would be the increased import of electricity from dirty coal-fired plants from the U.S. MEST has assured the public that no new coal-fired plants are expected to be built in Ontario once competition arrives, because it is cheaper and more efficient to build natural gas-fired plants. But it is faster and cheaper yet to import electricity from existing coal-fired plants in the U.S, and the Minister of Energy, Science and Technology approved an Ontario Hydro request in October 1998 to double its allowable level of imports from the U.S. A senior MEST official estimated in November 1998 that 25 per cent of all electricity in the open market would be imported from the U.S. Since the shut-down of half of Ontario Hydro’s nuclear plants, MEST says that the displaced nuclear power has to be replaced by coal-fired generation in the absence of new gas-fired capacity.
Introducing competition could also extend the life of older coal-fired plants, because once a company, whether in Ontario or the U.S., spends millions of dollars to improve emission controls on an older plant, they will want to run it as much and as long as possible to recover their costs. MOE and MEST say that the economics of this investment decision will depend on how expensive it would be to meet the environmental regulations adopted for the new electricity system and on how much it would cost to upgrade a coal-fired plant compared to the cost of converting from coal to natural gas. Clearly, it will depend on the new regulations promised for the new electricity system by these two ministries.
The ECA has spawned a vigorous debate about the environmental consequences of opening the grid. Many par ties believe that opening the grid in itself will not reduce CO2 emissions, because NUG power, and particularly renewable energy, is still more expensive than fossil fuel, especially in the short term. The market alone will not reduce CO2 emissions, because the environmental costs of dir ty fuel are not incorporated in the price of energy. Many stakeholders maintain that additional regulatory measures, such as a significant cap on emissions, a renewable portfolio standard or a systems benefit charge, are required. MEST and its Market Design Committee maintain that the tools they are introducing will provide the most cost-effective pollution control, and they resist any attempts to force the uneconomic production of renewable energy.
The government is planning an emissions cap and trade system, but MOE is currently developing regulations to cap emissions of only two pollutants, SOx and NOx, with no new limits on other emissions such as CO2 until perhaps 2007. The Ministers of the Environment and of Energy, Science and Technology promised in October 1998, however, that “we will be developing regulations setting emission limits that are equally tough to those proposed in the U.S.” The ECO will continue to monitor the design of the new electricity market by reviewing new regulations as they are proposed.
What is the potential for NUG power?
The Ministry of Energy, Science and Technology currently estimates that the production of a very small amount of new wind power (about 60 MW) and a small amount of hydro power (about 500 MW) could be economically feasible in the next few years, but expects most new energy production (up to 9,000 MW) will be by gas-fired industrial cogeneration plants. The Ontario government’s plans to increase competition have resulted in announcements in 1998 of about $1 billion worth of private sector proposals for high-efficiency natural gas cogeneration, energy-from waste, wind and small hydro. MEST says that the new announcements have a potential capacity of about 1,500 MW, which represents about 6 per cent of Ontario’s peak demand, a significant amount of capacity to be proposed in the year since the government’s policy was announced.
Will renewable energy increase?
MEST’s 1998-1999 Business Plan includes the goal of increasing the production of renewable energy, but sets no targets for a desired proportion of renewable energy. Nor is the ministry taking any actions to increase the production of renewable energy, other than letting consumers opt for green energy, for which they will have to pay extra. The government maintains they have removed barriers to renewable energy production, but they are going to let the market decide how much renewable energy is economical. Moreover, under the proposed regulatory system, the government has not in fact removed all the barriers.
Ontario’s existing coal-fired and nuclear plants will be subsidized by new NUGs, because the existing Ontario Hydro debt from building large, capital-intensive power plants will be paid for by everybody, including the new NUGs, Hydro’s competitors in the new electricity market. Thus, the customers of the new NUGs will have to pay for the NUG’s capital costs, operating costs and a share of Ontario’s stranded debt. MEST says that the new successor companies will be assigned their own debt in propor tion to the value of their assets (the portion of the debt which is not stranded).
Experts estimate that Ontario Hydro’s existing coal-fired plants can be operated for about 3.5¢ per kWh. New gas-fired cogeneration plants can be built and operated for 4.5¢ to 5¢ per kWh. As the chart on page 64 shows, renewable energy supply costs are much higher than fossil fuel supply costs. As an added disadvantage, the government has promised new market rules intended to keep the cost of electricity low for consumers. This makes it highly unlikely that renewable energy technologies could compete economically in an open market against existing Ontario coal-fired plants, cheap coal-fired energy impor ted from the U.S., or new gas-fired cogeneration plants.
This is an article from the 1998/99 Annual Report to the Legislature from the Environmental Commissioner of Ontario. Click here for more information.