ELECTRICITY

OPA FEED-IN TARIFF

By C. Rhodes

INCENTIVES:
The government of Ontario made a public commitment to phase out coal fuelled electricity generation. However, replacing coal fuelled electricity generation with any form of non-fossil fuel electricity generation is expensive in terms of both generation and transmission/distribution.

From the perspective of the Ontario electricity ratepayer a kWh generated by renewable distributed generation located near an end user is a kWh that does not require central nuclear generation and does not have to flow through the transmission system. It makes economic sense for the government of Ontario, acting on behalf of the electricity ratepayers, to offer a premium for environmentally acceptable distributed renewable electricity generation, subject to the amount of the generation being measured and the cost of the incentive, including its administration, being less than the cost of alternative nuclear generation and related transmission.

DEFINITION:
A Feed-in Tariff (FIT) is a relatively simple means by which small renewable generators can be paid standard prices for the electricity that they generate. A Feed-in Tariff provides an administratively practical means of implementing distributed electricity generation.

FEED-IN TARIFF LEGISLATION:
The Ontario Power Authority Feed-in Tariff (OPA FIT) was enabled by the Ontario Green Energy and Green Economy Act, 2009.

The OPA MicroFIT is a simplified version of the OPA FIT that is intended to be applied to residential and small commercial installations where the maximum generator output is less than 10 kW.

OPA FIT ASSUMPTIONs:
The OPA FIT program presently allows FIT generators to operate without constraint. The OPA implicitly assumes that the power and voltage fluctuations caused by unconstrained FIT generators can be balanced by dispatched generation. In effect the OPA implicitly assumes that FIT generation will always be a relatively small fraction of total generation.

This author believes that these assumptions by the OPA are inappropriate, expensive and dangerous. These assumptions implicitly commit Ontario to large amounts of transmission connected natural gas generation for balancing renewable generation and further commit Ontario to numerous transmission/distribution enhancements to meet worst case fluctuations in unconstrained renewable energy generation. This author believes that the OPA FIT program should be modified to incent both local energy storage and generation constraint. The contemplated modifications would reduce or eliminate renewable energy power fluctuations that must be met by dispatched central generation and enhanced transmission/distribution. The contemplated FIT program modifications would also largely eliminate the CO2 and other emissions related to operation of the natural gas fuelled combustion turbines that the OPA plans to use for generation balancing.

OPA FIT FEATURES:
The Ontario Power Authority (OPA) FIT circumvents existing Ontario electricity rate structure and rate determination problems related to generator compensation. A OPA FIT contract can be used by small generators to obtain a limited amount of commercial financing.

PRESENT OPA FIT IMPLEMENTATION:
The present implementation of the OPA FIT allows unconstrained generators using renewable energy sources to operate at random times and sell the electricity that they generate to the grid at a fixed rate. The present OPA FIT does not adequately reward reliable generation that is coincident with the provincial electricity demand peak and pays too much for electricity that is generated but not stored at times of low electricity demand. The present OPA FIT implicitly assumes that there is always uncommitted dispatchable energy generation and energy storage available for system balancing. However, as coal fuelled electricity generation is closed, the amount of available low cost system balancing generation will decrease.

A problem with the present OPA FIT implementation is that it does not consider the costs of energy storage for balancing renewable generation. The OPA FIT should financially reward renewable generators that have sufficient on-site energy storage to maintain close to a 100% daily capacity factor.

Another problem with the present OPA FIT implementation is that participating generators are not required to contribute to grid voltage regulation. Hence these FIT generators reduce system reliability and increase the black start and voltage instability problems. While these issues are small now, they will become major if renewable generation is allowed to proliferate to meet its potential. The OPA FIT program should be modified now to address these matters.

The OPA FIT circumvents existing rate structure and metering issues through the use of multiple interval kwh meters that are connected so that a building with behind the meter generation is billed as if the generation were not present. The FIT generator is treated as a separate LDC account. This metering methodology appears to be one of the major successes of the OPA FIT implementation. However, the FIT rules need to be modified to enable and encourage on-site energy storage. The FIT implementation must heavily penalize anyone who charges FIT energy storage from the grid.

OPA FIT AND OPA MICROFIT COMPENSATION PROBLEMS:
The OPA FIT does not presently provide a substantial price bonus for electricity that is reliably delivered coincident with the daily peak load on the electricity grid. One means of ensuring coincidence of generation with peak load is to reward high generator capacity factor, and hence efficient use of transmission/distribution.

The OPA FIT should provide electricity price bonuses for generators that assist in grid voltage regulation and grid black start and that do not require external reactive power. The present OPA FIT implementation does not achieve any of these electricity price bonus objectives.

A problem with the present implementation of OPA MicroFIT is that it financially benefits only owners of certain photovoltaic energy systems. The MicroFIT non-solar PV energy pricing is less than the value of marginal energy for reducing normal density Hydro One residential and small commercial electricity bills. Hence, participation in the OPA MicroFIT program does not make financial sense for many small generators.

OTHER OPA FIT IMPLEMENTATION PROBLEMS:
Other major problems with the present OPA FIT implementation are:
1. Too many rate payer dollars are allocated to technologies that are not cost competitive with nuclear power;
2. The OPA FIT energy prices offered for those technologies that are nuclear power price competitive are not sufficient for large scale commercial viability. Hence, the present implementation of the OPA FIT will not realize the amount of non-fossil fuel generation that Ontario requires;
3. The on-peak vs off-peak energy pricing ratio offered by the OPA is not sufficient to fund energy storage;
4. The actual cost of equity for FIT generator financing is higher than has been recognized by the OPA;
5. The OPA FIT energy pricing does not provide sufficient "up side" potential to attract major equity investors.
6. The OPA FIT energy pricing does not contemplate generators paying for grid use and hence lacks an administratively practical means of ensuring high power quality, high power factor and high capacity factor from OPA FIT generators;
7. The FIT rules do not adequately address the issues of directional interval kWh meters and implementation of an energy pricing formula that incents high power quality, high power factor and high capacity factor.

FUTURE FIT PRICING:
Underlying issues with FIT are that the present FIT pricing cannot be derived from the Hourly Ontario Electricity Price (HOEP), in part because the HOEP does not reflect true electricity system costs and also because the present OPA FIT pricing reflects the value of the generated kWh to a hypothetical generator investor instead of the value of the generated kWh to a ratepayer.

For about 25 years the full cost of non-fossil fuel electricity generation in Ontario has been concealed from the general public. The concealing accounting mechanisms are so complex that many senior persons in the energy sector do not understand them. Successive provincial governments of all political stripes have failed to properly address this issue. Currently Ontario has about $28 billion in stranded electricity bond debt. Electricity in Ontario is still sold far below its intrinsic value. Correcting this situation requires a substantial electricity rate increase which politicians are loath to face. However, the reality is that if this issue is not promptly faced insufficient non-fossil fuel generation will be built and Ontario will become more rather than less dependent on fossil fuels. Then extricating Ontario from fossil fuels will become much more difficult and much more expensive.

In addition to the existing $28 billion in stranded electricity bond debt the OPA is proposing $60 billion in additional planned expenditures relating to transmission upgrades and replacement or refurbishment of existing electricity generation. However, the present OPA plan does not include any allowance for new generation or transmission/distribution required to meet the additional electricity load caused by: increases in air conditioning, increases in immigration triggered by global warming and by substitution of electricity for liquid fossil fuels in the transportation and heating sectors. A minimum estimate of the cost of this additional generation is:
$8000 / base load kW X 10,000 MW X 1000 kW / MW = $80 billion Recent experience indicates that when the cost of the related transmission/distribution is included this amount could easily double.

Hence the minimum amount of public electricity debt that must be financed over the forseeable future is about:
$28 billion + $60 billion + $80 billion = $168 billion
This amount could possibly increase to $250 billion

This debt principal is between $10,000 and $15,000 for every man, woman and child projected to live in Ontario. The only source of funds of this magnitude is insurance and pension funds, so the net return on investment to an investor providing financing for the electricity system must be competitive in the insurance and pension fund market. Servicing this debt will require at least $16 billion per year on top of existing electricity rates. Obtaining that additional revenue will require at least doubling the average end user electricity rate in Ontario in the near term.

The present "Hourly Ontario Electricity Price" (HOEP) is much too low and any attempt to base Feed-in Tariff payments on the present HOEP discourages electricity conservation and prudent investment in cost effective energy storage, distributed generation and transmission that could mitigate the forecast debt load.

HOEP PROBLEMS:
The average HOEP is too low because:
1. There is no fossil carbon emissions tax;
2. The costs of paying down stranded electricity debt are not included in the HOEP;
3. The costs of government guaranteed electricity system financing are hidden;
4. Generators are not directly paying for ongoing use of transmission-distribution;
5. The inherent value of hydro-electric power with daily and/or seasonal energy storage is not properly reflected in the HOEP;
6. The cost of replacing coal fuelled generation with non-fossil fuel generation is not reflected in the HOEP.

REQUIRED FIT RATE CHANGES:
The immediate task facing the OPA is to implement FIT rate changes including distributed generation constraint and energy storage incentives that are sufficient to attract large scale private sector investment in non-fossil fuel electricity generation and related energy storage. Failure of the OPA to adequately address this matter will eventually lead to a non-fossil fuel electricity shortage in the Province of Ontario.

Issues that should be considered by the OPA in reassessment of FIT pricing include but are not limited to:
a) Application of an equivalent coal prohibitive fossil carbon emissions tax to the HOEP;
b) Proper allocation of past nuclear debt and future nuclear costs to the HOEP;
c) Charging all generators for transmission/distribution use on the same terms as general load customers, thus increasing the HOEP and reducing load customer transmission/distribution charges;
d) Use of direction sensitive interval kWh meters and congestion factor rates for fair allocation of both energy and transmission/distribution costs. These meters are applicable to a network containing distributed loads and distributed generation. These meters and congestion factor based electricity rates encourage use of energy storage by both generators and load customers while preventing excessive costs to equipment owners related to short term maintenance shutdowns;
e) Implementation of congestion factor rates for both generators and load customers to encourage use of energy storage at both generator sites and load sites;
f) Long term rate guarantees for parties willing to build distributed generation and/or energy storage;
g) Recognition that the cost of private sector capital for financing fixed assets for electricity generation and energy storage is much greater than the cost of government guaranteed debt.
h) Recognition that past vascillations of the government of Ontario caused many parties who invested in Distributed Generation and Energy Storage to lose money. In the near term an expectation of significant profit will be required to motivate these parties to reinvest.

GENERATION AND LOAD PROFILE MATCHING:
Congestion Factor based electricity rates should be used by both the OPA and the Ontario Energy Board (OEB) to encourage use of energy storage for leveling generation and load profiles. To the extent that energy storage that is financially enabled via congestion factor based rates does not achieve matching of generation and load profiles, then more expensive dispatched generation and/or load must be used to achieve the required profile matching. The economics of distributed generation depend in part on how well the total generation output matches the total grid load. The cost of storing energy during one season and recovering this energy during a later season is quite high.

ALTERNATIVE FIT PRICING METHODOLOGY:
An alternative means of establishing FIT pricing inclusive of energy storage and transmission/distribution is to use the same effective rate as is arrived at for large new non-fossil fuel generation projects such as out of province hydraulic generation or new nuclear facilities. If FIT pricing is too low and if as a consequence insufficient FIT generation or energy storage is built, then more expensive out of province hydraulic generation or new nuclear generation will be required. Conversely, if FIT pricing is set too high the ratepayer would be financially better off with a large central non-fossil fuel generation.

The FIT related legislation effectively provides the OPA a mechanism to implement a large increase in electricity price without being bogged down in regulatory matters.

ALTERNATIVE MICROFIT PRICING METHODOLOGY:
An alternative means for MicroFIT energy pricing would be to match the MicroFIT energy price to the marginal cost of electricity to a load customer. Then MicroFIT would become an administratively simple means for distribution utilities to realize grid load reduction by residential and small commercial customers. Unfortunately the OPA presently appears to lack the practical experience required to comprehend the administrative, participation and metering benefits of this MicroFIT energy pricing simplification.

For example, the OPA is currently offering $.135 / kWh for land based MicroFIT wind generation whereas during the summer of 2009 the value of marginal energy for reducing a Hydro One normal density residential electricity bill was $.162 / kWh including GST. The OPA MicroFIT price schedule provides a price escalation of only 20% of CPI over 20 years, not 100% of electricity price escalation as provided by Hydro One. Under these circumstances it does not make financial sense for the owner of a small wind or hydro generator to participate in the MicroFIT program. He or she is likely financially better off operating the same equipment behind the meter without participating in the MicroFIT program.

WIND SPECIFIC ISSUES:
There are various practical issues relating to wind power. Wind generation without adjacent energy storage has several major problems.

1. The first problem is that without energy storage the reliable wind generation that is coincident with the peak electricity load is almost zero. In some weeks the peak co-incident wind generation is very low right across Ontario. Furthermore, most good wind generation sites are located near the shores of large water bodies. The wind at such locations reverses direction twice in each 24 hour period. At the times of the wind direction reversals the wind generation drops to zero. In order to provide reliable power coincident with the daily electricity demand peak wind generators must be complemented by local energy storage systems.

2. The second problem is that the daily peaks in wind generation frequently occur at times when the provincial electricity load is close to minimum. In order to be economically beneficial the wind energy needs to be stored during the load off-peak period and then later released during the load on-peak period. Local energy storage is required to address this problem.

3. The third problem is that in Ontario the average wind generation in the summer is less than 20% of the peak wind generation. Hence wind generators without local energy storage use transmission very inefficiently. In order to contain the costs of transmission remote wind generators should be fitted with adjacent electro-chemical energy storage. Excess wind power should flow to storage. Wind power deficiency should be made up from energy storage. At present there is no financial incentive for wind generators to adopt adjacent energy storage.

4. The fourth problem is that most wind generators currently in use in Ontario do not contribute to grid voltage stability. In principle this problem can be solved by adding electro-chemical energy storage, a voltage source inverter and a control system to each wind generator. The net power versus voltage input-output characteristic should be programmable.

The financial analysis at Distributed Generation indicates that, with government guaranteed debt financing, wind generation with sufficient energy storage to reliably follow a winter weighted load costs about $.31 / kWh. At present the OPA and the federal government together provide the wind generator $.145 / kWh for unconstrained land based wind generation.

In some circumstances, where the load is geographically close to the wind generator or where the load is winter weighted, wind generation with adjacent energy storage may be less expensive than new nuclear generation plus transmission.

It is believed by this author that in calculating the FIT energy rate for wind the OPA assumed that the FIT generator had nearly free access to the electricity grid. If the change in transmission/distribution rate structure proposed at Transmission/Distribution Cost Apportioning is adopted a generator will likely have to pay for transmission/distribution at an effective rate of about $.0157 per kWh delivered to the grid. Hence, in addition to the average energy rate of $.31 / kWh for wind generation with adequate energy storage, calculated at Distributed Generation, the Feed-in Tariff will have to be increased by a further $.0157 per kWh to offset the cost of transmission/distribution borne by distributed generators.

NATURAL GAS FUELLED CO-GENERATION:
Natural gas fuelled co-generation could be provided under a Feed-in Tariff. As shown on the web page titled Distributed Electricity Generation the corresponding Feed-in Tariff for on-peak electricity generation with a 50% capacity factor and 80% thermal energy recovery via co-generation would have to be about $.40 / kWh. This rate may need further adjustment to reflect transmission/distribution and future increases in natural gas costs borne by the generator.

There are many practical operating and maintenance issues related to small natural gas fuelled prime movers that have yet to be fully appreciated by the OPA.

This web page last updated December 8, 2009.