January 26, 2004

Proposed reforms seek to create "conservation culture" in Ontario

Policy reforms proposed for Ontario's electricity sector by a provincial task force are aimed at creating a "conservation culture" which will ensure a diverse, reliable and sustainable energy supply while contributing to improved air quality.

Provincial Energy Minister Dwight Duncan said the Electricity Conservation and Supply Task Force (ECSTF) report provides a solid foundation for reforms to Ontario's electricity sector.

"Our government will use the report as a foundation for setting a new direction and developing a responsible and sustainable policy for Ontario's electricity sector," he said, noting that this will include legislative initiatives to be introduced in the spring.

The reforms proposed in the report, released January 14, are directed toward the following objectives:

1. Creating a "conservation culture" in Ontario, incorporating conservation, demand management and demand response strategies;

2. Ensuring a reliable, sustainable and diverse supply of competitively priced power;

3. Contributing to cleaner air by eliminating coal-fired generation and replacing it with other, cleaner sources of energy;

4. Encouraging new investment in conservation, generation and transmission; and

5. Protecting consumers, especially residential and small business consumers, from excessive price volatility.

The task force was commissioned in June 2003 to provide recommendations on increasing the province's supply of electricity, improving the reliability of Ontario's electricity grid, and enhancing conservation and demand management programs. Headed by Stelco president and CEO Courtney Pratt, former president and CEO of Toronto Hydro, the group included 19 experts and leaders from all aspects of the electricity sector. Its recommendations were based on input from more than 90 industry stakeholders.

Ontario faces a looming electricity supply shortfall as coal-fired generation is taken out of service and existing nuclear plants approach the end of their planned operating lives, says the report. As a result of its consultations, the task force has concluded that the market approach adopted in the late 1990's needs substantial enhancement if it is to deliver the new generation and conservation Ontario needs when it is needed. Major changes in the energy economy and in public policy, it says, have undermined the viability of the original market design.

The four most important changes have been (1) the demise of the merchant generation and related financial markets following the collapse of Enron and other energy traders; (2) higher and increasingly volatile natural gas prices, a trend many experts believe will continue to at least the end of the decade; (3) the government's commitment to phase out coal-fired generation by 2007; and (4) the government's commitment to public ownership of all its generation assets, which necessitates a review of the Market Power Mitigation Agreement and the role of Ontario Power Generation.

The task force determined that its action plan should be built from the ground up, starting with "a plan that works for consumers." Its consultations made it clear that consumers want and need stable prices that reflect the true cost of power, as determined by an independent regulator (i.e. the Ontario Energy Board). Among other things, the task force recommends that consumers should continue to have the option of entering into supply contracts with energy retailers and wholesalers, as retail competition will be helpful in driving innovation and conservation-oriented products and services.

Conservation measures, says the task force, may be the cleanest and cheapest way to address Ontario's power needs, contributing to a reduced requirement for new power plants. Its report calls for the creation of a "conservation culture" in Ontario, and says the province's long-term plan for electricity should include a comprehensive conservation strategy, with clear targets reflecting a full analysis of the costs and benefits of conservation.

The task force also endorses the government's move to terminate the 4.3 cents per kilowatt-hour price freeze and says support should target those conservation measures that deliver results in the most cost-efficient manner. Another recommendation proposes that consumers be encouraged to shift power consumption from periods of high demand and high prices. This, notes the report, will require incentives in terms of differentiated prices and technology in the form of "smart" meters. The task force believes that growth in peak demand can be reduced from 1.7% per year (the average over the past ten years) to 0.5% per year, which is in line with recently announced government targets.

Local distribution companies (LDCs) should evaluate proposed conservation initiatives on an equal basis with new supply options and distribution investments, adds the report. Also, LDCs and transmitters should be compensated for direct investments in demand side management, as well as for revenue loss resulting from conservation (as is currently done in the natural gas industry).

Other recommendations include the adoption of new market rules that promote demand-side bidding by large-volume customers; the removal of rules that financially penalize local distribution companies when they engage in conservation efforts; contribution of governments to enhanced conservation through measures such as tax incentives and reductions in their own energy use; and the creation of a "conservation champion" to monitor and co-ordinate conservation efforts across the province.

A key concept is that demand reduction should be given the opportunity to compete with supply side alternatives, and be evaluated on a level playing field. The task force recognizes the value of "distributed generation" and offers several recommendations for either removing barriers to such generation or encouraging it where there is a net system benefit.

The report also calls for quick action to implement the Renewable Portfolio Standard. Renewable generation, it notes, will be a vital part of the future supply mix. However, even with strong pushes on conservation and renewables, the projected demand-supply gap remains very wide. It will need to be filled in a way that recognizes the physical requirements of the electricity system and the unique attributes of the different generation types. Given the imperative of early action, there will need to be a certain amount of central co-ordination.

The task force favours a diverse supply mix and a balanced approach to filling the gap. It recommends that a process be put in place quickly to enable the negotiation and contracting of a range of new supply capacity to address the looming supply shortfall. The report further notes that, to avoid major supply risks, coal-fired plants may need to be kept in operation until adequate replacement generation and demand reduction measures are in place.

It is recommended that the transmission system be planned and managed as basic public infrastructure, facilitating new supply and competition. Expansion would be planned on a pro-active basis and cost-recovery would be through transmission rates, subject to Ontario Energy Board approval. Hydro One, as the principal transmitter, would be required to issue a long-term plan for transmission development, and update it annually. These recommendations represent a shift away from the merchant transmission approach underlying the present model.

The task force makes a number of recommendations aimed at clarifying the roles and responsibilities of different players in the electricity industry, notably the Independent Market Operator, the Ontario Energy Board and local distribution companies. The report discusses the roles of Ontario Power Generation and Hydro One, and suggests possible directions for the future evolution of certain private sector entities such as retailers and wholesalers.

Needed as well, it says, is support for technological advances. The task force proposes that research and innovation be promoted through mechanisms such as Centres of Excellence in Electricity and Alternative Energy Technology.

The Electricity Conservation & Supply Task Force report may be viewed on the Ministry of Energy Web site, www.energy.gov.on.ca.

Within a week after the release of the report, Energy Minister Dwight Duncan announced two initiatives relating to conservation and renewable energy. The first is the formation of a Conservation Action Team to be responsible for promoting the government's conservation initiatives for the province. Led by Donna Cansfield, Duncan's parliamentary assistant, the team will engage stakeholders from a variety of sectors across the province to seek out and promote the best in conservation ideas and practices. Its members are parliamentary assistants from nine Ontario government ministries responsible for a broad range of policy and program areas.

"Government has a responsibility to make people aware of the need to conserve, but it also has to lead by example by ensuring that its own policies and programs don't put roadblocks in the way of conservation," said Cansfield.

The Conservation Action Team will look at a number of options associated with conservation and demand-side management initiatives, and will develop an action plan to help the government meet its conservation target of 5% by 2007. The group will also work to find and remove barriers to conservation in existing government policies and programs, and will explore ways for new government policies and programs to incorporate conservation principles.

In addition to team leader Cansfield, the members are: Carol Mitchell, parliamentary assistant to the Minister of Agriculture and Food; Richard Patten, parliamentary assistant to the Minister of Education; Domenic Agostino, parliamentary assistant to the Minister of the Environment; Wayne Arthurs, parliamentary assistant to the Chair of Management Board of Cabinet; Brad Duguid, parliamentary assistant to the Minister of Municipal Affairs (Urban); Bill Mauro, parliamentary assistant to the Minister of Northern Development and Mines; Lou Rinaldi, parliamentary assistant to the Minister of Public Infrastructure Renewal; and Kathleen Wynne, parliamentary assistant to the Minister of Training, Colleges and Universities.

Secondly, Duncan said he will immediately seek a technical advisor to oversee a competitive contracting process to address the government's commitment to phase out coal-fired plants and to enhance Ontario's supply of renewable energy.

The government is seeking up to 2,500 megawatts (MW) of new electrical generation capacity and/or demand-side management initiatives to be in place as early as 2005, but no later than 2007. This represents one-third of its commitment to replace coal-fired generation with cleaner sources of energy or demand-side measures, and will also support the 5% by 2007 electricity conservation target, which represents approximately 1,350 MW at peak demand.

In addition, the government is seeking up to 300 MW of renewable energy capacity to be in service as soon as possible. This will help the government meet its goal of obtaining 5% (1,350 MW) of all generating capacity from renewables by 2007.

"We are moving forward in an innovative way since equal weighting will be given to demand management options to address short-term supply challenges," Duncan stated, adding that "we are sending a clear signal that we want participants in the market interested in supply, renewables and conservation to come to the table to help us meet these targets."

The government will choose a technical advisor through a competition of firms with direct expertise and experience conducting energy Requests for Proposals (RFPs). The technical advisor will be asked to draft two RFPs for new electricity capacity and to oversee the process, which is expected to begin in early February.

By 2020, it is projected that approximately 18,000 MW of Ontario's existing electricity generating capacity will need to be refurbished or replaced. Due to the planned closing of the Lakeview Generating Station (a coal burning station just west of Toronto) in 2005, and increased demand, the Independent Electricity Market Operator (IMO) has indicated that the Greater Toronto Area could face a significant short-term reliability risk from 2005 to 2007.

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