September 4, 2014 – Ontario electricity consumers will benefit from less risk and lower prices if the province moves to a capacity market for obtaining generation, according to a report from the C.D. Howe Institute. In “Rethinking Ontario’s Electricity System with Consumers in Mind,” author Michael Wyman calls for the province of Ontario to adopt a capacity market, in which generators would receive payments for being available to produce energy, if needed, at some point in the future.
“After a decade of relying on the centrally managed Ontario Power Authority (OPA) to procure capacity, Ontario consumers are on the hook for a substantial amount of project-development risk,” states Wyman. He draws attention to when Ontario ratepayers had to cover over $900 million in charges relating to the relocation of the Oakville and Mississauga OPA-gas contracts.
Capacity markets allocate project development risks to the most logical risk bearer: the generation developer. A capacity market in Ontario would also have the benefit of de-politicizing the power acquisition process. Further, relying on a capacity market would increase transparency by forcing more pricing and discussions into the public domain. Presently, the contract price of individual OPA contracts for natural gas-fired generators is confidential, and negotiations about extending nuclear often take place behind closed doors.
Wyman recommends that a capacity market in Ontario should include features that have proven critical to the success of such markets in other jurisdictions, such as:
Varying the capacity price among different geographic locations within the province.
Incorporating demand response.
Setting resource requirements in a well-reasoned and de-politicized way.
Integrating with neighboring markets, such as New York or Quebec, to the greatest extent possible, by treating out-of-province supply as equivalent to in-province generation to ensure that customers receive the most economical sources of new capacity.
Avoiding local-content requirements.
Combining a capacity market with market-based renewable energy markets or emissions pricing – replacing more politicized mechanisms.
The report concludes that laying the groundwork for the eventual transition away from the OPA’s central procurement towards market-oriented mechanisms is a necessary first step to a reliable, and efficient electricity generation system that reduces ratepayer risk.
The C. D. Howe Institute is an independent not-for-profit research institute whose mission is to raise living standards by fostering economically sound public policies. It is Canada’s trusted source of essential policy intelligence, distinguished by research that is nonpartisan, evidence-based and subject to definitive expert review. It is considered by many to be Canada’s most influential think tank.