A lesson for Bob Chiarelli on the difference between profit and loss
Open “Tongue in cheek” letter to:
December 17, 2015
Ontario Ministry of Energy,
Attention: The Honourable Bob Chiarelli, Minister
900 Bay Street, 4th Floor Hearst Block Toronto ON M7A 2E1 Canada
Dear Minister Chiarelli:
I have noticed on several occasions that you seem to have some difficulty understanding the time and place to use the word “profit”. The most recent occasion occurred December 3, 2015 during Question Period in the Legislature when you used it to again claim the export of Ontario’s surplus electricity to our neighbours in New York, Michigan, etc. generated a profit.
I’m not sure why the questions related to selling our surplus electricity causes you this failure but perhaps over the holidays you might consider spending some time analyzing what I have included in this letter. I expect you were taught some basic mathematics skills in school but perhaps because of a lack of usage those skills may have been forgotten. Hopefully this letter will refresh your memory and you may even get a grasp of how an actual “market system” works.
The intention of this letter is to focus on only one day in the life of our electricity system and the day chosen is November 12, 2015.
Visiting the Independent Electricity System Operator’s “Daily Market Summary” for November 12th you find a document that may be the cause of your confusion. That summary shows “Market Demand” averaged 18,210 megawatts (MW) per hour for total demand of 437,040 MWh (24 hours X 18,210 = 437,040 MWh). Ontario Demand was much less averaging 15,165 MW or 363,960 MWh for the 24 hours. The difference of 73,080 MWh represents Ontario’s net exports for the day.
Now what IESO don’t include in their summary is MWh curtailed (principally wind), or spilled (hydro) or steamed off (nuclear). This curtailed, spilled, etc. power can be significant and cost ratepayers as payment to all generators include undelivered production. In the case of gas plants it contains “idling costs” to back up wind and solar.
Bob, hopefully you are still with me to this point so I will carry on.
By looking at IESO’s summary you would not be aware of the above costs, nor would you know the actual cost of production (Market Demand) if you simply looked at what they refer to as “Energy Prices ($/MWh)”! On this particular day the latter averaged (weighted) 0.17 cents per MWh. This may be where you are having your problems as you may have assumed the costs of producing the “Total Demand” for the day was only $82,796.80, i.e., 487,040 X 0.17 cents = $82,796.80 — but that is the wrong assumption! The HOEP (Hourly Ontario Energy Price) referred to is really what the “traders” valued Ontario’s production at for this day. In other words, the demand for our power on November 12th wasn’t very valuable in the market so prices offered were low.
As you have probably been told, the actual price ratepayers are charged for power includes what one of your predecessors referred to as the “Provincial Benefit”. It turned out to not be a “benefit” so the term was changed to the “Global Adjustment Mechanism” (GAM). GAM reflects contracted prices for the various generation sources and they can be very high in comparison to the HOEP. As one example you or your predecessors contracted for rooftop solar at $702.00/MWh and on the day in question even though they were paid that amount IESO were only able to sell it for the .17 cents/MWh contained in their summary. Hope you are still with me but to clarify we might have paid say IKEA $702.00 for one MWh of generation which we then sold for .17 cents meaning we lost $701.83 for that MWh. Hope you get that?
Now in an effort to help you to better understand the math behind your Ministry’s rather confusing arrangements, I contacted my good friend Scott Luft and asked if he could produce a one-page summary estimating contracted costs for November 12th. He did and I have attached his summary1. (too bad IESO couldn’t do this) and while the production numbers are out by a few MWh (equivalent to about five minutes of demand) as compared to IESO it reflects actual costs including: contracted prices, costs for curtailed, spilled, steamed off power and embedded production (IKEA is the example as noted above) which Scott refers to as Distribution (Dx). As you will note, Scott’s estimate of the cost of the day’s electricity (he excludes conservation, transmission, IESO’s costs, etc.) comes to $39.5 million, i.e., the “cost” of the GAM of $39.3 million and the “HOEP” of $ .2 million.
OK, we are now ready to complete the final math on this exercise! Using the actual cost of generation from Scott’s summary you will note the per MWh cost of “Ontario Demand” of 363,960 MWh is approximately $108.00/MWh. The math exercise is simple: divide the $39.5 million by the 363,960 MWh!
The conclusion, Bob, is Ontario ratepayers paid about $7.9 million for the net exports of 73,080 MWh (73,080 MWh X $108. = $7,892,640) and sold them for .17 cents each generating $12,424 (73,080 X .17 cents = $12.424).
So we ratepayers paid $7.9 million for the exports but got only $12,000 from our friends — that, Bob, is a loss of $7.9 million, not a profit of $12,000.
If you have trouble with any of the numbers I would be pleased to sit down with you and review them again but hopefully I have spelled it out sufficiently for you to understand.
In the meantime I certainly hope you and your family have a Merry Christmas but please do remember to do your very best to only turn your Christmas lights on during “off-peak” periods to support conservation and to “saveonenergy”.
P.S. The next lesson will be in respect to the cost per MWh by generating source followed by a special session on how “conservation” drives the costs up for ratepayers.
- Please note Scott has produced these daily summaries, so far, for November 1, 2015 to December 12th.
The opinions expressed are those of the author and do not represent Wind Concerns Ontario policy.