Energy firms guaranteed revenue in sweetheart deals with Ontario

The Ontario government has inked a string of sweetheart deals with private-sector energy companies, promising them guaranteed revenue regardless of how much electricity they produce and sell into the market.

The practice began when the governing Liberals came to power in 2003, according to the Ontario Power Authority.

Nineteen natural gas-fired plants have been built in Ontario as part of the McGuinty government’s push to replace coal-fired electricity plants with cleaner sources of power. The plants accounted for about 15 per cent of the province’s electricity output last year.

The power authority, a government agency, routinely signs deals with companies operating these new gas-powered plants, agreeing to pay them fixed prices regardless of how much electricity they produce, according to the documents and interviews with industry sources.

In some cases, the companies receive 100 per cent of their revenue for operating the plants at well below half their capacity. The cost is passed on to consumers.

The contracts have been shrouded in secrecy, with both government and company officials citing commercial sensitivity. But the government was forced to disclose reams of documents last week, after the controversy over its decision two years ago to pull the plug on building a plant in Oakville, west of Toronto.

In one example, Alberta energy giant TransCanada Corp is guaranteed revenue of $3.3-billion over the next two decades – no matter how much power it produces – in return for building the province’s third largest natural gas-fired plant in Eastern Ontario, the documents show.

Government officials said the natural gas plants supply backup electricity to ensure that the lights stay on during periods of high demand. They said companies would not build the plants without a firm prospect of recovering their construction costs and operating expenses.

But critics said the government’s clean energy strategy is ratcheting up consumers’ electricity costs for plants that often sit idle. One natural gas plant operated at only 25 per cent of its capacity last year, according to figures obtained by The Globe and Mail.

“Building these plants and guaranteeing a stream of revenue is a very expensive way to deal with peak power demand,” said Peter Tabuns, the New Democratic Party’s energy critic.

Energy consultant Tom Adams criticized the government’s lack of planning. Because there is no reliable forecast for the province’s long-term electricity needs, he said, private-sector players are unwilling to commit to big projects without guaranteed rates of return.

“The government doesn’t really know how much power we’re going to need,” Mr. Adams said.

The documents released on the TransCanada deal show that the company will receive revenue of $15,200 for each megawatt month of electricity, based on the capacity of the plant. That is well above the average of $13,187 in revenue for Ontario’s fleet of gas fired plants.

“Older plants that resulted from a competitive process typically are under $10,000,” says an Energy Ministry document. “Newer plants that were negotiated and procured in a time of shortage tend to be over $15,000.”

The TransCanada plant, originally slated for Oakville, will now be built in Lennox and Addington County, about 140 kilometres from Ottawa. The fixed monthly rate for the 900-megawatt plant translates into annual revenue of $164.2-million for the company, and $3.28-billion over the 20-year life of the contract.

TransCanada is a major player in Ontario’s electricity sector. As well as its equity stake in nuclear operator Bruce Power, the company owns the Halton Hills Generating Station, which is capable of producing enough power for 700,000 homes. But the 683-megawatt gas-fired plant operated at only 32-per-cent capacity last year, according to figures obtained by The Globe and Mail.

TransCanada and Crown-owned electricity utility Ontario Power Generation also jointly own the Portlands Energy Centre, a 550-megawatt gas-fired plant in downtown Toronto. The plant produced 1.2 million megawatt hours of electricity in 2011, 25 per cent of its capacity.

“Had the plants … been built without income guarantees, the owners would have lost a bundle last year,” said Mr. Adams, the energy consultant.

The contracts for Halton Hills and Portlands are “broadly structured” in the same way as Lennox, TransCanada spokesman James Millar said in an e-mail to The Globe. He declined to reveal revenue figures, citing confidentiality.

The revenue deals for the natural gas-fired plants are unique. Other hydro utilities in the province, as well as wind and solar power producers, get paid based on how much electricity they produce and sell into the market. Ontario Power Generation, which produces about 60 per cent of the province’s electricity, receives five cents a kilowatt hour on average. Wind producers get 11.5 cents a kilowatt hour.

Companies that build gas-fired plants need to be able to recover their costs, Jennifer Kett, a spokeswoman for Energy Minister Chris Bentley, said in an e-mail response to The Globe. “Capacity payments help bring the risks associated with building and operating a gas plant to an acceptable level to make the investment,” she said.

Despite the deluge of paper released by the government – 36,000 pages in total – many details about the power-plant projects remain unknown. Progressive Conservative MPP Rob Leone said the government has been “far from honest” about how much taxpayers’ money has been squandered on the two power plants.

“It’s undeniable that the government has something to hide,” Mr. Leone told reporters.

Original Article
Source: the globe and mail
Author: KAREN HOWLETT