“Ontario’s Electricity System: Headed in The Right Direction” Speech by Dave Butters to the BOT
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For immediate release, May 29, 2012:
“Ontario’s Electricity System: Headed in The Right Direction”
Remarks by Dave Butters
President & CEO of APPrO,
The Association of Power Producers of Ontario
The Toronto Board of Trade
Accenture Energy Series
May 29, 2012
Let me begin by saying thank you to the Toronto Board of Trade and Accenture for today’s Energy Series luncheon. And to all of you for taking the time to join us.
It’s my pleasure to serve as the President and CEO of APPrO – the Association of Power Producers of Ontario. Our membership includes some 27 power generators and more than 100 other organizations and individuals dedicated to around-the-clock supply of affordable, clean and reliable electrical power to the people of Ontario.
I like to say that makes me a pretty energizing guy. My wife Angie likes to say “Stick to the script dear and quit trying to be funny…..”
Electrical power is the life blood that courses through the body of Ontario. It sustains and gives growth to our small businesses and large manufacturers. It literally lights our lives and livelihoods. Our homes and hospitals.
In that respect the provision of affordable, reliable power is fundamental to all that we do.
That, in turn, means we must place a premium on the way in which we approach this complicated and complex sector.
We must make wise, careful decisions that create the conditions for progress and preserve the public interest.
That’s a responsibility that falls not only to decision-makers. But also to industry. We are in the business of providing power – one of the most indispensible components of our province’s economic and individual success.
In that regard, it is a particularly fitting time to take stock of where we stand.
We are book-ended by not one, but two memorable anniversaries. One that we’ve hit already. Another that we’re coming upon.
It was a decade ago, on May 1st 2002 that we saw the opening of the electricity market in Ontario to competition.
Nine years ago, in August 2003, a landmark event of a different sort occurred – the power black outs that hit Ontario and much of the Northeastern United States, affecting some 55 million people.
Since then, we’ve passed many milestones – the 2002 rate freeze, the Electricity Pricing Conservation and Supply Act, the Electricity Restructuring Act, the Green Energy Act, and many, many more.
Indeed, as you all know, it has been a decade of constant change for the electricity sector.
But it was those two events more than any other that gave rise to the unique landscape that defines today’s electricity market. Those two events created change – and choices. They forced review and reflection. They led to innovation and adjustment.
It is therefore the perfect time to ask ourselves: How are we doing?
Let me offer my own answer: We’re doing pretty well. In fact, I’d say we’re doing quite well.
Generation is abundant and reliable. Supply has become more diversified. And our system is cleaner than ever before. Soon, we will have moved completely away from coal. And importantly, we have invested tens of billions of dollars into the renewal and refurbishment of our electricity system.
Now before the buzz begins to rise to a beehive pitch, let me also rush to say that the system is far from unblemished. And some safe distance from perfection.
There remains much to work on. Changes that require attention. Reforms that are needed.
The issue therefore is how can we best work as partners – industry and policymakers – to build upon a good thing?
I can summarize the view of power producers in three simple words:
Quit fixing us. Please.
Actually, that’s four words. But only because I wanted to be polite.
Policy adjustments. Experience-based improvements. Fine-tuning. Corrections. These are all welcome. And necessary.
But stem-to-stern reviews. Sweeping overhauls. Game-changing changes.
Let’s have less of that. Instead, we would urge a focus on three clear principles:
Reliability. Stability. And predictability.
That’s what leads to steady service, affordable prices and long-term security for ratepayers.
Importantly, that’s also what we need as an industry to attract the capital and investment required to support efficient, sustainable development.
And let’s be clear: A climate of perpetual, disruptive change discourages efficient investment decisions. Which renders achievement of our goals harder. Which places greater, not less burden on taxpayers and ratepayers.
None of this is to say that we should chill all debate. Recently, we’ve seen a major electricity discussion paper from Mr. Hudak, the Leader of Opposition. It and others naturally deserve respectful consideration.
But as that discussion takes place, I would encourage all participants to embrace the principles of reliability, stability and predictability. As we debate, let’s ensure an informed dialogue that is in pursuit of these goals, not in contradiction to them.
And, I feel it’s important to add, let’s work hard to rise above the all-too-common partisanship that often afflicts discussions of this policy area. No one party has or ever will corner the market on correct answers. Let’s keep the focus on common goals and the public good.
How? It will require that government and industry adhere to a few simple tests related to supply, price and sustainability.
Let me review each in brief.
Electricity supply. Let’s start by asking: do we have sufficient capacity to meet demand? The answer is yes. In fact, we now have an abundance of supply. Together with this capacity overhang is a fleet that, in comparison to years past when we relied so much more on coal, is relatively more inflexible. And that, to be candid, is a challenge.
But this is a long run game, and as we look to some of challenges of the coming decade, I’d be rather have a bit more supply than might be strictly necessary, than too little. And it is not that long ago we were scrambling to keep the lights on right here in Ontario.
Now, we come to price. Or, as my wife warns: The part in the speech where the audience turns on me.
Obviously, no increase to the rates we pay is ever welcome.
But the question is whether rates are fair and reasonable? Are increases justifiable and measured? Are we on a path that is manageable for people and businesses – as we work to better reflect the costs of generating, transmitting and distributing power around the province?
In our view it’s very hard to identify the right price. But it’s not at all difficult to know when we’ve gotten it wrong.
On balance, Ontario is more right than more wrong when it comes to price.
Understanding that any increase is a hardship, the increase in the total market cost of electricity has been relatively modest over the past decade – matching the rate of inflation almost exactly.
During that time the cost of electricity as a percentage of the overall household basket of goods is virtually unchanged, moving from 1.9% to a still quite low 2.1% . In contrast, the cost of food and gasoline has far outpaced the CPI index.
At the risk of appearing provocative, I want to take the argument one step further. I don’t believe the electricity sector should be the least bit apologetic about these price increases. We’re refurbishing system-wide infrastructure, delivering a guarantee of virtually unblemished reliability and transforming the system into something far cleaner. That costs money. A lot of it.
And when you think back to the disruption caused by the August 2003 outages we’re reminded of the enormous toll exacted in economic and human terms. On balance, I don’t believe it is going too far to say that our supply of electricity in Ontario offers outstanding value for the price we pay and service we receive.
A final note on this topic relates to a group I call the market purists. These are the people who believe that market price should be sole policy consideration when it comes to power in this province. They resist any government involvement in the market whatsoever. To them, I say that their perspective is at odds with practical experience. Both here and in jurisdictions around the world. It is also at odds with history.
The undiluted truth is that a range of factors have always guided policymaking. Economic growth and job creation. Public works. Regional equity. Clean energy. All of these have played a prominent part in policymaking.
That’s just a plain fact and I see limited worth in debating the advisability of the matter. Make it transparent for sure, but our members must manage the world as they encounter it, not as some might imagined it ought to be.
Our system must also face the test of sustainability. It is a word loaded with meaning.
In the practical sense I think we can sleep soundly. Reinvestment in our electricity system – expensive and daunting though it may be – is a priority with which we are finally coming to grips.
Rather, the aspect of sustainability where I believe we should concentrate relates to the contemporary definition - from an environmental perspective.
Here, I think we must acknowledge that recent experience has been mixed. The GEA and its consequent alterations have introduced dramatic change. There have been bumps along the road.
My guess is that we’re going to continue to learn as we go, adjusting as we must, and refining it into something that works better.
But again, in broad terms, I’d say we’re getting there. Measured against these key tests of supply, price and sustainability, I would argue we’re more than holding our own as a sector.
And that is why I suggest decision-makers push pause on the steady supply of big fixes and radical realignments.
That does not mean we stand still. There remain priorities that must we labour hard to improve. Let me highlight a few.
First, we need to set a schedule for nuclear refurbishment and new build and simply get on with it. Fact: last month nuclear supplied 61% of our energy. Ontario is not going to walk away from nuclear – nor should it. While I was encouraged to see the government proceed with planning on nuclear refurbishment, there needs to be a clear commitment to move forward from there. And each day that we delay the decision is another day that the rest of the system is left waiting. Let’s please just move forward.
Second, the issue of surplus baseload capacity simply must be tackled. It is, in our view, the single greatest impediment to ongoing confidence in the system - the greatest obstacle to forward momentum.
As everyone here knows, electricity does not remain idle. It cannot be stored in a jar. Put away for later. Once generated, it must be moved along the grid and delivered to a destination. Or not generated at all.
This is why we develop complex systems to price and dispatch power.
And when we err – as we will -- it is best that we err on the side of too much rather than too little.
Still, our members recognize that Ontario is now paying for generation capacity that cannot always be efficiently utilized. It’s a challenge that must be managed. I can assure you that all market participants are working full-out to manage and improve this circumstance.
However, this is a challenge that demands great delicacy. A sweeping, one size fits all approach would be decidedly unhelpful.
At least in the short term, much of the challenge can be met through contract accommodations and market rule amendments.
But equally we should investigate innovative solutions that take advantage of this abundance and put it to positive work on behalf of us all.
The third priority for action relates to another topic raised earlier: The integration of renewables.
Creating a policy environment that encourages the generation of clean, renewable electricity is hard to contest. In the world in which we live, there is going to be more renewable energy in the future, not less. Have we gone too far too quickly in Ontario? Some say the renewables honeymoon is over. Perhaps. But I prefer to believe we’re simply settling into a more mature, longer-term relationship now that the early passion has abated.
As part of that maturation, I suspect more work will be required to reach a truly comfortable, compatible place. For all the adjustments to the GEA since its introduction, I think we’ll need to see more.
And let’s be clear in saying that there’s nothing wrong with that. Certainly from the perspective of our members if every move to make reasonable alterations is met with condemnation, then governments will only prove reluctant to make needed changes. That’s not desirable. Let’s applaud smart change and encourage continued progress.
How to integrate renewables into the system writ large – how they fit from the perspective of baseload capacity, projecting future supply, affecting prices for all – these and many other questions have to be answered in a way that works for the long-term – and balances the interest of consumers and investors.
It won’t happen overnight. And it certainly won’t emerge from yet another system-wide review. These answers will present themselves practically. As a consequence of time and experience.
The final issue I would flag is one that reaches back to the early days of independent electricity generation – forgive me if it seems a bit technical but it’s very important.
I’m speaking about the future of the Non-Utility Generators or NUGs - as they’re so elegantly nicknamed.
The NUGs were the province’s first experiment in the move away from monopoly.
In partnering with the NUGs, Ontario Hydro avoided significant new build costs that, based on Hydro’s then track record, would have likely have been over-budget, and off-schedule.
Operated independently, they transferred risk away from ratepayers while providing an additional source of power generation.
In policy circles, the long-term contracts entered into with the NUGs have been the target of unflattering – and usually ill-informed - comment over the years.
But what has never been in dispute is the value of the assets. These facilities have served Ontario consumers well, providing power at a reasonable cost, while operating to the highest reliability, safety and environmental standards. And they provide important local benefits, including good jobs. We should be working hard to get more value from these existing generation assets as their contracts expire. Ratepayers would expect no less.
So that’s our list of near-term action items: a nuclear new build and refurb decision, managing surplus baseload capacity, integrating renewables, and a fair renewal of the NUGs.
It’s not a long list. None of them require radical shifts in policy or massive upheaval to the market. The secret to success will be found in careful, measured efforts.
I suppose I should pause before concluding to also comment on the issue du jour – the proposed merger of the OPA and IESO.
As you’ve probably gathered from my remarks, Ontario’s power producers are decidedly pragmatic. Our members approach the proposed merger with a single, simple question: Will it cause harm to our business?
And the answer so far is: not that we can see, provided the market administration and procurement functions can be properly ring-fenced.
No matter the structure, what our members feel must be made clear is the respective roles of Government, the OEB, the OESO and stakeholders – for the short, medium and long term. Why? Because investors must understand the pathway when it comes to planning and approvals for the electricity sector. And, to be blunt, given the newly proposed Ministerial directive powers for planning, that clarity is all the more important.
The planning process is too important to be opaque.
In conclusion, let me be quick.
I’ll start by repeating that, a decade after opening the market, our system in Ontario is working pretty well.
There are challenges to be overcome. And solutions to be found. But on balance, the greatest threat is the instinct to overwhelm the system with constant, sweeping change. To over-do it. And to keep doing it.
I advise pragmatism over grand designs. Small steps over great leaps. Let’s rely on practical experience and the pursuit of gradual improvements.
That is how we can best realize the goal of building an even stronger, affordable system. One that offers reliability, stability, predictability – for both power producers and the people of Ontario.
And it is for that reason that I finish by saying that our fondest wish is that decision-makers will hear us when we say: Please, quit fixing us.
* * *
APPrO is a non-profit organization representing more than 100 companies involved in the generation of electricity in Ontario, including generators, suppliers of services, equipment and consulting services. APPrO members produce power from nuclear, hydro, fossil, wind, waste wood and other energy sources. APPrO's members currently produce over 95% of the electricity generated in Ontario.
For further information contact:
David Butters, President
Association of Power Producers of Ontario (APPrO)
25 Adelaide St. E., Suite 1602, Toronto ON M5C 3A1
tel: (416) 322-6549 or (647) 444-6549
fax: (416) 481-5785