Sustainable Energy - Background Information and Definitions

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Definitions, Background Information and Abbreviations:

Independent Power: Electric power produced by an entity other than the electric utility in the area.

NUG: Non-utility generation (or generator) -- synonymous with independent power.

Parallel Generation: Synonymous with independent power and NUG, above.

Private power: Power produced from privately-owned generation facilities. (Most independent power in Canada is also private power.)

Open access: A system where electricity producers are allowed to interconnect to the transmission system (the wires) and transmit their power to buyers. (It's also referred to as transmission access, or in some cases, 'wheeling' of power.) The producers pay a fee for the use of the wires of course, but the amount of the fee is set by an independent regulator, to make sure that all producers have the same opportunity to market their power. This is known as "non-discriminatory transmission tariffs" and it is an essential component of transmission access.

Electric Utility: An electric power company that operates a power transmission system and has the legal right to produce and sell electric power in a given geographic area. Usually involves some form of legal monopoly over electric services in the geographic area.

Private Utility: An electric utility that is privately owned, regardless of whether its shares are publicly traded or privately held. (Most US utilities are private, a few Canadian are as well). Synonymous with "IOU" or investor-owned utility.

Public Utility: In Canada, a provincial crown corporation such as Ontario Hydro that is owned by the government. In the US, a public utility may be government-owned, non-profit, co-operatively owned, or a combination of the above.

Privatization: Refers to the privatization of ownership of a public utility. Does not necessarily imply the reduction of a utility's monopoly powers, or the purchase of independent power.

RET: Renewable Energy Technology

What is "the obligation to serve?"

One of the most important recommendations in the Macdonald report was also one of the most subtle. Mr. Macdonald recommended that the "obligation to serve" be transferred from Ontario Hydro the municipal utilities. The "obligation to serve" is the legal duty to provide transmission, distribution and power services to grid- connected customers of electric power in Ontario. Exactly how this is defined is rather complicated, but in general terms it means that Ontario Hydro now, and perhaps the municipal utilities in the future, have to do everything reasonable to make sure power is delivered safely and reliably to everyone within a reasonable distance of existing power lines in Ontario.

The obligation to serve is important because it forces a utility to look after every customer to a certain minimum standard of service, rather than just looking after the larger and more profitable customers. Public utilities the world over, whether privately or publicly owned, generally operate under some kind of legal duty like the "obligation to serve." Because upholding such a duty carries with it certain costs, the serving utilities usually are allowed to adjust (i.e. raise) their overall rates to allow them to recover the added costs incurred from serving the more difficult to serve customers.

However, now that price-based open competition is approaching the electricity market, the obligation to serve will have new complications to deal with. How should a utility respond when it has been instructed to raise its prices in order to provide widespread public service, and then finds cheaper competitors in its backyard, and these competitors have no "obligation to serve."

This problem is one of the most compelling reasons for unbundling, or breaking up the utility into separate transmission, distribution and generation companies. The generating companies can compete, based primarily on price, while the transmission and distribution companies can be charged with the responsibilities of providing widespead service, at specially-adjusted prices if necessary.

Perhaps the unspoken issue behind the Macdonald recommendations is that a company which is given an "obligation to serve" is very likely to be given a legal monopoly of some sort or at least some kind of protected market. The public can not allow such a company go out of business. However, a company in the generation business is likely to operate on a purely competitive basis, and can possibly go out of business if it makes serious business mistakes.

Macdonald's recommendation to transfer the obligation to serve to the municipal electric utilities (MEUs) suggests that they will inherit an important public service function, and the corresponding protected market, a version of which Ontario Hydro now enjoys. If Ontario Hydro is no longer under any obligation to serve, then it will be hard to justify giving it any sort of market protection. In theory, this could mean that Ontario Hydro could be competed out of business. This is why Macdonald's recommendation is so radical.

Potentially this problem could be solved by splitting up the obligation to serve into two components: Obligation to provide transmission and distribution service and obligation to supply the commodity of electricity. The MEUs could have the first and Hydro could have the second. Of course, there are many other options as well.

- Utility Restructuring -

What's all the fuss about? Doesn't the system work now?

Canada's electricity industry is like a sleeping giant about to awaken. Even though the electric power sector is burdened with a high proportion of uncompetitive capital investments, it is poised to undergo a revolutionary transition because of the growth of competition, and the growing need for environmental responsibility.

Ironically, one part of the solution is being largely excluded from the market: Independent power. Independent producers are generally not allowed to build new power plants in Canada, or to make new power sales, which are necessary to build new plants. In most provinces, the provincial utility has banned "third party" use of the transmission lines, and in Ontario at least, Hydro is actively discouraging people even from making their own power. Independent power producers want the right to compete, and they believe consumers want them to have that right too.

Ontario Hydro and Canada's power utilities have done a great job over the last 90 years delivering affordable and reliable power. But, the basic facts that they depend on have started to change: Our natural resources are no longer cheap and plentiful, governments no longer have endless credit cards to borrow on, and the environment can no longer support repeated insults in the name of power generation. More important, alternative energy supplies have become less expensive than power from utilities - meaning that the utilities now have financial problems because of their long- term investments in relatively expensive power plants. Ontario Hydro and other Canadian utilities are now using a wide range of unfair tactics to prevent consumers from accessing this lower cost cleaner power. This kind of corporate behaviour is anti- competitive, costly, bad for the economy and the environment, depresses job creation, and is quite possibly illegal under both Canadian law and our international trade agreements.

Changing the situation is difficult however, because big utilities form such an integral part of our economy and because energy sector investments are very long-term and hard to change once started. All in the energy sector agree that it is time for a major reform or "restructuring" in the electric sector, complete with new legislation, new regulatory systems, and new corporate structures. Depending on how it's done this could mean many things. The only thing for sure is that you - the consumer - will end up paying for everything, and dealing with all the after-effects. So each of us has a major stake in making sure the restructuring is done right.

Customer Choice: Independent power producers believe the public has the right to choose its supplier(s) of electric power. Most Canadians do not yet have this right. If they did, consumer research shows that many people would choose to purchase from smaller, greener suppliers than they can now. For example, in Traverse City, Michigan, the right of customer choice has led to the development of a wind energy program. Perhaps even more important, customer choice would lead to a more flexible and responsive relationship between power consumers and their utilties, putting the customer "on top" for a change.

What is independent power?

Independent power is electrical energy generated by anyone who doesn't already hold a monopoly on the local power supply or distribution system. In other words, power that doesn't come from the electric utility. Independent power has grown rapidly all over the world in the last 15 years as alternative energy sources have become more and more competitive with traditional utility-supplied power, and as consumers demanded more choice in their utility services. In Ontario, 90 independent power producers already supply about 2000 megawatts, or nearly 10% of Ontario's capacity. The great majority of independent power producers use environmentally- friendly technologies like small hydro, wind energy and cogeneration (a form of waste heat recovery, based on high- efficiency combustion of fuels, which can be anything from natural gas to agricultural waste).

In the late 1980's, Ontario Hydro and the province felt there existed a requirement for significant additional new power generating capacity. After examination of the alternatives to meet new capacity requirements, the NUG option was selected as the lowest cost and most timely solution. In the early 1990's, Ontario Hydro realized that its forecast of load growth was overstated and put the brakes on the building of additional new capacity, both its own and independents'. Until that point Darlington, representing about 15% of the province's electrical production capacity, had been the primary point of embarrassment for Ontario Hydro. (It had an original budget of $4 billion, but cost over $13 billion.)

Now Ontario Hydro is trying to use NUGs as the example of exhorbitant costs and as the new scapegoat. In fact NUGs still cost exactly what Hydro and the producers agreed they would cost. NUGs are the lowest cost and most efficient sources of new electricity. Don't be fooled by their detractors, who would rather commit the province to more expensive and less environmentally friendly power.

What is 'open acess'?

Open access refers to any system where electricity producers are allowed to interconnect to the transmission system (the wires) and transmit their power to buyers. (It's also referred to as transmission access, or in some cases 'wheeling' of power.) The producers pay a fee for the use of the wires of course, but the amount of the fee is set by an independent regulator, to make sure that all producers have the same opportunity to market their power. This is known as "non-discriminatory transmission tariffs" and it is an essential component of transmission access. Without this, one producer could have unfair advantages over other producers, because of dfferences in transmission costs.

The Cost of Power

Independent power costs less than most of the alternatives. (Comparisons of the costs of power are detailed on page 12.) For example, power from Ontario Hydro's Darlington nuclear plant costs more than 8 cents per kilowatt-hour, according to Ontario Hydro, while its long-term independent power contracts average 30% less - about 5 cents per kilowatt-hour.

Comparing power costs can be a tricky business because most people actually pay a blended price - this is because most utilities wisely purchase power from a variety of sources, some for reliability and some for economy. Spurious figures quoted by Ontario Hydro and its major Union sometimes misrepresent the cost of power by ignoring or understating capital costs, the largest component of power costs.

In addition there are huge public subsidies to conventional forms of power generation, tax concessions to public utilities, and enormous sums of public capital placed at risk, all of which would be reduced with more independent power.

Recent controversies in London, Kingston, Sarnia, Windsor and elsewhere demonstrate that municipal utilities are prepared to switch to independent power (although Ontario Hydro has blocked them from doing so) only because independent power is about 20% less expensive than power from Ontario Hydro, without even considering the environmental and job creation benefits.

For more information see IPPSO's recently-commissioned study The Economic Cost of Power

Reliability

Independent power from a wide variety of sources is more reliable than having a few centralized generating stations, as recent shut- downs at Ontario nuclear plants have demonstrated. The reliability of independent power comes from three sources: independent power plants generally use newer and more dependable technology with impressive 'availability' characteristics, the power supplied from a large number of smaller plants is statistically less vulnerable to simultaneous failures or the failures of any one plant or component, and the diversity of fuel sources and owners reduces the impact of fuel supply disruptions and price changes.

Competition

Competition is widely trusted as a mechanism for keeping prices in check, keeping large companies responsive to their customers and the public, and minimizing excessive capital investment in megaprojects. Just like with telephone and natural gas services, consumers are demanding a choice of suppliers for their electric power. In some places they are beginning to get that choice. However no such choice is yet available in Ontario. Independent power can lead to at least three types of competition:

  • retail competition, where consumers can buy directly from producers
  • wholesale competition, where consumers buy from a pool or pools, which can buy directly from producers
  • investment competition, where proposals for new power plants have to compete in the open market for capital, and don't get built unless they are competitive with alternative options, or are legally protected in some way.

Ontario is already benefitting from the third form of competition, and this is arguably the reason that Ontario has had its rates frozen for the past few years. Investors know that if independents were allowed to compete fairly against Ontario Hydro, the independents would be more attractive investments, and they are poised to shift their investments as soon as the rules protecting Ontario Hydro investments change. Ontario Hydro has stopped building its expensive megaprojects, because it is aware that financiers know the alternatives are more economic. The second form of competition started to happen in the early 1990's before Ontario Hydro clamped down on competition. It is this form - wholesale competition - that promises the most immediate benefits to the public, and which IPPSO advocates be implemented as soon as possible. Retail competition, which offers further benefits, also entails some transitional costs, and therefore may require some time before being implemented in Ontario.

Taking the Public Risk out of power plants

In Ontario and most of Canada, utility power plants are built with money guaranteed by the public, because they are built with borrowed money secured by the respective provincial government. This means that if the investment turns out to be a bad one, the public will have to cover the losses, either through the power rates, through bailouts of public power corporations, or by simply accepting the loss in value of the publicly-owned power corporations. Such problems are rarely discovered until long after the mistake is made and little can be done about it, as was the case with Darlington. Potentially this kind of problem could hurt public finances in Canada worse than anything in recent memory.

IPPSO is not opposed to public ownership in the power sector. However, since the private sector is able to shoulder some of the risk of power plant construction, the public may be better off with an industry structure that facilitates sharing of risk between the public and private sectors. Independent power producers are confident that such a system would limit the tendency to invest in questionable projects, and thereby protect the public as well as shore up public finances.

For example, it is a little-known fact that nuclear power plants in Canada are not liable for damages in excess of a relatively minimal amount, in case of an accident. This is because special legislation, called the Nuclear Liability Act, specifically exempts them from liability greater than this amount, regardless of their "culpability." Independent power producers carry liability insurance without special legal exemptions, and have no qualms about accepting responsibility for the full range of possible effects resulting from their operations.

Independent power is a way of reducing the risk that the public has been unwittingly forced to accept by our current power generating system. A sharing of risk between the public and private sectors not only saves money while providing more complete protection, it allows for more judicious investments in the first place.

Safety and Security

Almost all experts agree that the most secure energy system is the one that depends on the widest variety of sources. A diversity of primary fuel sources, a diversity of conversion technologies and a diversity of owners is the best way to protect against sudden problems arising from fuel, technology or business problems. Ontario Hydro is over-dependent on power from just three nuclear stations: if any one of Bruce, Pickering or Darlington were forced to close suddenly, Ontario would lose almost 20% of its supply. Replacing so much power on such short notice can be very expensive, and amounts to a hidden cost.

Independent power projects are very safe. Ontario Hydro plants are legally exempted from full public liability for certain kinds of accidents.

The technologies that independent power producers use are widely varied. Some are very mature such as small hydro. The risks are very well understood in these areas. Others are newer and more experimental like wind energy. But even in these areas, the risks are covered by liability laws, and need to be measured in comparison to the greater problems associated with the pollution caused by conventional power generation.

With a widely diversified and decentralized power system it is very difficult for disruptions of any kind to shut down the entire power system, whether they be technical problems, business problems, lightning, earthquakes, labour strikes, or even acts of terrorists.

Jobs

Power plant construction creates lots of jobs. However, power generation itself is generally not very labour-intensive, in comparison to the amount of dollars involved. But some systems create more jobs than others. Biomass-fuelled power plants for example are excellent job creators because they require so much material to be collected and processed for combustion. Industrial cogeneration plants have a very positive impact on jobs because they make their "host" industrial plants more efficient and competitive, not only protecting high-wage jobs that might be vulnerable to international competition, but also anchoring industrial investments and providing an attractive location for industrial expansion.

Jobs created by the independent power industry tend to be well distributed geographically across the province and provide work near to where people already live.

Ontario Hydro's nuclear power plants create only a relatively small number of jobs, compared to the jobs created per megawatt of capacity, or per dollar of investment, by most alternative power suppliers. Oddly, most of these nuclear employees are needed regardless of whether the plant is idle or in production. Coal- fired power plants create a few more jobs per dollar of investment, but most of these jobs are in coal mines, outside of Ontario, or in the US.

In contrast, the growing world-wide market for wind energy has stimulated the construction of a new wind turbine factory, creating hundreds of new jobs in Ontario, for a much smaller investment. Energy efficiency is the best job-creator of all in the energy sector. Independent power, which is naturally combined with energy efficiency, is undoubtedly the most effective overall strategy to create jobs, protect existing jobs, and save money for consumers, without the hidden costs of megaproject energy.

The Environment and health

All forms of electricity involve some amount of pollution. Most of the pollution occurs at the point where the fuel is extracted (i.e. uranium or coal mines) but some occurs where the fuel is converted (the power plants). Very little occurs at the point of consumption, because electricity in its finished form can be highly efficient. However, society's most serious environmental problems are caused by power generation more than by anything else:
- Smog (or ground-level ozone)
- Acid rain
- Global warming / climate change
- nuclear pollution / radiation
- flooding of river valleys, disruption and contamination of river systems is caused by some major hydro-electric projects
- EMF (problems caused by radiation from high-voltage power lines, exacerbated by the current centralization of power generation)
- resource depletion
- heat pollution of lakes and rivers

In addition, other environmental problems such as ozone depeletion in the upper atmosphere, toxic releases and PCB contamination of soils are in large part caused by the activities of the power industry.

The most effective and practical way to significantly reduce the environmental problems caused by power generation is to increase the efficiency of power generation. Cogeneration has a huge role to play here because it can triple and sometimes even quarduple the efficiency of power generation, effectively cutting the emissions by two-thirds or more, in a profitable fashion.

Other methods of reducing pollution may not be quite as profitable in the short run, but offer great promise nonetheless: Renewable energy systems such as small hydro, wind and solar energy produce no pollution directly. Their polluting effects result mainly from the construction of their facilities, the manufacture of equipment and so on. Thus, the pollution caused by renewable energy systems is relatively small, and tends to be a one-time problem which is soon dwarfed by their long-term history of relatively clean power production.

How IPPSO believes the system needs to be restructured:

IPPSO has proposed a system for reforming power generation and distribution in Ontario. The detailed proposal is laid out in our paper "Clean, Competitive, Customer-Driven Power" which is available free from the IPPSO office. IPPSO's proposal in a nutshell is as follows:

1. Open up the wholesale power market to competition immediately. (This would mean that Ontario's Central Market Operator would have to buy a range of power supplies, mostly from the least expensive suppliers, instead of always buying from Ontario Hydro's own power plants). Competition to supply a central power pool (currently Ontario Hydro) would replace the current uncompetitive system. The wholesale cost of power is 70% of the consumer's energy cost, so a lot of consumer savings would occur quickly with this measure.

2. Separate Ontario Hydro and other utilities into their competitive and monopolistic components. Transmission of electricity is a natural monopoly and it does not make sense to have competing providers of distribution wires and transformers. As a monopoly it requires regulation to protect against price gouging, discriminatory pricing, and other abuses of market power. The rest of the system is naturally competitive, and requires different, perhaps "lighter," forms of regulation.

3. Introduce retail access in a controlled fashion. IPPSO proposes that consumers be allowed to contract directly with suppliers for up to 10% of the power sold in Ontario. This will introduce competition to the retail side of the power business, but not risk the total commercial obliteration of the existing structure, primarily Ontario Hydro.

4. Require new power suppliers to develop the most economical sustainable forms of energy first by means of a renewable set- aside. IPPSO proposes that 20% of all new power supplies in Ontario come from renewable energy systems on a competitive basis. This will create a steady and healthy stimulus to the development of a Canadian-base renewable energy industry, avoid price shock, and begin the transition to a sustainable energy system.

5. Introduce regulatory systems that provide accountability and fairness. Major corporate endeavours all depend on legally enforceable rules and regulations to set standards and protect against subtle abuses of power. Ontario currently has the least regulated power system in the western world. A binding regulatory system that looks after consumer price issues, allows for fair competition, and tries to protect the environment and the public interest in general is long overdue in Ontario. IPPSO's proposals for regulation are not unique. Details are in the paper described above.

Isn't independent power just a subtle form of privatization?

Independent power is fully compatible with continued public ownership of utilities, or with privatized utilities. IPPSO does not advocate privatization, merely decentralization of generation into smaller more efficient units that do not rely on large amounts of public funding. There is much to be gained by co-operation between the public and private sectors. In some cases, the acquisition of independent power may be the best way to strengthen and preserve public power. Ontario Hydro, Peterborough PUC, Ottawa Hydro, Brock University, and others in the public sector have made use of independent power for many years, and it has only made them more competitive and flexible.

Independent power is just as important in the public sector as in the private sector. Hospitals for example need small cogeneration systems more than almost any other places. This would make them more secure in case of power outages, while reducing their operating costs at a time of severe financial constraints.

Independent power producers want a full and open public discussion about the shape of our future energy system. We are confident that doing so will only lead to more use of independent power, whatever decisions are made about privatization. This is because independent power serves the public well, makes economic sense, and protects the environment. Independent power clearly has an important role to play in any energy system the public may decide to choose.

The Stakeholder Alliance for Competition and Customer Choice

A broad-based alliance of Ontario interests has released a plan endorsing a rapid move to competition in the Ontario electric industry. The Stakeholder Alliance for Electricity Competition and Customer Choice (SAC) has been active since September 1996. It includes representatives of Ontario's major industries, business associations, and municipal utilities who in turn represent the great majority of Ontario power consumers. The SAC's three-point plan consists of the following main items:
1. Separate the transmission system, including the independent system operator, from Ontario Hydro and establish it under its own governance.
2. Set a time frame for Municipal Utilities and Ontario Hydro Retail, established as a municipal utility under its own governance, to work out the restructuring of local distribution through regional studies.
3. Establish a Transition Agency independent of Ontario Hydro with the mandate and authority to effect the changes needed to introduce a competitive electricity market. Supporters of the SAC include:

Alliance of Manufacturers and Exporters Canada (Alliance)
Association of Major Power Consumers in Ontario (AMPCO)
Board of Trade, Metro Toronto (BOT)
Canadian Chemical Producers' Association (CCPA)
Canadian Federation of Independent Business (CFIB)
Canadian Foundry Association (CFA)
Canadian Steel Producers Association (CSPA)
Electro Federation of Canada
Independent Power Producers' Society of Ontario (IPPSO)
Machinery & Equipment Manufacturers' Association of Canada
Municipal Electric Association (MEA)
Motor Vehicle Manufacturers' Association (MVMA)
Ontario Chamber of Commerce (OCC)
Ontario Hotel & Motel Association
Ontario Mining Association (OMA)
Ontario Natural Gas Association (ONGA)
Clarington Hydro
Etobicoke Hydro
London Hydro
Mississauga Hydro
North Bay Hydro
Oakville Hydro
Ottawa Hydro
Pembroke Hydro
Sarnia Hydro
Scarborough Public Utilities
St. Catharines Hydro
Sudbury Hydro
Thunder Bay Hydro
Toronto Hydro

See also related file on Definitions

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For queries or suggestions, please forward to:
IPPSO, PO Box 1084 Station F, Toronto, Ontario, M4Y 2T7 Canada.
Street address: 25 Adelaide St. East, Suite 1602., Toronto, Ontario M5C 3A1
(416) 322-6549 fax 416-481-5785 Internet e-mail: This email address is being protected from spambots. You need JavaScript enabled to view it.

Last update: 8 April 2004
URL:http://www.appro.org//articles/4689-definitions

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