OPG’s strong 2014 results: aka how I made OPG $243 million

This was first posted on my coldaircurrents site  – which I use for posting found items of interest. This post went beyond pointing out OPG’s 2014 results, with enough of an edge I’m double posting it here.

OPG’s final 2014 results have been released and the net income they are reporting is, if my records are correct, the highest since 1998

[Toronto]: – Ontario Power Generation Inc. (OPG or Company) today reported income of $568 million, before extraordinary gain, for 2014 compared to $135 million for 2013. Net income, after extraordinary gain, for 2014 was $811 million, compared to $135 million in 2013.

Let me tell you about extraordinary items.

but first…

There are new business segments for contracted generation (biomass, hydro and gas partnerships) and eliminated business segments (thermal, or fossil fuels, and non-regulated hydro).

I’ve flipped through OPG’s 2014 MANAGEMENT’S DISCUSSION AND ANALYSIS and spotted some things of interest to me, relevant to many things I’ve written.

There’s news in OPG’s reporting that, I’ll just put out there, maybe I should get a nice cheque for.

Maybe I’d subliminally noticed this in earlier reports, but this paragraph caught my attention as it emphasizes my point in Ontario is the sucker of first choice for off-price electricity

-increase in net trading revenue of $51 million primarily due to higher margins from physical energy sold to
neighbouring markets
as a result of unseasonably cold temperatures and high natural gas prices in the first
quarter of 2014

There’s a lesson folks: losses on exports are difficult to ascertain, but the indication are the opportunity for profiting off Ontario’s needlessly depressed market rates seems huge and growing. If you haven’t read Ontario is the sucker… maybe you should.

One story I may, or may not, have gotten wrong is wasted on the traditional territory of the Mississaugas. My piece angered some of the few people I’d rather not anger, but clearly we aren’t recognizing increased hydroelectric generating capabilities because we can’t take all the power while the political power in the Province can exercise the power to complete a line intended to move power more efficiently to the border area at Niagara.

Total electricity generated increased in 2014 to 82.2 terawatt hours (TWh) from
generation of 80.8 TWh in 2013. The increase was mainly due to higher nuclear
generation, partially offset by production forgone by OPG’s hydroelectric facilities due
to surplus baseload conditions
.

Numbers are attached to the foregone hydroelectric too: 3.2 we couldn’t use, 1.9 of which OPG will get reimbursed through our rates.

As dispatching hydroelectric units down to reduce production is the first measure the IESO uses to manage SBG, OPG’s hydroelectric generation was significantly affected, reducing generation by approximately 3.2 TWh in 2014. The net income impact of SBG conditions on OPG’s existing regulated hydroelectric stations and, beginning November 1, 2014, the newly regulated hydroelectric stations was offset by the impact of a regulatory variance account. Of OPG’s 3.2 TWh of lost generation due to SBG conditions, the volume that was offset by an OEB-authorized regulatory variance account during 2014 was 1.9 TWh.

That 3.2 TWh avoided represents 10% of what Ontario could have generated with it’s publicly owned hydroelectric generating units.

10% !

The IESO put out contracts for more variable intermittent suppliers this week. I tried to ignore it but arrggghhhh. 3.2 TWh of hydro spilled in 2014; a year the IESO reported wind generated 6.8 TWh – and that reduced by 4.6% from what we paid for, due to curtailments. I’d be more inclined to aske the IESO exactly how much generation was curtailed in 2014, but I doubt they’d know; there’s no indication they’ve even approached a clue on what solar generated, but there is strong evidence they can’t forecast demand on a sunny day.

about the extraordinary income

This extraordinary items “income” is all me … and Parker Gallant … and fuzzy accounting.

Honestly.

The direction to regulate pricing at all of OPG’s hydroelectric sites came from the Minister of Energy after The Financial Post ran Ontario Power Generation turning water into debt

OPG recognized an extraordinary gain of $243 million in 2014
related to the forty-eight hydroelectric facilities, which were prescribed for rate regulation beginning in 2014. The gain relates to deferred income taxes expected to
be recovered from customers through regulated prices in respect of these newly
regulated facilities. Effective November 2014, OPG receives new regulated prices for
its regulated facilities, including regulated prices for the forty-eight hydroelectric
facilities.

I’m willing to share responsibility. In fact, I’d be good with a 10% cut of the proceeds.

Parker Gallant would know what’s fair better than I.

note: Parker, can you handle arranging this, and let me know when I can start spending?
Wood U.: Riddle me this

How can these projects avoid a comprehensive analysis:

    1. Atikokan, now running infrequently on biomass instead of operating infrequently on coal, after spending $179 million on conversion,  and,
    2. Thunder Bay, now running infrequently on a different biomass (advanced biomass), instead of generally not running on coal, after spending $7 million.
Graphic from my LTEP 2014: an unfinished plan

Now would be a really good time to do that analysis. Can the coal-fired units in southern Ontario, at Nanticoke and Lambton, operate during peak periods with the biomass fuel Thunder Bay is using after only a $7 million project? With the IESO currently conducting an incoherent pursuit of capacity auctions, OPG should get a handle on these possibilities before the IESO gets a handle on how to find the necessary capacity I noted was needed in LTEP2013: An unfinished plan – and before they make any rash decisions on disposing of the assets:

Converted thermal generating stations can provide Ontario’s electricity system with continued flexibility of daily start up and shut down, load-following capability to meet changing system needs, and complement non-dispatchable renewable energy sources. The activities required to preserve this option are reflected in the Services, Trading, and Other Non-Generation segment starting in 2014. OPG is seeking recovery of ongoing costs to preserve the option to convert the units. If recovery is not allowed, OPG will consider all options regarding the future of these stations, including full site closure and decommissioning. The decision to continue to incur preservation costs, in the absence of a cost recovery mechanism, will be revisited in the first half of 2015.

Should OPG find a way to maintain the assets, and its accountants ratchet up the balance sheet assets to reflect the ongoing utility, I expect to be remunerated for this work just as I’ve been on the hydroelectric regulation changes now benefiting OPG.

Unfortunately.

Note:

Both the Atikokan conversion to biomass and the Lower Mattagami hydroelectric project were completed ahead of schedule and within budget (budgets $2.77 billion, to-date spend $2.537B)

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