Spilling: Ontario’s water taxes and surplus baseload generation

Following a recent post in which I displayed the growth in hours the market failed to produce a positive price for electricity I was advised a much better indication of Ontario having too much committed supply is when the price exceeds the taxes on hydroelectric generators. I’ve since performed some research, and analysis, that do show this is a better methodology for estimating periods of surplus baseload generation (SBG).

The Ontario Ministry of Finance shows two charges levied on hydro-electric (hdyro) generators: property taxes and a water rental charge of 9.5% of “a stations’s gross revenue from annual generation”. The property tax escalates with the production level: 2.5% (of revenues) on the first 50 gigawatt-hours (GWh),  4.5% on the next 350 GWh, 6% on the next 300 GWh, and 26.5% on all annual generation above 700 GWh. This makes the top rate 36% (combining water rental and property tax).

OPG’s hydro generators have a number of rates, but all are between $40 per megawatt-hour (MWh), and $45/MWh. For simplicity, I picked $15/MWh (36% of $41.67/MWh) to query IESO data in order to estimate the percentage of hours  Ontario has experienced surplus baseload generation.

Graphing the results usefully displays the steep increases since 2010, and the rapid growth in periods of surplus during the Mid-Peak and On-Peak periods of Ontario’s Regulate Price Plan (RPP). I’ve displayed results by these period in the hopes of dispelling the idea SBG is mostly occurs overnight. The trend lines are the same as when I performed the analyses using $0/MWh, but the percentage of hours SBG is estimate at is much higher, particularly in Mid- and On-Peak hours. However, the estimate is still low,showing 46% of all hours exhibiting SBG conditions in 2015 whereas IESO documentation notes “SBG in ~65% of hours in 2015.” The difference is understandable; if export markets were the one additional factor determining the price, this would simply indicate that additional demand allowed for pricing above the floor set by taxation levels on hydro.

What is a concern is the IESO reported SBG 40% higher than my estimate for 2015, and my 2016 estimate is 62% – making it possible SBG conditions existed in over 80% of all hours in 2016.

Looking at the charges on hydro provides a view of surplus supply conditions that helps to explain:

While it helps to explain these things, it does not excuse the IESO’s reporting failures. The IESO displays, once a year, (ie. 2015) “Wind Energy Dispatched Down” and “nuclear reductions for SBG.” They do not report on hydro that simply bids into the market at rates higher than acceptable, because the operator doesn’t have to actively dispatch that display down. While their methodology can be explained, the supply the IESO had to take action on is not as important a metric for making supply decisions as the amount of supply paid for but wasted.

Ontario Power Generation reported 3.2 terawatt-hours (TWh) for each of 2014 and 2015, noting they will be compensated for “the gross margin impact of production forgone.” The IESO’s reported curtailment of wind and nuclear totaled approximately 1.7 TWh each of those years – a fraction of the lost hdyro.

During the first 3 quarters of 2016, OPG reported 3.9 TWh lost to SBG conditions.


Note:

Parker Gallant wrote on the levies in, You’re paying a tax you don’t even know about: the water rental fee


My estimates of annual generation figures for hydro-electric generators, including property taxes and water rental fees,  are in this spreadsheet.
The graphic for this post is in the final tab of this spreadsheet

 

 

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