Janet McFarland
Globe and Mail
November 4, 2002

Private-sector companies are growing increasingly reluctant to build new electricity-generating plants in Ontario, arguing the province’s deregulation policies are muddled and the market conditions are poor.

Last week, New York electricity giant Sithe Energies Inc. said it was postponing its plans to build two large power plants in the Toronto region, citing a list of concerns about the regulatory system and the lack of progress in creating a competitive market through the sale of power plants owned by Ontario Power Generation Inc. OPG, a Crown corporation, continues to control about 75 per cent of Ontario’s electricity market.

"The conditions in the market don’t support new investment," says Duane Cramer, vice-president of development at Sithe Energies.

The need for new electricity generation in Ontario has become increasingly acute since the province faced soaring electricity prices this summer because of inadequate supply.

Ontario ended up importing large amounts of expensive electricity from surrounding U.S. states and provinces, and the market operator has forecast a similar situation next summer.

Moreover, OPG announced last week that it is facing another delay in the reopening of the Pickering A nuclear reactors, further postponing another major source of additional electricity.

Mr. Cramer said companies such as Sithe have not been convinced to build, despite the evident need for more electricity in the province.

He said it is difficult for new plants – most of which are gas-fired – to compete with lower-cost nuclear and hydroelectric power plants, and with OPG’s continued market dominance. Nuclear and hydro plants provide Ontario with cheap base electricity, so new power plants have to reap their profits from pricing at peak times – an uncertain basis to justify construction.

As well, Mr. Cramer said new producers cannot develop reliable forecasts about the electricity market in Ontario because of uncertainties about the reopening of the Pickering A nuclear reactors, and unclear dates about the closing of the province’s coal-fired plants.

He said the province’s willingness to continue to invest huge sums of public money in the increasingly over-budget renovation of Pickering A means there is no level playing field for private companies that must compete with OPG.

"It casts a cloud over the market," he said. "There is no private-sector test they have to meet. It’s very hard to envision a private-sector company putting $3-billion into a 30-year-old nuclear plant."

Various private-sector companies have filed almost 50 applications with the Independent Electricity Market Operator (IMO), the government body that manages the electricity system, to build new power plants. But almost no major projects have been launched, despite the fact that Ontario’s reserve margins of electricity are among the lowest in North America.

TransAlta Corp. is nearing completion of a power plant near Sarnia, while OPG and Atco Ltd. are raising money for a joint project they plan to build near Windsor. But other plans for major plants remain on the drawing board, and no new projects have been started in the past year.

Even TransAlta has said it will not invest more once its current project is finished, with chief executive officer Steve Snyder citing concerns about the bungling of the proposed privatization of power lines firm Hydro One and uncertain market rules. In early October, Stanley Marshall, CEO of St. John’s-based power company Fortis Inc., was also highly critical of the Ontario government’s handling of deregulation, saying it has discouraged big players from investing.

Jan Carr, an electricity consultant to the private sector, says private investment is critical to guaranteeing adequate future electricity supply.

"The entire electricity restructuring policy is founded on the principle that demand will be met through market forces," says Mr. Carr of Barker Dunn & Rossi in Toronto. "There’s no question we need it. And it’s not happening."

By contrast, he said the Alberta government has done a better job of attracting private investment by ensuring quick-sale assets to guarantee a competitive marketplace. (Alberta and Ontario are the only Canadian provinces to deregulate their electricity industries.) As well, Mr. Carr said there is not the same lingering political uncertainty in Alberta about possible rule changes, while Ontario has waffled in its plans.

Tom Adams, executive director of Toronto-based industry watchdog Energy Probe, says the private sector has been backing away from Ontario’s electricity sector for the past three years, deterred by delays in opening the market, by the spectre of the reopening of the Pickering A reactors, by major rate discounts offered by the Ontario government to big industrial clients, and by the reversal of the plan to privatize Hydro One.

Mr. Adams says electricity producers are also upset about the IMO’s system of pricing electricity.

Electricity imports are excluded from setting the spot market price, so market conditions are not directly linked to market pricing. Power plants outside Ontario can receive extremely high prices for exports to Ontario at peak times, but plants in Ontario receive far less for their electricity at the same time. This erodes the incentive to build plants in Ontario to capitalize on high costs at peak times.

"When it comes down to it, the big problem in Ontario is chaotic electricity politics," Mr. Adams adds. "All the other problems are fixable, but political chaos has a way of becoming a runaway brush fire."