(December 4, 2013) The Ontario Power Generation (OPG) announced its 3rd quarter results via a press release on November 14, 2013 and the media ignored it. It was full of bad news.
Net income dropped to $30 million from $139 million in the same quarter in 2012. Operations, maintenance and administration costs were up $74 million (12.1%) and depreciation and amortization by $79 million (48%). Generation had fallen yet again, by 3% or 600,000 megawatt hours (MWh).
To put the latter in context: for the nine months ended September 30, 2013, OPG produced 61 terawatt hours (TWh) and in 2004 they had produced 78.9 TWh for a decline of 17.9 TWh (23%) or enough to power 1.8 million Ontario homes. Gross revenue for the 9 months ended September 30, 2013, compared to the same period in 2004, fell by $864 million or 19%, and compared to 2003, generation was down by 21.1 TWh (26%), and revenue by $1.5 billion (29%). So why has generation fallen and with it OPG’s gross revenue?
There are many reasons but chief among them was the push for renewable energy and the decline in consumption; the latter down 12.1 TWh, or 8% from 2004, despite a rising population. The consumption decline has been principally caused by rising prices while the former is responsible for driving up those prices. Along with those two drivers has been the destructive Liberal tendency to instruct OPG to carry out multimillion-dollar projects without proper cost/benefit studies.
Before the press release announcing OPG’s 3rd quarter results they had quietly applied to the Ontario Energy Board for a significant rate increase. They cited a number of issues in their rate application: the completion and commissioning of “Big Becky” (the Niagara tunnel), the fact they were obliged to “spill” hydro when base-load was too high (usually the fault of wind and solar generation), the restructuring at Lambton and Nanticoke (coal phase-out) and most significantly a request that they be granted a fixed price for “unregulated” hydro. The latter currently generates revenue based on the hourly Ontario electricity price (HOEP) which meant OPG received 2.8 cents per kilowatt hour (kWh) so far, in 2013 and 2.3 cents per kWh in 2012. Bumping that up to the 5 cents per kWh OPG is asking for, could generate an additional $325 million alone based on 2012 unregulated hydro generation (12.1 TWh) and would raise the average bill by almost $6.00 per month.
When this application was discovered, the media was all over it, perhaps because it was discovered following the October announcement by the Ontario Energy Board (OEB) that electricity rates were to jump 12.2% per annum commencing November 1, 2013.
To reflect on the one positive political interference benefiting OPG in the 3rd quarter (perhaps the saving grace) they obtained a payment to maintain one of the units at the Thunder Bay coal plant as noted in their report: “The higher contract revenue includes $32 million from the Thunder Bay Reliability Must Run contract related to the period from January 1, 2013 to September 30, 2013, recognized during the third quarter of 2013” .
That nine-month contract came after OPG had originally been instructed to covert the plant to gas and followed a later OPG announcement that they would not proceed with the conversion. Without that one time payment OPG may have suffered a loss in the recent quarter.
Now those who follow Ontario’s energy news will recall that just two weeks ago our Energy Minister, Bob Chairelli announced the Thunder Bay plant would be converted to “biomass”. The estimate of that conversion cost is unknown but if Atikokan (refer OPG’s “Fact Sheet”) is an example, the cost will be significant. Atikokan’s budget is set at $170 million. The Thunder Bay plant is expected to generate electricity at 2% of its capacity and Atikokan 8% of its rated capacity. The “Fact Sheet” also lists the other major project that OPG is working on. The Mattagami run-of-river $2.6 billion hydro project will produce power when Ontario is unlikely to need it; during the spring freshet! This is the time when wind and solar produce at high levels and when Ontario’s peak demand is at a low level. Those two projects, when completed respectively in 2014 and 2015, will generate another rate increase request from OPG. At this point, the cost and completion date of Thunder Bay is unknown.
Projects such as the Atikokan conversion and the Lower Mattagami are contained in OPG’s balance sheet under the heading, “Regulatory assets,” which as of September 30, 2013, total $6.1 billion and included in that “asset” are $4.9 billion “Pension and Other Post-Employment Benefits” which will be recovered from ratepayers over the next 12 years as noted in a recent Financial Post article. This co-incidentally represents the shortfall in OPG’s pension plan which ratepayers will now pay for over the agreed time period.
While OPG may have had better success in containing their costs without those grandiose plans sent from above they are bound to do as they are told by the governing Liberal Party who have imposed directions to them that, in all likelihood, make no economic sense. The direction to build “Big Becky” came from the Liberals and had been previously rejected by earlier governing parties. The build out of Mattagami, the conversion of Atikokan and now of Thunder Bay, are being done at the behest of various Liberal ministers over the past several years without the benefit of a cost/benefit study.
OPG are simply limping along and their debt has grown from $3.4 billion (after the restructuring in 1999) to $5.6 billon (up 65%) as has their pension liability. OPG may once again wind up with another large chunk of debt which a future governing party may again label as “stranded”. At that point they will add it to the pile already present on the books of the Ontario Electricity Financial Corporation further extending the “debt retirement charge” for future ratepayers.
The recently revised Long-Term Energy Plan indicates the role of “whipping boy” for OPG has not yet been shelved!
Parker Gallant is a retired bank executive and a former director of Energy Probe Research Foundation. As with all independent bloggers on this site, Parker’s views do not necessarily reflect those of Energy Probe.
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Reblogged this on Cold Air and commented:
The construction of the next stranded debt?
another lie from Parker.
Peak time for solar is June and July
Setting aside legitimate questions about project management and cost control, at least the biomass conversion of Thunder Bay makes more sense than Atikokan. The potential at least exists (economics yet to be examined) to increase utilization of one or two Thunder Bay units and to development a district heat system that could use waste heat (in the form of hot water) from those those units. Atikokan is too far away from any population density for waste heat utilization-based district heat to be part of its story. Years ago I strongly advocated for TB over Atikokan given OPG’s commitment to make a market for Ontario bio waste.
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