Power firms were paid millions not to generate power

By John Spears Thu Mar 17 2011
http://www.moneyville.ca/article/956001--power-companies-paid-millions-not-to-generate-elecrtricity?bn=1

If you’ve paid a steep hydro bill lately, you might want to take a deep breath before reading this.

Here’s what Ontario electricity market’s official watchdog has turned up in its latest report:

• Since Ontario’s electricity market opened in 2002, electricity generators have been paid millions for not producing power;

• Traders have been paid millions more for not importing power;

• One generator has reaped millions by repeatedly switching itself off, then back on.
And consumers have paid the tab.

Consider this sentence from the panel’s report, outlining payments called CMSC credits that have been awarded to a handful of market players in northwestern Ontario:

“Of the $360 million in CMSC payments, $161 million (45 per cent) was paid for not generating, and $146 million (40 per cent) was paid for not importing . . .” the panel says.

It notes deadpan: “This design has a few fundamental defects.”

The panel doesn’t stop there.

It says one unnamed generator has discovered a loophole allowing it to wring nearly $19 million in extra payments out of the system by unnecessarily switching on and off during the day — the equivalent of a working stiff earning a bonus every time he makes a coffee run to Timmy’s.

The Independent Electricity System Operator says that it has been working to curb the expensive practices. And the Ontario Energy Board has asked for a report next months on what steps are being taken.

Here’s how the panel says some players have been working the system:
Some generators, especially in northwestern Ontario, have exploited the fact that transmission lines can only carry so much power. That’s called “congestion.”

A few smart operators have figured out how to anticipate when congestion is likely, and to offer to sell power at an attractive price during that time.

The bid is accepted, but when the time comes to send the power, there’s no room on the transmission line. Nonetheless, the generator still receives what’s called a “constrained off” payment because originally the bid had been booked.

Power importers in the northwest playing the same strategy do even better than generators. The panel figures they get paid more than three times as much as importers elsewhere in the province by collecting congestion payments.

Money for the extra payments is built into the price paid by every electricity user in the province.

Overall, the panel says market players in the northwest area of the province have scooped up 33 per cent of the congestion payments since 2002, although they account for only 4 per cent of generating capacity and 10 per cent of import capacity.

It does not name any of the players.

A second strategy has been exploited more recently largely by an unnamed generator, which has discovered there’s money to be made by switching off and on.

Under some circumstances, fossil fuel generators can qualify for guaranteed payments that recognize the costs a unit incurs when it starts up.

Not only do those who qualify get a guaranteed cost payment; they get a guaranteed floor price for their output for a certain length of time. And there’s no ceiling; if the market price happens to go higher, they get the improved price.

The panel gives the example of a generator that shuts down for two hours, then restarts. By staying online, the generator would have collected $10,000 in revenue. But by shutting off, then back on, a qualifying generator gets about $50,000 in revenue, which all ultimately comes from the pockets of consumers.

In a six-month period last year, the panel found 426 occasions when generators had shut down, then restarted in two hours or less. One generator was responsible for 336 of the shut-downs.
It figures that cost the marketplace about $19 million — 95 per cent of which went to a single player.

Terry Young, vice-president of the IESO, said in an interview that the agency is aware of the issues and has started a consultation process with market participants about changing some rules.

But it will take some time, he said: “You’re talking about a complex situation; you’re not going to get this done by lunch.”

He noted that the province’s long term energy plan calls for more north-south transmission capacity, which would make it easier for power to flow from northwestern Ontario and trigger fewer congestion payments.

Young said the agency’s compliance staff monitors the market, and are talking to some of the players whose actions were highlighted by the panel, such as frequently switching on and off.
“We do recognize this is an area that needs to be dealt with,” he said.

The panel has suggested that generators should be able to qualify for the shut-down and start-up program only once per day. The IESO will study that option and others, he said.