The removal of regulatory barriers, initially erected by Ontario Hydro, could open up opportunities for the development of substantial quantities of CHP in Ontario, Canada. Pete Litster points the way towards greater independent power production in the province.

Combined heat and power (CHP) production only became a part of the electricity supply mix in Canada’s most populous province in the early 1990s. Yet despite numerous studies identifying significant possibilities for CHP, generation capacity increases have been small and look to remain stagnant into the future. Over time, a number of significant barriers to CHP were erected by the province’s recently defunct electricity monopoly, Ontario Hydro.

POWER SYSTEM PLANNING AND CHP PROCUREMENT

In 2004, the Ontario Power Authority (OPA) took over electricity system planning for the province following the breakup of Ontario Hydro. In August 2007, it released its Integrated Power System Plan (IPSP) which set out the types and amount of generation capacity that would be procured over the next 20 years. Currently 1658 MW of grid connected CHP exists in the province. This number actually represents a decrease from a high of over 2000 installed MW in 2004 and is little more than the 1375 MW that were on-line in 1994.

Grid connected CHP was first procured in the early 1990s through Non-Utility Generator (NUG) contracts and most recently has been procured through a Request for Proposals (RFP). However, the first CHP RFP, which was intended to procure 1000 MW, only received applications for 414 MW and offered contracts to all comers, defeating the purpose of the competitive RFP process. The OPA forecasts that total grid-connected CHP will be a less-than-impressive 1471 MW in 2027 – less than is currently operating.


A night view of the Ontario Provincial Police General Headquarters in Orillia photo: ontario realty corporation
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However, a new programme is being developed by the OPA that will build on the success of its nascent Renewable Energy Standard Offer Program (RESOP) as well as California’s success in procuring CHP through standard offers. The Clean Energy Standard Offer Program (CESOP) will pay a fixed rate for clean energy and high-efficiency power projects with a capacity of 10 MW or less. While this programme is yet to be released, the OPA intends that it will procure about 1000 MW of generation.

Yet even if this 1000 MW does come on-line in addition to the 1471 MW set out in the IPSP, that will only put installed generation a couple of hundred megawatts higher than its peak in 2004. A comparison of this objective to various independent feasibility studies will illustrate the OPA and Ministry of Energy’s lack of interest in CHP.

A SIGNIFICANT GAP

A study in 2000 for the Ministry of Natural Resources indicated 16,000 MW of technical CHP feasibility by 2020 and a more realistic 3880 MW that will be economically feasible by 2010. A follow up study in 2006 by the Pembina Institute indicated that 6700 MW of CHP had become economically rational. That an additional 2820 MW had become economic by 2006 can be explained by the assumption in the 2000 study that electricity prices would average $40/MWh over the decade, while in reality IESO data from 2002–2008 show prices averaging $56/MWh.


Atrium inside the Ontario Ministry of Agriculture Headquarters, Guelph – the building has a natural gas-fired cogeneration unit
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Considering these studies it is clear that Ontario is procuring significantly less CHP than is economically feasible. This is contradictory to Ontario’s load order, which determines priorities for generation procurement and is designed to pursue cost-effective energy efficiency and clean energy before more conventional supply sources such as nuclear and stand-alone natural gas generation.

This article examines why procurement hasn’t reflected this potential and how policies could be adjusted to bring more CHP on-line in Ontario.

NON-CONTRACTED CHP IN ONTARIO

It is important to note that some non-contracted CHP projects exist in Ontario, largely in government or university buildings with the largest installations being the University of Toronto’s 8 MW unit, York University’s 10 MW unit, and Queens University’s 15 MW unit. The government buildings containing CHP units are described in greater detail in an article by Anita Susi – see COSPP May–June 2008.

While the lion’s share of generation is still contracted by the OPA, a growing number of small CHP projects in the range of several hundred kW are being installed. An important driver for this is a change in the regulations governing emergency power systems in multi-residential buildings in Canada. The previous standard required on-site fuel storage, but has been amended to allow piped natural gas to fuel the systems. As a result, combined heat and emergency power (CHeP) systems are starting to come on-line, which are able to run far more often than conventional emergency systems, greatly increasing their value. It will therefore be worthwhile to examine the barriers for Ontario’s non-contracted generators.

MAIN BARRIERS TO CHP IN ONTARIO

Input from various Ontario CHP stakeholders including electricity industry associations, power developers, OPA CHP contract holders, regulators, academics and environmental groups identified the following barriers to CHP in Ontario.

■ Ontario electricity prices are quite low compared to many neighbouring jurisdictions and, in the view of many Ontario stakeholders, artificially low. Electricity prices in Ontario have historically been low thanks to abundant hydro electric resources. The provincially-owned Hydro Electric Power Commission wasted no opportunity to remind Ontarians about their right to this ‘power at cost.’ However, cheap hydro resources had mostly been harnessed by the 1960s and the newer, costlier forms of generation benefited from public subsidy in order to maintain the institutionalized expectation of low prices.

The province’s nuclear stations have had their capital cost overruns covered by Ontario taxpayers through the Ontario Electricity Finance Corporation (OEFC) and supplemented by a debt retirement charge now lobbied on rate payers, a guarantee which allowed them initial access to cheap capital. The full costs of accident liability, decommissioning and storing spent fuel are also guaranteed by the provincial government, which further reduces, again artificially, financial risk to generators and lowers electricity prices. In addition, there is no mechanism to monetize the cost of pollutant emissions, including greenhouse gases, from the province’s coal-fired generators allowing them to produce electricity more cheaply than many other jurisdictions would allow.

The artificially low costs for nuclear and coal generation make it more difficult for CHP to compete on price. The low electricity price also increases spark spread risk for generators using natural gas.

■ The Ontario Power Authority (OPA) is responsible for power system planning in the province meaning that it gets the final say over how much of each kind of generation connects to the grid. Its 2007 Integrated Power System Plan calls for 14,000 MW of nuclear generation by 2027, an initiative which will command 44% of the plan’s budget.

With the plan deep into a year-long review it has become clear that the OPA is refusing to consider less nuclear generation, despite reports from the Pembina Institute that demand could be met more cost-effectively by increasing conservation and demand-side management as well as CHP. In fact, if the 6700 MW of CHP declared economically rational by Pembina in 2006 came on-line, it could offset the need for the entire 4000 MW Bruce Power New Build Project. (Bruce Power is a private nuclear generator).


A 172-ton York/Johnson Controls absorption chiller uses exhaust heat from cogeneration to supply space cooling at One Stone Road in Guelph photo: ontario realty corporation
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With its commanding share of the funding for new generation, nuclear power presents another barrier to CHP in that it dominates Ontario’s baseload market, a niche for which most industrial CHP is best suited. Without a mechanism for other forms of generation and conservation to challenge nuclear power on cost, CHP is essentially shut out of the baseload market where it could make a significant contribution.

■ Ontario Hydro always considered distributed generators as customers. On-site CHP producers are therefore disadvantaged right from the outset as the electricity rate structure is riddled with unnecessary and unfair system charges, a legacy of this deftly monopolistic organization. Efforts to prepare the Ontario electricity system for privatization in the late 1990s resulted in all entities being restructured for profit maximization. The transmission and distribution codes were written with this in mind and a number of system charges to distributed generators resulted. These charges were designed with the objective of making distribution companies attractive acquisition targets for investors rather than reflecting the actual costs of distributed generation.

The fact of the matter is that centralized generators do not pay to use the grid while distributed generators pay various transmission and distribution charges. Many on-site CHP generators must pay a standby charge for the infrastructure needed to import electricity from the grid in case their units shut down, a cost that again does not reflect the value that these generators provide to the system.

Considering the many advantages that distributed CHP generators provide that centralized generators cannot, such as reduced transmission losses, offsetting transmission system upgrades and providing greater system resilience, they should at least be treated equally.


The cogeneration unit at the Ontario Police College in Aylmer, ON has been up and running for a year. Shown is the view from the building’s rear exterior photo: ontario realty corporation
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On-site CHP generators are even obliged to pay the debt retirement charge, designed to pay down the province’s stranded nuclear debt, which has no relation to on-site CHP production and costs one Toronto-area generator $400,000 or 6% of annual costs.

Decentralized electricity production is an asset to the system and the various system use charges essentially price these generators as a liability. If these charges were removed and CHP could compete with wholesale prices, many more projects would be viable.

■ The growing market for small-scale CHP systems to replace gas boilers and emergency generators must contend with an immaturity of the market for capital equipment. For example, a 65 kW CHP system could cost four times as much as a similar-sized gas boiler – capital cost incentives similar to those in California would be most helpful for generators of this size.

■ Finally, the substantial potential for CHP in the industrial sector could likely be another casualty of the current economic turmoil in Ontario. When electricity prices rose sharply after the Darlington nuclear station came on-line in 1990, Ontario Hydro offered load retention rates below the market cost of power to discourage large industry in Ontario from on-site generation. This practice has continued and has bred unfamiliarity with on-site generation options like CHP for the majority of industrial customers.

Increasingly prohibitive installation costs and long payback periods on capital equipment present significant risks for industries struggling just to stay in business. Logically, industry will focus on investments in its core business during times of hardship and few industries in Ontario would consider CHP part of their core business. This will be a profound barrier to industrial CHP for the foreseeable future.

RECOMMENDATIONS

 

Level the playing field

The Ontario Energy Board, provincial regulator for the electricity system, is in the process of reviewing connection cost responsibilities for distributed generation. Increasing interest in small-scale generation will continue to expose the regulatory barriers to distributed CHP. The following are the most crucial actions to take:

  • remove debt retirement charge for new, clean means of generation
  • remove standby charges
  • pass offset wholesale charges on to generator – currently transmission and market administration costs that on-site generators offset are passed on as savings to consumers, instead of to the generator who made the cost-saving investment.

A two-tiered Clean Energy Standard Offer Program (CESOP)

Standard offers helped to procure 25% of California’s CHP generation, largely as a function of offering a set price for power purchase which significantly reduced installation costs to project proponents. This presents an advantage over an RFP process, where proponents must base their bid price on models built on assumptions of uncertain market prices for electricity, which was likely the reason for the lacklustre response to the OPA’s first CHP RFP.


Aerial view indicates the size of the Ontario Ministry of Agriculture Headquarters at One Stone Road in Guelph. photo: ontario realty corporation
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Considering Ontario’s growing familiarity with this policy thanks to the RESOP, a second tier offer for larger generators is worth pursuing:

  • Two standard offers
    − one for 10 MW or less to achieve the goals of procuring more distributed generation
    − one for more than 10 MW to add significant clean energy capacity
  • Pay price premium whenever there is a heat load to serve, not just peak times
    − like a wind turbine’s dependence on the flow of wind, CHP is dependant on a heat load to achieve high efficiencies, RESOP contracts pay whenever the generator can generate, so should CESOP
  • Use price discovery for 10 MW+ standard offer
    − the offer for larger projects should set a low price premium to see how many bids it receives from large experienced developers and raise it until the most efficient price is set.

    Abolish the distinct status of nuclear power

    While impressive, this form of generation is being subsidized at the expense of other cleaner and cheaper supply options that can provide greater system resilience through a more diverse supply mix. The following changes would ensure a level playing field for other supply options such as CHP to challenge nuclear for baseload market share:

    • include the full costs of accident liability, storing spent fuel and plant decommissioning when assessing costs of bringing nuclear power back on-line
    • no sharing of generation project cost overruns with ratepayers and taxpayers
    • consider less nuclear power in the supply mix outlined by the IPSP

    Increase investment in conservation

    As CHP is quite often used in an on-site application, it is often a form of load reduction. As a result, it can qualify for $9.9 billion in conservation spending that the OPA has proposed for the next 20 years. While peak load conservation initiatives are most common in Ontario, pursuing baseload conservation would not only set up CHP as a great candidate to help meet the goals, but also slow demand increases on which the justification for nuclear power relies. The recommendation here is simple: pursue baseload conservation initiatives using CHP.

    Incentives for small-scale capital equipment

    In order to help the market for small-scale capital equipment to mature and thus bring down prices, Ontario needs capital cost incentives like the ones used in other leading jurisdictions such as California. Some examples of these are:

    • low-interest loans
    • tax credits for capital expense
    • small self-generation incentives in the form of electricity consumption rebates
    • production tax credits for CO2 emissions reduction.

    CONCLUSION

    US recessionary pressures are being felt most sharply in manufacturing-heavy Ontario and distributed energy development holds opportunities for job creation and economic activity that the province needs. High-efficiency generation sources like CHP could provide sustainable economic opportunities considering the tight supply of conventional fuels. If desperate times call for desperate measures then this may finally be the right time for Ontario to allow for greater independent power production and invest in CHP.

    Pete Litster is at York University, Toronto, Ontario, Canada.
    e-mail: petelitster@gmail.com