Update on Ontarios Clean Energy Standard Offer Program

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November 18, 2008

• Update on Ontarios Clean Energy Standard Offer
  Program
• Jim MacDougall

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Presentation Overview

• Clean Energy Standard Offer Program Background
• Development of the CESOP
• Going forward

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Clean Energy Standard Offer Program

• June 15, 2007 OPA directed to develop CESOP,
  with objective to launch by end of 2007
• CESOP eligible projects are
• Located in Ontario with commercial operating date
  after August 18, 2005
• Installed generating gross nameplate capacity
  10MW
• Project never subject to contract with Ontario
  Hydro, Province or OPA
• Connected to an eligible local distribution
  company on IESO Grid, or to LDC load customer

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CESOP Background

• Stakeholder concerns raised during Fall 2007
  program development
• fixed 8-month payment schedule excluded four
  shoulder months
• revenue/cost uncertainty of fixed payments on top
  of HOEP revenues (HOEP-plus)
• CHP projects with un-hedged NG risk will not sign
  fixed price Power Purchase Agreements (PPA)
• OPA worked with consultant (Navigant Consulting
  Inc.) to revise pricing approach to address above
  concerns
• Current approach value derived from avoid
  capacity, with appropriate adjustments

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CESOP Approach

• Guiding Principles for CESOP
• The Program should be kept simple
• Obtaining value for ratepayers
• Adhere to distribution transmission limits
• Consistency with RESOP and CHP II (where
  appropriate)
• Expected Project Types
• 10 MW projects, connect to eligible LDC on IESO
  grid
• If using natural gas, must be combined heat
  power (CHP) projects
• By-product fuel-fired generation projects (e.g.
  flue-gas)
• Under-utilized energy (thermal or mechanical)
  projects

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CESOP Approach

• Payment schedule
• Based on performance of representative NG-fired
  CHP e.g. Virtual Power Plant (VPP)
• provide a 12-month market-sensitive schedule
  (replacing fixed 8-month schedule)
• VPP deemed to run when economic, but only
  weekdays 7 AM - 11 PM (all year)
• strong incentive to operate efficiently, no
  penalty for annual base-load operation
• Separate PPA prices for non- NG-fired CHP
  projects
• By-product and underutilized energy projects
  dont have NG fuel price risk costs largely
  fixed in money terms once financed and built
• Higher incentive during weekday and a lower price
  during nights and weekends, without penalizing
  base load output

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CESOP Payments

• CESOP Approach CHP capacity payment derived from
  capacity value of CCGT
• CCGT is used because
• CCGT assumed to be marginal capacity
• it has an output profile closest to NG-fired CHP
  (Frame CCGT costs taken from IPSP)
• CESOP CHP value is a combination of
• avoided cost of the marginal capacity it
  replaces/displaces (i.e. CCGT), plus
• adders for differences in attributes between
  CESOP as distributed generation and central CCGT

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CESOP CHP - Capacity Payments

• Market prices are inadequate to attract
  investment for CHP or for CCGT
• Derivation of CESOP capacity value includes four
  components
• Deemed market revenue of the representative CCGT
• Calculations use gas, electricity prices
  extrapolated from 2003-07
• Capacity payments (based on the required
  above-market revenue of CCGT generation)
• Avoided transmission losses adjustment
• Avoided transmission capital costs adjustment

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CHP Capacity Payments contd

• Natural Gas Fuel-fired CHP (with NG price risk)
• OPA calculates total revenue, from the market,
  plus the OPA top-up, that the reference CHP would
  require
• This is called the Net Revenue Guarantee (NRG)
• 17.25/kW-month for projects with COD after Aug.
  31, 2008 (approx 207,000/MW-yr)
• 15.97/kW-month for projects with COD after Aug.
  18, 2005 and before Sept. 01, 2008 (approx
  192,000/MW-yr)

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CHP Capacity Payments contd

• When market revenues are insufficient for a
  reference combined heat power plant, all CHP
  projects will get a Contingent Support Payment
  (CSP).
• Payment is based on the assumed operation of the
  reference combined heat power plant (or virtual
  power plant VPP)
• OPA calculates Net Market Revenue (NMR) that the
  reference VPP would earn during a 16 hour
  business day, 12-month operating schedule
• VPP deemed to run when economic, but only
  weekdays 7 AM - 11 PM (all year)
• Difference between NRG and NMR is the support
  payment that OPA will provide to all CHP contract
  facilities
• Facilities choose own operation

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CSP to Gx NRG (fixed) minus NMR (deemed)


CSP (paid from OPA to actual physical generators)
NRG (fixed capacity payment) NMR (revenues
that OPA deems would have been earned by the
Virtual Power Plant
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CESOP Requirements

• Learn from RESOP experience with queue and
  contract prerequisites
• Raise the bar for the distribution queue
• Completion Security
• Project milestones
• Increase certainty around project progress and
  completion

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CESOP Requirements

• OPA will impose availability requirements
• Cannot simply receive CSP if out of service
• OPA will require 15 useful heat output from CHP
  projects
• Mirrors CHP I and II
• OPA will financially settle CHP contracts
• Monthly production data not required
• Payment derived from capacity payment less deemed
  market revenue
• Regardless of actual operation, two 3 MW projects
  would earn same monthly revenue

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Payments for PPA Projects

• By-Product Fuel-Fired
• By-products of industrial or manufacturing
  processes used as fuels
• Under-utilized Energy Projects
• Otherwise wasted thermal or mechanical energy

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Payments for PPA Projects

• Will be offered Power Purchase Agreements (PPAs),
  which are appropriate because
• dont have NG fuel price risk
• costs largely fixed in money terms once financed
  and built
• Higher incentive during weekday days (7 am to 11
  pm)
• 11.7/kWh
• Lower price during nights and weekends
• 5.1/kWh

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CESOP Next Steps

• Continued stakeholders engagement
• Finalize gas price risk mitigation approach
• We anticipate a positive industry response
• Proposed changes should be aligned with the
  Government's policy priorities for distributed
  generation
• Program needs to be consistent with September
  2008 IPSP Directive

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For Additional Information

• OPA Standard Offer Program Website
  www.powerauthority.on.ca/sop
• OEB Website http//www.oeb.gov.on.ca for more
  information on connections and queuing
• Questions?