"How Does Market System Encourages Investment Climate"
February 2, 2007 Dr. Jan Carr President Ontario Power Authority Suite 1600 120 Adelaide Street West Toronto, ON M5H 1T1 RE: OCC Submission on the OPA’s Discussion Paper # 8: Procurement Options Dear Mr. Carr: The Ontario Chamber of Commerce (OCC) is a federation of 160 local chambers of commerce and boards of trade in the Province of Ontario, representing 57,000 businesses of all sizes, in all economic sectors and from every area of the province. The OCC’s mandate is to advocate strong policies on issues that affect its membership throughout Ontario’s business community. We appreciate the opportunity to comment on the Ontario Power Authority’s eighth discussion paper on Procurement Options that will be used to develop the Integrated Power System Plan (IPSP). Broad consultations, including active participation of the business community will be critical in forming OPA’s procurement processes for conservation and demand management (CDM) and generation resources to meet Ontario’s power system needs. Energy is of major strategic importance to Ontario’s long-term economic health and competitiveness. Our members have identified reliable, adequate and affordable energy supply as a priority of the government. The Ontario Chamber of Commerce energy policies are enclosed for your consideration. Our more specific comments on your discussion paper are set out below. I. Procurement Process The Ontario Chamber of Commerce believes that the OPA, where it is possible, should allow the electricity sector participants develop the CDM and generation requirements outlined in the IPSP. The Ontario Chamber of Commerce is content that the OPA assumes a role of a guarantor of “last resort” in the procurement process, in that “its contracts resulting from procurement initiatives are to be used to support investment only insofar as that investment is not occurring through other means”. We also acknowledge that the OPA is committed to undertake market scans to assess the existence and adequacy of programs and efforts by participants targeting a specific outcome. These scans include assessing whether: the market has mechanisms to ensure resources are developed in a timely manner to meet Ontario power system’s needs, there is sufficient liquidity in the forward-contracting market to enable new investments, sufficient demand and supply-side competition exists, and the necessary market features are developed, including a forward exchange encouraging long-term contracting, with an array of financial risk hedging instruments available and ensured market liquidity. The OCC is encouraged that OPA’s has outlined 11 principles guiding the procurement process, amongst which are principles important to our membership: fairness, transparency, competitiveness, accountability, flexibility and enforceability. Of greatest importance is that OPA has proposed the standard offer procurement and non- competitive procurement to complement the competitive procurement. The Standard Offer procurement is of particular importance for small scale community power projects throughout Ontario and we have seen strong support from our membership for its implementation. 1. Competitive procurement The OCC is pleased that the discussion paper describes the competitive procurement as OPA’s preferred procurement mechanism. Only fair competition, where market conditions are present, could ensure efficient results and maximize the value of proponent’s offerings. The OCC also is supportive of stakeholder consultations and options like surveying potential participants before issuing a Request for Proposal (RFP) though a Request for Information (RFI), a Request for Expression of Interest (RFEI) and a Request for Qualifications (RFQ). These mechanisms allow screening of participants and early identification of potential losers. Nevertheless, the OCC has concerns that the registration fees for submitting RFP and the complicated and expensive bid process could keep out some less buoyant proponents and their drop-off could result in less competitive tension. The OPA’s proposed payment of honoraria to losers to offset the costs of preparing and submitting proposals could be a viable solution to level up the number of proponents. A reasonable level of prudence in paying honoraria is highly advisable to avoid abuse. Some OCC members have expressed concerns on the bias in the competitive procurement process and we are happy to notice that OPA proposes a Fairness Advisor to oversee and monitor the fairness and integrity of the procurement process. 2. Standard Offer Procurement The Ontario Chamber of Commerce believes that a Standard Offer Contract (SOC) is the preferred procurement process for small scale CDM and generation projects, particularly those from renewable or alternative energy sources. By definition, a SOC is structured more simply than competitive procurements and offers a fixed pre-determined price in exchange for delivery of a resource. Thus the SOC provides a more stable and predictable investment climate for generation participants and therefore supports a more viable and reliable electricity system going forward. What Ontario’s system needs is more predictability and certainty. SOC helps to provide some of that. Ratepayers will benefit from the steady generation investment in the system they hope to be able to rely on going forward. Small projects offer a significant advantage, as the sites could be located in near proximity to the customer, greatly reducing line transportation losses. Yet small generation is challenged by economies of scale. These natural factors should be recognized by granting projects below 10 MW a slightly higher price. Long term contracts ( 20 years) should continue to be the norm, as the amortization of capital over a long period provides least cost to consumers. Long term Power Purchase Agreements are required to attract financing for renewable energy resources capable to of-set the up-front high capital costs. The Ontario Chamber of Commerce recommends the OPA to utilize the price as a tool to decrease of increase ongoing deployment over time. At the same time, this price should not be below the previously announced “minimum guaranteed price”, adjusted for inflation. A remaining concern it that the discussion paper does not explicitly say whether the SOC beneficiaries, can or can not, connect directly to the transmission grid. Connection to both distribution lines and transmission grids, where it is economically to do so, should be open options provided economic checks work. 3. Non-competitive procurement The OCC recognizes that under specific circumstances, like for example, a localized reliability need, or a unique advantage in delivering the resource (i.e. a natural monopoly), the OPA may initiate a non-competitive procurement process, subject to negotiation. The OCC urges the OPA to limit the use of the non-competitive procurement process to those cases where no alternative and/or reliable supply is available. These contracts should be restricted to a limited, short- to mid-term-, period of time till more providers emerge and/or conditions for competitive bidding are created. 4. Evolving CDM procurement The Ontario Chamber of Commerce is pleased that the OPA disintegrates CDM procurement from its generation procurement options. Recognizing that a megawatt saved is not the same as a megawatt generated; the OPA proposes a different approach to employ financial and technological drivers of the CDM. Human behavioural parameters present in CDM are not present in generation capacity initiatives and therefore the procurement processes applied for CDM should account for this difference. Therefore, the procurement process for CDM should be based on a performance contracting framework. Also, the CDM procurement arrangements should focus on the proponent rather than the end-user. Furthermore, pre-qualifying Energy Management Firms will create a standard of performance in engineering, project financing, customer standards, training, implementation monitoring and evaluation. As such, the last element could create an environment where more competitors could bid for CDM competitive procurement. Recently, in result of an urgent supply challenge in downtown Toronto the OPA granted a CDM non-competitive procurement contract to Building Owners Management Association that due to its unique position was selected as a delivery agent able to deliver results promptly. This is an excellent example of short term solution, but OPA should aim to create a competitive environment for CDM procurement in long term. II. Electricity Sector Development The Ontario Chamber of Commerce is content to see that the OPA, as highlighted in its discussion paper, is committed to facilitate greater competition within Ontario’s electricity sector and implement measures to reduce reliance on OPA’s procurement in the future. The discussion paper mentions the cooperative effort of the OPA and the Independent Electricity System Operator (IESO) to “implement a long term transition to a market- driven electricity system that encourages conservation and energy efficiency, reliability of supply, economic efficiency and the opportunity for consumers to transfer commercial risks to CDM and generation developers”. Despite this commendable commitment, our members have indicated that the lack of an open electricity forward exchange and the caps on prices in the electricity market distort business choices. Apart from the lack of long-term price predictability, this affects both end-users effective prices, discouraging conservation and sending wrong signals to investors who become hesitant to invest in new generation. The industry welcomes the continuation of electricity auctions until a time when the market will have enough forward electricity to function on its own. One of other alternative interim measures, the OPA’s paper mentions, is the recently introduced concept of Load Serving Entity (LSE), a company, that would have the ability to contract its own supply, or for its customers. It is expected that creating an LSE secondary market could help increase electricity market liquidity. The OCC favours the proposed OPA’s flexible approach meaning that existing market conditions and evolving market mechanisms would be considered when developing and administering different forms of procurement contracts. Possible procurement includes: “contract-for-differences” and power purchase agreements. Unfortunately the discussion paper does not elaborate on how these would be used and the OPA did not commit to any timeframes. Recommendations: The OCC believes that time is of essence and sending the right signals to new electricity generation and CDM developers is crucial. Therefore the OCC urges the government and the OPA to: 1. Continue to regard the OPA procurement process as a transitional measure needed to create market conditions for new renewable and alternative generation and CDM programs in Ontario. 2. Guarantee that the OPA’s procurement process is transparent, fair, competitive, accountable, flexible, enforceable and open to all players. 3. Continue to limit OPA’s procurement initiatives to support investment only insofar as that investment is not occurring through other means. 4. Create conditions for competitive environment, including the creation of a forward exchange to help facilitate market liquidity, long-term contracting, and long-term price predictability. 5. Give preference to competitive procurement option wherever contracting large and medium scale generation or CDM development and leave the Standard offer procurement for small scale community projects, mostly renewables, alternative energy, combined heat and electricity generation. 6. Differentiate between generation and CDM development as being different by nature and design procurement distinct contracts accommodating their unique economic drivers. 7. For Standard Offer procurement ensure long-term contracts between the generator/CDM developer and the OPG or other governmental agency and do not limit their interconnection to distribution lines. 8. Restrict non-competitive procurement process to those cases where no alternative and/or reliable supply is available and restrict contracts to short-term, medium- term only. 9. Keep all processes and mechanisms flexible and adjust them to existing and evolving market conditions. 10. Continue to consult businesses and energy stakeholders throughout the process, and publish the results of the reviews. Thank you for this opportunity to share our views. If you have any questions or comments on any of the above issues, your staff may contact Stuart Johnston, Vice President, Policy and Government Relations, at (416) 482-5222, extension 232. Yours sincerely, Len Crispino President & CEO ccs: The Honourable Dalton McGuinty, MPP, Premier of Ontario The Honorable Dwight Duncan, Ontario Minister of Energy MPP, Howard Hampton, Leader of the Ontario NDP, MPP, John Tory, Leader of the Ontario PCP MPP, John Yakabuski ON PCP, Critic, Energy Peter Love, Ontario's Chief Energy Conservation Officer OCC Membership encl: As the most diverse and most influential business group in the province, the Ontario Chamber of Commerce works closely with governments, labour, academia and various other groups to create a stronger and more vibrant economy in Ontario and the surrounding regions. The OCC represents 57,000 members through 160 affiliated chambers of commerce and boards of trade throughout the province. The OCC has worked on behalf of business since 1911.