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Perspective

Why Ontario needs a competitive market.
Fortnightly Magazine - May 2004

not the only issue troubling potential developers. Equally problematic was the fate of OPG's mothballed nuclear stations. The shutdown of seven of OH's nuclear facilities (an eighth had been mothballed earlier) in 1997 transformed Ontario from a major power exporter to an occasional power importer. Prior to the shutdown, Ontario had substantial excess capacity. Developers needed to grapple with whether, and when, the nuclear facilities would be restarted, as a full restart would delay need for new capacity by several years. Indeed, announced plans by OPG and Bruce Power (an entity formed to lease one of OPG's three nuclear generating complexes) called for restarting six of the eight mothballed units. Bruce Power successfully restarted two of the four units under its control (it originally had no plans to restart the other two units). To date, OPG has managed only to activate one of the four units it planned to bring back to service, massively over budget and behind schedule.

Thus, at market opening, developers could reasonably have believed that approximately 2,100 MW of base-load capacity would be brought back on line over a relatively short time period. Under such circumstances, to say that the market has "failed" due to the fact that substantial new capacity additions have not been built is absurd. Delaying investment was completely rational on the part of the private sector; indeed, a centrally planned electricity monopoly that expected to restart mothballed nuclear reactors would have behaved in exactly the same way. Given that capacity addition decisions have been rational, and prices have not been anomalous, why are some policy-makers in Ontario so keen to turn their backs on the market?

The recent change of government in Ontario has further complicated electricity policy in the province. The Liberal government has committed itself publicly to shutting down all coal-fired capacity in the province, potentially as early as 2007. More than 6,000 MW of OPG capacity, or approximately 20 percent of Ontario operable capacity, is coal-fired. While it is debatable whether shutting down coal-fired power stations is the least-cost way to achieve a desired level of improvement in Ontario environmental conditions, doing so undoubtedly will increase the cost of electricity. Completing the phase-out by 2007 would be, at a minimum, financially onerous and may pose technical challenges; more likely, the process will take place over a period of at least five years. Regardless, retirement of the coal stations makes development of new capacity an imperative. Again, however, developers face a conundrum: How can they be sure that, if they build new capacity to replace the coal stations, the government will follow through on its commitment to shut down the coal plants?

Current plans call for the Ontario government to issue a Request for Proposals for more than 2,000 MW of new capacity. Crucial questions, such as who the counterparty will be and how the counterparty will convey the power to end users, have yet to be asked. In the meantime, a committee established to review the operations of OPG and suggest potential changes has made its recommendations. Its findings would essentially