Oakville gas plant costs $700M, says energy consultant

October 11, 2012 - All News

Ontario electricity users are on the hook for more than $700 million in extra fees because of the McGuinty government’s decision to move a gas-fired generator out of Oakville, says an energy consultant.
Provincial officials say that number is much too big.
However, one provincial source, who did not want to be named, concedes that the cost of moving the plant from Oakville to the site of the Lennox generating station near Bath, 210 kilometres east of Toronto, is $220 million more than the $40-million cost acknowledged by the province to date.
Energy consultant Bruce Sharp, who pegs the cost of the move at $700 million, says earlier estimates haven’t taken into account several huge items.
Sharp says the issues require further scrutiny.
“People are saying: “Let’s get the auditor general to look at this,’ and I agree,” he said.
The office of Energy Minister Chris Bentley was sticking with the $40-million cost Wednesday, and insisting that “the new plant will be an important part of Ontario’s energy mix.”
Nonetheless, after considering Sharp’s arguments for a day, the Ontario Power Authority, acknowledged Wednesday that “there will be additional ratepayer costs” — but it said it doesn’t yet know how much they’ll be.
The OPA is the independent government agency that negotiated the contract to move the TransCanada Corp. generator from Oakville to the Kingston area.
Sharp, a professional engineer who has worked for both hydro and gas utilities, says the biggest hidden cost in the deal is the province’s agreement to accept the cost of what’s known as “gas delivery and management services” costs, which he figures could add $346 million to the bill.
And a further $200 million or more comes from the decision to move the plant hundreds of kilometres to the east, says Sharp, who has also been an expert witness at the Ontario Energy Board for a variety of clients, including the Canadian Manufacturers and Exporters.
Sharp cites an OPA analysis prepared in 2009 supporting the Oakville location.
“If a plant were located outside the southwest GTA, the local transmission infrastructure upgrades costs would increase by about $200 million,” the OPA said at the time.
By the time the plant is built, those costs are likely to be $250 million, Sharp estimates.
On Wednesday, the power authority, in a written response to questions from the Star, maintained that transmission upgrades are needed in the southwestern GTA, with or without a new plant in the region.
If the plant is built elsewhere, the Oakville-area transmission upgrades will be needed in 2018 rather than 2029 as previously planned, the OPA said. “OPA is continuing to determine the extent of the upgrades required and the associated costs.”
A provincial source close to the issue said the extra cost of the transmission upgrades is less than Sharp’s estimate but substantial nonetheless. The source pegged it at $140 million, rather than Sharp’s estimate of $250 million.
Sharp says the gas delivery and management fees haven’t garnered much scrutiny “because nobody put any kind of a number on it, and because it’s such an obscure issue it’s not going to get much attention.”
The transfer of those costs from TransCanada to the OPA — or, in effect, to electricity ratepayers — is difficult to find. It’s in clause 2 (f) of a schedule to the agreement between the Ontario Power Authority and TransCanada.
Sharp and the OPA agree that gas delivery costs are higher for the transmission plant’s new location because it’s farther from Ontario’s main gas storage hub in Dawn, near Sarnia.
The Dawn hub is a huge natural gas reservoir that feeds much of southern Ontario’s gas distribution system. The farther a facility is from the Dawn hub, the higher the cost of delivering the gas and assuring a ready supply when it’s needed.
Sharp estimates the extra cost of delivering gas to the new location to be $24.5 million a year over 20 years.
That, he says, is the equivalent of $346 million in today’s dollars for the life of the contract.
(That’s known as the net present value: “It’s like having $346 million now would cover that cost over 20 years,” said Sharp.)
The OPA, using different financial assumptions, calculates the net present value at a lower, but still substantial, $252 million.
“There will be additional ratepayer costs for gas management and delivery for the Lennox plant, because Lennox is further from the Dawn gas distribution hub than Oakville,” the OPA acknowledged.
“These costs will be determined once information is provided by gas distributors, and the OPA and TransCanada agree to a gas management and delivery plan as set out in the Sept. 24 memorandum of understanding.”
But the provincial source produced a lower number, saying that delivering gas to the new plant will only drive up costs by about $10 million a year.
That works out to $80 million as a net present value, the source said. Combined with the $140 million in transmission upgrades, the source put the cost of moving at $220 million, in addition to the $40 million in admitted costs.
The OPA argues that some of those costs will be offset by lower payments made to TransCanada during the life of the contract.
TransCanada receives guaranteed minimum payments, known as net revenue requirements, as part of the deal; the new agreement reduces those payments by 12 per cent.
“In exchange for purchasing the turbines up front and covering the gas management costs for the new plant, TransCanada will receive significantly less money for the electricity produced at the plant — reducing costs for ratepayers,” an official in Bentley’s office said.
But that reduction does not fully offset the gas delivery and management fees that are now landing in the laps of ratepayers.
— Torstar News Service