MARKET PRICES FOR SOLAR ELECTRICITY IN ONTARIO

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1 Montreal, 2-24, 24 MARKET PRICES FOR SOLAR ELECTRICITY IN ONTARIO Ian H. Rowlands Faculty of Environmental Studies University of Waterloo Tel: (519) , ext ABSTRACT In Ontario, the electricity system is at a crossroads. Greater demand generated by a growing population and increased economic growth needs to be met by an electricity supply that is facing considerable challenges: after years of political uncertainty, investments in generating capacity have not kept pace with requirements; moreover, the government of Ontario has committed itself to closing all of the province s coal-fired power stations by the year 29. Thus, the electricity system has become the subject of much debate. In the wake of these challenges, the government of Ontario established the Ontario Power Authority (OPA) in late 24, with the mandate, among other things, to engage in activities in support of the goal of ensuring adequate, reliable and secure electricity supply and resources in Ontario, and to engage in activities to facilitate the diversification of sources of electricity supply by promoting the use of cleaner energy sources and technologies, including alternative energy sources and renewable energy sources. To this end, the OPA is developing standard offer contracts for a range of renewable energy sources solar photovoltaics (PV) included. The purpose of this paper is to advance discussions regarding the contribution that solar PV can make to Ontario s supply mix by examining the revenue that the electricity produced by solar PV panels in Waterloo, Ontario (Canada) would have generated under four different pricing regimes in Ontario. Those regimes are: a) the standard price of 5.8 cents/kwh now paid by small users in Ontario; b) the time-of-use (or band ) price available to those in Ontario who have an interval meter; c) the spot market price in Ontario, to which some large users are subject; and d) the standard offer contract, as has been proposed by the Government of Ontario and is currently being developed by the OPA. Not surprisingly, it is discovered that a solar PV system that produces 3, kwh of electricity over the course of a year would generate different revenue amounts, ranging from the smallest amount (approximately $174.) in case (a), through to higher amounts in case (b) and (c) ($ and $25.46 respectively), to a significant amount ($1,26.) in case (d). These differences are significant, with the second being more than 24% higher than the first, the third being 16% higher than the second, and the fourth being more than five times as large as the third. Given that solar electricity is produced during times of peak demand (and peak prices), pricing regimes that most closely reflect not only the real-time costs of electricity, but also the other non-market benefits would seem to have the most potential to increase the deployment and use of solar PV systems across Ontario. INTRODUCTION Electricity issues have, during the past decade, attracted a high level of attention across Canada, particularly in Ontario. Indeed a number of events in that province efforts to restructure the electricity market, rising prices, increasing recognition of the environmental consequences of power generation and a major blackout have all served to catalyze public interest in electricity. Events last summer (25) continued this trend. Technically, the unusually hot weather meant that there was increasing strain on the province s power system, which resulted in, at times, voltage reductions and brownouts. Politically, there was the formation of a potentially-powerful new institution (the Ontario Power Authority), along with the introduction of additional plans by the provincial government to reform the electricity system in the province not least of all through the introduction of smart meters. Against this background, the time is right to reflect upon the potential contribution that solar photovoltaic (PV) electricity could make to the electricity system in Ontario. This paper follows recent work done both outside and inside of Ontario by exploring the value of solar PV electricity in the province (Rowlands, 25a; Rowlands, 25b; and Borenstein, 25).

2 Montreal, 2-24, 24 More specifically, the paper determines the value of the electricity that would have been produced by a PV system located in southwestern Ontario (Waterloo) under four different pricing regimes the first is the conventional small user tariff system that is currently in place in Ontario, the second is the time-of-use pricing system (or bands ) that is voluntarily available to those who have smart (interval) meters installed in their facilities, the third is the spot market (hourly) prices, to which some of Ontario s largest electricity users are exposed, and the fourth is the recently-proposed rate for standard offer contracts for PV systems. By determining, and subsequently analyzing, these different values, we hope to contribute to the debate in Ontario regarding the potential value of electricity produced by PV systems. The article proceeds in four sections. Following this brief introduction, the context is presented in the second section: the community investigated is introduced, and the data that are subsequently analyzed are reviewed. The third section presents the results that is, the value of the solar PV electricity generated, under the four different pricing regimes. The fourth section presents some research and policy implications of these results, and it also serves to conclude the article. CONTEXT This investigation is with reference to Waterloo, Ontario a community of approximately 1, people located in southwestern Ontario, approximately 1 km west of Toronto. We envisage the operation of a solar PV system for a period of 12 months (1 25 to 3 26). While we would have liked to have had continuous solar panel production data for that time period, we content ourselves with solar radiation data recorded by the weather station at the University of Waterloo s weather station (43 o 28' 25.6" N, 8 o 33' 27.5" W; elevation of m). In this location, a flat plate collector (Kipp & Zonen Model: CM11 S.N ) was used to record instantaneous incoming shortwave radiation values (in W/m 2 ). Although investigations into the optimal tilt for solar PV structures suggest that an angle of either the location s latitude (to maximize annual energy generation) or latitude minus 15 o (to maximize summer energy generation) is preferred, our only available data at this time necessitate the use of an angle of o. Future work could investigate alternative tilt angles and see how this affects the results. Information regarding solar radiation for Waterloo, Ontario is presented in Table 1. More specifically, the total solar radiation that was actually received on the horizontal surface (daily average) is presented in the first column of data in the table. In the second column, the share of the solar radiation that was received that month (as compared to the year as a whole) is presented. From this, we see not surprisingly that to are key, where just over one-half of the yearly solar radiation is received during these four months. In the third column, we have for reference information from NASA regarding solar radiation on a horizontal surface averaged over a 1 year period. Again, to are key months, as the subsequent column (relative share) reveals. Comparing these averages, with the particular year s data that we are investigating, it appears that 25-6 was slightly (2.3%) brighter than usual, with, and being particularly brighter. Month Table 1 Solar radiation data for study location Recorded data for 1-year average data Average Share Average Share daily of daily of radiation annual radiation annual on total on total horizontal (%) horizontal (%) surface surface (kwh/m 2 / (kwh/m 2 / day) day) Aug Sept Oct Nov Dec Jan Feb Mar Ave Sources: University of Waterloo Weather Station website ( and NASA Surface Meteorology and Solar Energy: RETScreen data. Let us envisage a small PV system that produces 3, kwh of electricity over the course of a year. (This might be what a system of the order of 2-4 kw would generate that is, a residentially-sized system for this part of Canada.) Although we recognize the problems associated with assuming solar panel electricity generation to be proportionate to solar radiation, we proceed assuming that it is a reasonable first cut to initiate discussion. If we assume this, then our system produces, in monthly terms, the most

3 Montreal, 2-24, 24 electricity in 25 (45 kwh) and the least in 25 (73 kwh). Its daily maximum is on Saturday, 2 25 (19.2 kwh) and its daily minimum is on Thursday, (.5 kwh). In terms of hourly production, the maximum is on Thursday, 12 at 1pm (EDT) (2.27 kwh) while there are of course numerous minimums of zero. Market data regarding both the Ontario-wide demand for electricity and the hourly price of electricity in the spot market were taken from the website of the Independent Electricity System Operator in Ontario. Figure 1 presents data about the demand for electricity in the province, highlighting the average demand, as well as the minimum and maximum values for the particular month. While the system clearly peaks in both the summer and the winter, Ontario is increasingly becoming a summerpeaking system. Indeed, during the summer of 25, Ontario set a record for system demand on numerous occasions. By summer s end, nine of the 1 highest demand values ever recorded had been recorded between and , 25, 2, 15, 1, 5, minimum average maximum Figure 1. Ontario electricity demand data (MW), 25 to 26. source: Independent Electricity System Operator Figures 2 and 3 present similar information regarding the market price for electricity in Ontario. More specifically, they summarize data regarding the Hourly Ontario Energy Price between 1 25 and This is determined by using the average of the five-minute Ontario energy prices. It is used as the wholesale price for electricity for nondispatchable generators and non-dispatchable load. (These are producers and users who are participants in the market, but do not submit bids and offers to the market. These participants agree to be paid for the energy they generate or pay for the energy they consume based on this hourly rate.) (This is a quotation from the Independent Electricity System Operator.) Figure 2 compares and contrasts the average price (a simple numerical average across all hours in the month) and the weighted average price (an average value that is weighted by demand in the market). While the numbers are largely similar, they do differ by more than 6% in,, and of 25; the weighted average price is higher than the average price. This is because as we will see system-wide demand was markedly higher during high price periods. Indeed, we already see that prices were rising in the summer of average weighted ave. Figure 2. Average price and weighted average price (cents/kwh) for electricity in Ontario, monthly values, 25 to 26. source: Independent Electricity System Operator minimum weighted ave. maximum Figure 3. Minimum price, weighted average price and maximum price (cents/kwh) for electricity in Ontario, monthly values, 25 to 26. source: Independent Electricity System Operator Figure 3 presents additional information about system-wide prices. In addition to presenting the monthly weighted average, we also present the minimum and maximum values for the month. During our year under consideration, prices ranged

4 Montreal, 2-24, 24 from a low of.4 cents/kwh at 4am (EDT) on Saturday, to a high of 7. cents/kwh at 9am (EDT) on Friday, RESULTS To investigate the impact of alternative pricing regimes, we, first, assume a tariff rate of 5.8 cents per kilowatt hour, and that this is the same for the entire year. This is the rate presently charged to small users (before their consumption threshold, which varies by season). As noted above, the PV system produces 3, kwh a year. Therefore, since each unit of electricity it produces is valued the same, we can calculate that the annual revenue is $174. across the entire year. The way in which that revenue stream is divided across months which is proportionate to the monthly values for solar radiation is shown in Figure 4. Values range from a low of $4.32 in 25 to a high of $23.5 in Figure 4. Revenue from PV system ($), under a standard pricing regime, 25 to 26. A second method that was used to calculate the revenue stream is on the basis of the time-of-use (or bands ) that are presently available to those who have a smart (interval) meter in the province of Ontario. Table 2 provides information about the cost of electricity during different time periods, with notable differences between the winter and summer seasons. Generally, the peak prices correlate with peak demand periods (morning and evening in the winter, closely associated with lighting and heating requirements; afternoon in the summer, closely associated with air conditioning requirements). Figure 5 provides the results. Largely because of higher revenues for the electricity in the summer period (because of the correlation between solar electricity production and peak price period during the afternoon), the total revenue is higher, as compared to our previous case. More specifically, the total revenue, across the year, is $ some 24.2% higher than the $174. value under the standard arrangement. Third, let us consider the prices that were on the spot market during this time (the aforementioned Hourly Ontario Energy Price ). Figure 6 provides the results. Remarkable here are the dramatically higher prices during the summer months. Indeed, under this arrangement, the total revenue is $ % higher than the revenue received under the standard arrangements, and 16% higher than the revenue received under the periods (or bands ) arrangement. Kind of day Table 2. Cost of electricity (cents/kwh) during different periods. Weekdays Weekends and holidays Time period Winter (1 to 3 ) Summer (1 to 31 ) midnight to 7am 7am to am 11am to pm 5pm to pm 8pm to 1pm pm to midnight all day source: Ontario Energy Board Figure 5. Revenue from PV system ($), under a time-of-use ( bands ) pricing regime, 25 to 26.

5 Montreal, 2-24, 24 And finally, we consider the system of a standard offer contract a variation on feed-in tariffs or advanced renewable energy tariffs, this involves providing a set, pre-established price for every unit of electricity produced. The figure, in discussions surrounding solar PV electricity is 42 cents per kilowatt-hour. Figure 7 presents the resultant revenue under such a system. The shape of the graph is the same as in figure 4 that is, under a standard pricing system but the quantities are significantly higher. Over $1 is received in seven of the 12 months under investigation, and the total amount generated is $1,26.. Figure 8, where we put the four regimes together, offers clarification regarding the differences Figure 6. Revenue from PV system ($), under a spot market pricing regime, 25 to 26. warning. Power Warnings alert the public that the IESO is about to take urgent measures to maintain the balance of supply and demand. These measures may include making emergency purchases from outside Ontario and reducing voltage along the transmission lines by 3 to 5 per cent. These levels of voltage reductions are usually not noticeable to most consumers. A power warning also indicates that rotating blackouts might be necessary if all other measures are not sufficient to manage demand. The IESO will make every effort to provide advance notice of rotating blackouts, although this may not always be possible. (This is a quotation from the Independent Electricity System Operator.) Table 3 provides information about what happened during this day in terms of solar radiation/solar panel production, and the four prices that would have been in effect (under each of the four pricing regimes). We see that the spot market price varied from 3.74 cents/kwh at 7am (EDT) to cents/kwh at 1pm (EDT). Indeed, for virtually every hour (except in the early morning hours), it is above the first two price regimes (the standard and time-of-use) but below the fourth (the standard offer contract). Table 4 shows how this translates into hourly revenue on this particular day. In total, for the day, the standard pricing regime would have yielded $.9 (for the kwh produced by the system); the periods regime, $1.47; the spot market, $2.78; and the standard offer contract, $6.51. Of course, this is an ideal day for solar PV: hot and sunny. Nevertheless, it is worthwhile noting that a difference in system could have generated many times difference in revenue Figure 7. Revenue from PV system ($), under a standard offer contract pricing regime, 25 to standard time-of-use spot SOC Figure 8. Revenue from PV system ($), under four different pricing regimes, 25 to 26. To help to show why this kind of dramatic difference occurs, we take one day during our period, and investigate it in some depth. The day we choose is Tuesday, 2 25 a day during which the province was under an IESO-imposed power DISCUSSION AND CONCLUSION This particular investigation revealed that pricing regimes that more closely reflect real, time-of-day electricity prices appear to be more advantageous to

6 Montreal, 2-24, 24 solar PV systems. That is not particularly surprising, given the correlation that has been revealed, many times in the past, between peak system demand/peak system price and solar radiation/solar PV electricity generation. Nevertheless, investigations like this reveal the extent of the difference, and thus encourage premium prices to be paid for solar PV through, perhaps, standard-offer contracts (or advanced renewable energy tariffs or feed-in tariffs ) or through net metering legislation that not only allows the meter to spin backwards, but also recognizes that time of day at which both consumption and production of electricity is occurring. Of course, although this article aimed to investigate the value of solar electricity, additional work regarding the other benefits of solar PV is needed (for example, avoided capacity/generation needs, avoided transmission and distribution cost and losses, environmental benefits, and job creation (See, for example, the Submission to the California Public Utilities by Americans for Solar Power ( Even without those, however, the numbers advanced here begin to make a powerful case for increased attention to the value of solar electricity. Table 3. PV panel production (kwh) and electricity prices (cents/kwh) under four different pricing regimes, 2 25 hour ending (EDT) PV elect. (kwh) timeofuse spot SOC standar d 1am am am am am am am am am am am noon pm pm pm pm pm pm pm pm pm pm pm mid Table 4. Hourly revenue (cents) under four different pricing regimes, 2 25 hour ending (EDT) time-ofuse spot SOC standard 7am 2 8am am am am noon pm pm pm pm pm pm pm pm pm 1 REFERENCES Borenstein, S. 25. Valuing the Time-Varying Electricity Production of Solar Photovoltaic Cells, Berkeley, CA, University of California Energy Institute, CSEM WP 142,. Rowlands, I.H. 25a. Here Comes the Sun: Valuing Solar Electricity in Ontario, Annual Conference of the Canadian Society for Ecological Economics, Toronto, ON,. Rowlands, I. H. 25b. Solar PV Electricity and Market Characteristics: Two Canadian Case- Studies, Renewable Energy (Vol. 3, 25), pp