Energy Cluster: Background Material

Transcription

1 Energy Cluster: Background Material

2 Introduction Thank you for participating in our Toronto Region Economic Summit. The Summit is designed to bring together private sector leaders from leading economic clusters to advance overdue ideas and better drive regional competiveness by fostering stronger collaboration within and across key industries. The Summit will encourage business leaders to take a leading role in advancing an economic cluster strategy for the Toronto Region. A key component of the Summit s agenda are a series of cluster break-out sessions where industry leaders from each cluster, including yourself, can discuss joint issues and business strategies to enhance their industry s competiveness position. Following the keynote address by Dr. Michael Porter, we would greatly appreciate you joining the Transportation & Logistics Cluster for a 2-hour roundtable session. This session will be moderated to ensure maximum amount of participation and feedback. What follows below is a primer on the Transportation & Logistics Cluster to assist you with preparation for this break-out. The primer is structured around key themes as follows: the big picture; why we re here; opportunities for the Transportation & Logistics Cluster; key facts about the Transportation & Logistics Cluster; and proposed discussion questions. We wish to thank KPMG, the Summit s presenting sponsor; and IHS Global Insight for their generous contribution to the Summit s content development. The Big Picture We know what the Toronto Region s strengths are: an enviable quality of life, a highly educated and diverse workforce and a critical mass of leading edge service and manufacturing-oriented industry clusters. Yet we can t escape the effects of recent economic upheavals or the profound shifts in the global economic order, most notably the emergence of high-growth economies such as Brazil, China and India. As part of the Toronto Board of Trade s ongoing efforts to measure Toronto s competitiveness we have been publishing since 2009 our annual Toronto as a Global City: Scorecard on Prosperity (Scorecard) report. The reports findings are consistent and point to a troubling reality that despite our market size and major institutional assets like research hospitals and universities, the Toronto Region punches well below its weight. Scorecard 2012 s results are no different. Regardless of the indicator one looks at, whether it s GDP and productivity growth or average size of IPOs our long-term performance puts us near the bottom of North American league tables. This has huge implications, not least of which is in on our ability to sustain and pay for the vital public investments we need to make in our social and physical infrastructure. Nevertheless, as the Drummond report laid bare and as we see with the budgetary challenges of municipal governments across the Toronto Region, the fiscal space for major government economic stimulus just is not there. Clearly, if we wish to sustain the long-term economic vitality of the region our businesses must be at the forefront of change. Undoubtedly, there is no simple recipe for generating economic growth. But today, we make an important and groundbreaking step. We are setting in motion the development of a business led roadmap to compete against the best-in-class city-regions from across the globe. It s not about picking winners and elaborate industrial strategies. Instead, it s about generating sensible approaches and collaborations between industry, government and other stakeholders that can enhance our business environment and make it that much more competitive and entrepreneurial. PAGE 2

3 On Monday March 26th, we will release Scorecard 2012 our benchmarking report which takes a unique and special lens on the North American position of Toronto s key economic clusters. Scorecard 2012 will serve as a foundation document for the Summit. As clearly articulated in the Board s provincial election campaign VoteOntario2011, cluster-based strategies will be an important element to drive economic growth and investment in the Toronto Region. Additionally, these strategies can provide a strong impetus for better positioning and branding Toronto s unique selling points. Why We re Here: The Energy Breakout Session As the Board argued in the 2011VoteOntario paper Shifting Into High Gear, a successful regional economic development strategy must be underpinned by a competitive pro-business environment. For example, we know successful economies are built on the foundations of a strong business environment and a robust institutional infrastructure. While many factors shape a region s ability to attract businesses and investors, having a reliable, secure and costcompetitive energy supply is undoubtedly one key precondition for success. With the release of the Green Energy Act in 2009, the Long-Term Energy Plan in 2010, the Drummond Commission s recommendations for the Ontario s energy sector (see Table B, appendix) and the recent review of the province s feed-in-tariff strategy, it is time take careful stock of where we re at and where the Board needs to position itself in this evolving policy area. As you ll see the in the appendix, the Board has taken a variety of positions in recent years on energy-related matters impacting our members, including, raising concerns about: Generation and transmission capacity Level of investments Rising energy costs Reliability and security of supply Nevertheless, big challenges remain, including: Meeting the government s target of 10,700 megawatts of alternate energy (wind, solar, biomass) by 2030 Making-up the lost energy generating capacity, approximately 4,484 megawatts, lost due to phaseout of coal by 2014 How to pay for the almost $90 Billion worth of investment needed to pay for the province s longterm energy plan, including critical transmission and generating infrastructure upgrades in the Toronto Region Achieving the government s target of 50,000 new ttgreen energy industry jobs by The following consultation questions that will help us refining our thinking on energy and the potential there is for the Board undertaking a policy and stakeholder engagement approach on energy related issues. Key Objectives Our consultation today will be split into two key questions: 1. If the Board is to pursue a policy and advocacy agenda on Energy related issues, which one of the following three strategic areas do recommend be pursued: Ensuring a secure and reliable energy supply for the Toronto Region Providing competitive energy cost structure vis-à-vis our key city-region competitors Maximising economic opportunities from transition to low carbon energy generation Recognising there are overlaps between these various issue areas, we nonetheless encourage you to consider, which of these three issue areas provides the greatest opportunity for the Board to have a positive impact. 2. What are the main challenges and opportunities in this issue area? We encourage you to think about a broad range of regulatory, energy pricing, infrastructure (e.g., energy generation/ transmission) conservation and economic related matters. PAGE 3

4 The table below provides some ideas to help kick-start discussion at your table. OBJECTIVE CHALLENGES OPPORTUNITIES Ensure a secure and reliable energy supply for the Toronto Region Meeting energy demands of growing economy and population in Toronto Region Financing needed generating and transmission capacity enhancements Complying with renewable energy generating targets of Green Energy Act More local/toronto Region energy generation? Changes to Green Energy Act /LTEP? Changes in energy supply mix? Provide competitive energy cost structure vis-à-vis our key city-region competitors Current Feed in Tariff pricing model Costs of renewable energy generation Changes to FIT program Consolidation of LDA s as proposed by Drummond? Maximize economic opportunities from transition to low carbon energy Competing with lower-cost jurisdictions on production of green energy technology Global uncertainty concerning future of renewable energy projects and emergence of new energy sources (e.g., shale gas US) Finding local, national and international markets for Toronto Strategically promote Ontario s strengths in the energy sector, capitalizing on export opportunities for domestic goods and services. PAGE 4

5 Appendix: Background Energy related issues are amongst the most critical facing the Toronto region businesses today. Rising electricity prices, blackouts in the downtown core, infrastructure upgrades, changes in the supply mix and the introduction of a Long Term Energy Plan are affecting the reliability and affordability of our energy supply and our region s cost competitiveness. The Board has traditionally focused on ensuring the affordability, reliability and transparency in pricing of the Toronto region s energy system in a low carbon world. This position was most recently expressed in the Board s Integrated Power Systems Plan II (IPSP II) submission to the government of Ontario; the Board s provincial campaign 2011VoteOntario Shifting Into High Gear position paper; and as part of the Board s Executive Energy Forum. The Board previously expressed similar concerns in a 2009 letter to the Minister of Energy and Infrastructure regarding the Green Energy Act; and in the Board s 10-year capital plan submission to the government of Ontario. Toronto Board of Trade s Previous Positions Integrated Power Systems Plan II (IPSP II) submission to the government of Ontario On June 14th, 2011 the Board provided input to the Ontario Power Authority (OPA) as part of the consultation process in the updated IPSP II. The Board s recommendations were based on feedback from the Board s Infrastructure and Policy & Advocacy Committees. The Board s submission focused on three core themes such as Governance and Transparency; Reliability and Security of Supply; and Cost Pricing and Competitiveness. 2011VoteOntario Provincial Campaign Shifting Into High Gear position paper On June 8, 2011 the Board identified energy as one of the key factors shaping our region s attractiveness to businesses and investors. Energy was seen as a foundational element for a successful regional economic development strategy combined with a comprehensive cluster approach to economic development. The Board argued that the cost and reliability of our energy supply has a significant impact on our business competitiveness. The Board highlighted our members concern regarding the security and supply of energy into the Toronto downtown core. As a result of blackouts, aging infrastructure and rising prices, our members pressed on all provincial parties to focus on greater transparency in energy pricing, ongoing investment into rapidly ageing infrastructure and the creation of a long-term, integrated energy system plan outlining future prices, system costs and investments. Executive Energy Forum On December 15, 2010 the Board brought together about 20 executives to discuss energy issues and what the main items related to energy and electricity on which the Board should be devoting resources. Based on this discussion, it was recommended the Board advance three key issues: Governance and Transparency Reliability and Security of Supply Cost Pricing and Competitiveness 10-Year Capital Plan submission The Board urged the government to immediately produce and release a ten year Integrated Power Systems Plan (IPSP). The Board warned that demographic trends will place stress on Ontario s energy supply, and urged the province to invest the resources and infrastructure necessary to meet these future demands without compromising the energy supply. Suggested investments included: new electricity supplies, transmission pathways, diversification, and efforts to bring the cost of Green energy down to a competitive level. Special attention was given to the need to increase redundancies especially in the Toronto downtown core where a third transmission path is required to prevent economically costly power outages in this high-demand zone was identified Letter to the Minister of Energy and Infrastructure on the Green Energy Act The Act identified two objectives: economic development by promoting a green economy and, environmental sustainability through energy conservation and efficient use. The Board recommended the Act be amended to include a third objective: a secure supply of electricity for residents and businesses. Additionally, while the Board applauded the Province s vision in identifying Green Energy initiatives as driving future economic growth, the Board raised concerns about the impact of this initiative on energy prices and the cost competitiveness of this region. PAGE 5

6 Current Energy-Related Issues In Ontario: The province of Ontario has identified three key objectives for its electrical system: reliability, affordability and environmental sustainability. The OPA addresses the objective of reliability by employing long-term energy contracts, supporting capital investments and securing new energy supplies. Affordability is addressed by regulating prices to mitigate price spikes and by limiting the market power of suppliers. Contracts and incentives for renewable energy and initiatives to promote conservation, outlined in the 2009 the Green Energy and Environment Act, address the objective of environmental sustainability. Ontario operates a hybrid electricity market which uses a combination of public and private organizations and wholesale electricity markets alongside a regulated and contracted energy market that is used by most (nonindustrial) consumers. The agencies and corporations of the Ministry of Energy are outlined in Table A of the Appendix. Ontario s supply mix relies on three categories of power: base-load power which operates continually, providing a secure and stable energy supply (nuclear, hydroelectric); variable/ intermittent power available only during certain times, such as windy days for wind projects; intermediate/ peak power designed to ramp up or down in response to demand changes thought the day which includes natural gas and some hydroelectric projects. The graph to the right maps projections for Ontario s required reserve margins and resources requirements. Without additional capacity investments Ontario s energy supply will be inadequate to meet demand beyond Ontario will require additional energy capacity in 2015 to make up for the loss of coal-generated energy, which is to be phased out at the end of On November 23rd, 2010, the Ministry of Energy released a Long Term Energy Plan for (LTEP). The LTEP addresses the system inadequacy outlined by the above graph by committing to increase the system s installed capacity through capital investments totaling $87 billion over the next 20 years. This year the OPA will begin public consultations so that it can take the direction outlined by the LTEP, and turn it into an Integrated Power System Plan (IPSP). Table 1: Installed Capacity (MW) Installed Capacity Nuclear Hydroelectric Wind, Solar, Bioenergy Gas Coal Conservation Total , ,484 1,837 35, ,000 9,000 10, ,100 48,000 Source: Ministry of Energy Long Term Energy Plan 2010 intermediate/ peak power designed to ramp up or down in response to demand changes thought the day which includes natural gas and some hydroelectric projects. The graph to the right maps projections for Ontario s required reserve margins and resources requirements. 1 Ministry of Energy, Ontario s Long-Term Energy Plan, November 18th, 2010 Though population growth and urbanization will increase Ontario s population by 28% and the GTA s by 38%, the economic slowdown coupled with conservation efforts mean that demand is expected to grow by only 15% by To meet this demand, by 2030, 15,000 MW of energy will need to be renewed, replaced or added to the system. Table 1 outlines the planned capacity gains over the next 20 years. The supply of nuclear, PAGE 6

7 hydroelectric and natural gas will remain relatively constant over the next 20 years. Coal will be eliminated in Investments in renewable energy will increase their supply by almost 6.5 times while gains from conservation will increase by just less than four times. To continue generating 50% of Ontario s base-load energy supply, upgrades to the province s nuclear infrastructure will be necessary. For an estimated $33-billion, the province will modernize the Bruce and Darlington sites, create two new nuclear units at Darlington and refurbishing the Pickering B station. The province will invest heavily in renewable, $23-billion on solar and wind capacity, to replace coal powered generation. See table 2 for a full breakdown of the projected $87-billion in capital investments. Moreover, the flood of shale gas onto the North American market will likely change the economics of natural gas. As mentioned earlier, renewable energy provides intermittent power to the grid. Much of the new initiatives will come from the Feed in Tariff (FIT). FIT contracts out renewable energy generation by offering producers a guaranteed pricing structure. Independent producers sell energy to the system at prices designed to cover project costs and allow for a reasonable return on investments. Much of the new generation Table 2: Estimated Capital Cost of LTEP Source Nuclear Natural gas Solar Wind Hydro Biomas Conservation Transmission Total $ Billions will be connected to local distribution systems not the IESO controlled grid, allowing municipalities, local distribution companies and community groups to invest in, own and operate generation facilities. Replacing coal with renewable energy is expensive, and it is raising the cost of energy. While the government does not pay the upfront capital costs of the FIT program, $87 B the consumer pays for the investment in higher energy rates. As emphasized by the Drummond Commission on the reform of Ontario s public services, the province may need to reconsider whether subsidizing renewable energy sources is a desirable policy tool, as subsidies rarely lead to the innovations necessary to create new developments and reduce the cost of generation. For more information on the recommendations related to energy see Table B of the Appendix. Conservation is a policy tool that increases system capacity without increasing generation; the Ministry of Energy aims to reduce Ontario s peak demand 20% by The LTEP estimates that spending on conservation programs will total $12-billion in twenty years. The results will be an avoided lifetime supply cost of $10 billion and a net benefit to ratepayers of $7-billion. On August 17th, 2010 the Ministry of Energy announced it would help industrial and manufacturing companies conserve energy by extending the time of use pricing to them. This price change will take effect on January 1, 2011 and will be available to 200 of the province s largest electricity users purchasing energy at wholesale rates. Almost 10% of investments will be spent on transmission projects. Transmission upgrades include new lines to accommodate the anticipated surge in renewable energy feeding into the system, reinforcement and upgrades of old infrastructure, overhauls of transformer stations and investments in Smart Grid infrastructure. The Bruce-to- Milton line will come online in 2012, and will transfer increased capability coming from the reactivation of Bruce A units 1 and 2 to southern Ontario. Smart Grid infrastructure will aid utilities in coordinating production from the many new small producers feeding into the system and make the grid more responsive and efficient, decreasing future capital expansion needs. Of continued, critical interest to Toronto region businesses is the need for transmission redundancies in the Toronto downtown grid. The two recent blackouts in Toronto s downtown core, first in August then October, highlight the need for securing electricity transmission in this zone. The LTEP highlighted the recent installation of two underground cables between Toronto s downtown transfer stations and commits to invest an additional $360 in future with reinforcement and upgrade projects. 2 Commission on the Reform of Ontario s Public Services, February, Ministry of Energy, Conservation, 4 Government of Ontario, Helping Large Industry Conserve Energy, Newsroom, August 17th, PAGE 7

8 Finally, the LTEP draws attention to the $20 billion in stranded debt that was left when Ontario Hydro was re-organized in While this debt has been decreased by $5.7 billion since 2003, as Ontario continues with new capital and program investments, while collecting less revenue due to decreased demand, concerns are being raised that this stranded debt is going to increase. For example, in the second quarter of 2010 Hydro one s combined revenue declined $111-million or 4.7%, to $2.4 billion while their net income dropped 80% to $76 million. Cost-overruns on capital investments are aggravating the situation. Cash strapped distributers are applying to raise rates and are reducing their payments to the province. Capital investments, high cost of renewable energies relative to the coal they re replacing, loss of revenue from decreased energy demand, investments in aging infrastructure, overruns and the stranded debt are contributing to the increase in electricity prices. In the next twenty years: Residential energy bills will rise by 3.5% per year Industrial rates will rise by 2.7% per year The Province will help consumers manage costs with programs that decrease consumption, not prices. The OPA s Industrial Accelerator Program assists transmission-connected industrial electricity users invest in energy-efficiency projects by offering financial incentives of up to 70% of all eligible costs to achieve savings of up to 30%. Chart 2 outlines how for Ontario s wholesale energy prices were lower than those of neighbouring regions, giving the Ontario region and businesses a cost advantage. By committing to a trajectory of increased energy costs, Ontario risks losing this cost advantage, which will occur if other regions do not also experience rising energy prices. Ontario Wholesale Prices Lower Than other Regions Source: IESO: Price Overview 6 Table A: Ministry of Energy Agencies and Corporations Ministry of Energy: The Ministry is responsible for developing energy policy frameworks in accordance with broad policy objectives of province. Ontario Energy Board (OEB): OEB is the sector regulator. An independent, adjudicative tribunal charged with regulating the provinces natural gas and electricity sectors. Protects consumer interest with respect to electricity prices, electricity reliability and quality. Ontario Power Authority (OPA): OPA is responsible for long-term electricity system planning, procuring new generation and conservation, planning and coordinating electricity conservation through the Integrated Power System Plan. It is also responsible for all contracting in the sector. Ontario Power Generation (OPG): OPG is a provinciallyowned and operated electricity generator. It operates hydroelectric, nuclear and fossil fuel stations and generates an estimated 70% of Ontario s energy. Hydro One: A provincially-owned company, Hydro One owns and operates Ontario s transmission lines. Hydro One also serves as a local electricity distributor in some, mainly rural, areas of the province and is responsible for distributing electricity to 1.3 million consumers. 5 Parker Gallant, Ontario Power Trip: prices up profits down, Financial Post, August 26, IESO, Price Overview July July PAGE 8

9 Independent Electricity System Operator (IESO): IESO conducts the day-to-day operations of Ontario s power system, including the wholesale electricity market. IESO is responsible for managing system reliability, forecasting and reporting electricity supply and demand, and for conducting market surveillance to ensure fair competition Summary of Energy-related Recommendations of the Drummond Commission on the reform of Ontario s public services Recommendation 12-10: Eliminate the Ontario Clean Energy Benefit as quickly as possible. Recommendation 12-11: Review all other energy subsidy programs against measures of value for money and achievement of specific policy goals. Recommendation 12-12: Produce an Integrated Power System Plan built on the foundation of the province s Long-Term Energy Plan. Recommendation 12-13: Consolidate Ontario s 80 local distribution companies along regional lines to create economies of scale. Recommendation 12-14: As part of the review of the feed-in tariff (FIT) program, take steps to mitigate its impact on electricity prices by: Lowering the initial prices offered in the FIT contract and introducing degression rates that reduce the tariff over time to encourage innovation and discourage any reliance on public subsidies; and Making better use of off-ramps built into existing contracts. Recommendation 12-15: Procure larger generation facilities through a request for proposal process. Recommendation 12-16: Review the roles of various electricity sector agencies to identify areas for economies in administration. This could include investigating the potential to co-ordinate back-office functions. Recommendation 12-17: Make wholesale electricity prices inclusive of transmission costs such as capacity limitations and congestion as part of a comprehensive restructuring of the wholesale electricity market. Recommendation 12-18: Make regulated prices more reflective of wholesale prices by increasing the on-peak to off-peak price ratio of time-of-use pricing and by making critical peak pricing available on an opt-in basis. Recommendation 12-19: Co-ordinate a comprehensive, proactive electricity education strategy across sector participants that at a minimum covers: Ontario s electricity resources including nuclear, hydroelectric, thermal and renewable generation; The role and value of electricity import and export markets; Roles and responsibilities of the various entities operating in the electricity sector; The evolving role of the electricity ratepayer in the smart grid paradigm; and Electricity prices what drives them, how they are communicated and how they are best responded to. Recommendation 12-20: Strategically promote Ontario s strengths in the energy sector, capitalizing on export opportunities for domestic goods and services. 2 Commission on the Reform of Ontario s Public Services, February, Ministry of Energy, Conservation, 4 Government of Ontario, Helping Large Industry Conserve Energy, Newsroom, August 17th, PAGE 9