Demand for natural gas to fuel new power plants in Ontario will skyrocket if the province makes good on its plan to phase out four coal-fired generating plants by 2014, a CIBC Markets analyst wrote in a recent research note.

The coal phaseout can be achieved, but in order to work there will need to be no glitches in the development of new power generation. And with the coal plants eliminated, the province will find itself much more reliant on natural gas-fired generation and subject to the volatility of gas prices, according to analysis by CIBC World Markets Inc.

“Regardless how you look at it, [the] Ontario government’s plan to phase out coal plants and completely close them down by 2014 is ambitious,” wrote CIBC analyst Benjamin Tal in a note released July 18. “In fact, the plan will make Ontario the only jurisdiction in North America to be phasing out coal.”

Tallying up the effect of phasing out the coal plants, declining nuclear capacity and rising demand yields a power gap of roughly 14,000 MW by 2015, Tal wrote. “Put differently, in the coming eight years Ontario must develop more new electricity-generating sources than currently exist in Alberta as a whole.”

There is reason to be optimistic that Ontario could meet that goal as it has 6,778 of additional capacity committed by 2010, according to Tal. Of this, nuclear accounts for 1,500 MW; hydro, 43 MW; wind , 956 MW; and natural gas, 4,279 MW. Clearly, Ontario will be leaning more heavily on gas markets in the future.

“[E]lectricity prices in Ontario dance very closely to the tune of natural gas,” wrote Tal. “The surge in natural gas prices during [Hurricane] Katrina led to a 40% increase in electricity prices in Ontario.”

He said a 1% increase in gas prices leads to a 0.5% increase in power prices in Ontario in the current environment where gas accounts for 15% of power generation. “The heavy reliance on natural gas as the dominant source of new supply will bring this share to 30% by 2015 — doubling Ontario’s electricity price sensitivity to swings in natural gas prices.”

Based on a natural gas price forecast of $12-14/MMBtu by 2015 and assuming natural gas-electricity price elasticity of 0.7-0.8, Tal wrote that CIBC estimates by the time the last coal-fired plant is closed electricity prices will be 60-70% higher than they are now, an increase of roughly 6.5% per year.

“That kind of price increase will be needed in order to meet the government’s goal of a ninefold increase in energy savings from conservation and demand management between now and 2015,” wrote Tal.

Ontario’s electric reliability outlook has improved significantly since summer 2006, the Independent Electricity System Operator (IESO) said in March. The key factors in that improvement were the decision to delay the coal-fired phaseout and the introduction of about 7,000 MW of new and refurbished generation, which is expected to be added to the grid by 2011.

Still, CIBC’s Tal found reason for caution. For instance, nuclear capacity in the province is in decline, and at about the time that the coal plants are to be completely shut down, the province faces the potential shutdown for refurbishment of the four 500 MW reactors at its Pickering B nuclear station. And all the while demand for power is rising by more than 1% per year, he said.

Unlike in other provinces, electricity demand in Ontario peaks in the summer. In summer 2005 demand exceeded supply for 593 hours, necessitating power imports. “By the time the coal plants are completely shut down, normal weather peak demand will be 7% higher than today’s levels,” Tal wrote. “That means at least 3,100 MW in additional required resources.”

Monday the Power Workers’ Union (PWU) seized upon Tal’s findings as further support in its argument against shuttering Ontario’s coal-fired power plants.

Since making the 2003 election campaign promise to close the coal plants, the IESO and the Ontario Power Authority (OPA) have continued to raise concerns about the significant risks to electricity reliability and price. Now another independent review has reached the same conclusion, the PWU said.

“Successive IESO and OPA documents and recent speeches show these risks have not gone away but are actually worse,” said PWU President Don MacKinnon. Key risks include uncertainties about load growth forecasts and what realistic contributions can be expected from conservation and demand management; how volatile natural gas prices will affect electricity prices; the need for more gas pipeline infrastructure to service new gas-fueled generators; the costs of redesigning and building new transmission and distribution infrastructure to integrate natural gas and renewable generation from wind farms; and the need to have a backup plan if replacement generation is not in place.

“While the IESO is studying the potential impact of coal plant closures, the government is blindly moving forward with a regulation that closes these plants by 2014,” MacKinnon said.

©Copyright 2007Intelligence Press Inc. All rights reserved. The preceding news reportmay not be republished or redistributed, in whole or in part, in anyform, without prior written consent of Intelligence Press, Inc.