The Deregulated Market
January 1, 2000
By Thomas Beese, UMA/B&V
Over the past decade, we have seen major changes in the telecommunications industry due to deregulation and the opening up of competition. It is safe to say, however, that similar changes in the elect...
Over the past decade, we have seen major changes in the telecommunications industry due to deregulation and the opening up of competition. It is safe to say, however, that similar changes in the electrical industry will have even more far-ranging effects. These transformations, driven by the United States and now under way in this country, are political, economic and technological in nature.
For consulting engineers and other members of the power industry, particularly in Ontario, the new deregulated market spells both a threat and an opportunity.
It is a threat in that the regulated, quasi-monopoly world of Ontario Hydro is being forcibly opened up to a new competitive environment. Anyone not prepared to compete in this new market will quickly be sidelined. However, deregulation also means some excellent business opportunities for those able to move wisely, quickly and decisively.
Deregulation in Ontario has been a long and winding road that has included the Electricity Competition Act and the Ontario Energy Board Act of 1998. The partition of Ontario Hydro in 1999 will now lead to open competition in the wholesale market in November 2000.
Starting with the generation side, perhaps one of the biggest changes is the government-dictated shrinkage of the recently created Ontario Power Generation Inc., the scion of Ontario Hydro that has been dedicated to generation. Ontario Power Generation must reduce its “market footprint” — its presence in the market — by 35% within four years, and by 65% within 10 years. This move is to create competition in the market.
Other changes include a growing need by industry for improved energy efficiency. Partly due to the Kyoto Conference resolutions there is increasing pressure for reducing emissions.
These trends will create an environment that in the near term will see far more co-generation whereby organizations use high-efficiency, gas-driven generators to produce their own power, as well as for meeting their own energy requirements for heating and cooling. Large industries, as well as institutions such as universities, hospitals and military bases, are among the early adopters of co-generation.
As a result, there will be greater demand for operation and maintenance services — few of these organizations will want to increase staff to maintain their own systems. It also means growing demand for services to design, procure and install generation systems.
In the longer term, we can expect growth in:
Merchant power — businesses that believe they can profitably generate and sell power to the grid, without having a firm contract in place. In some cases, they will purchase obsolete plants and use them to provide peak-hours power at a premium price.
Distributed power. Power generation is sited near the load or expected load growth, rather than at a central station. A generation plant might be installed close to a major industrial operation, in the steel-manufacturing town of Hamilton, for example, where it is able to undercut the costs of more distant sources such as Niagara.
Large industrial co-generation. Early adopters include major energy sinks such as pulp and paper plants, petrochemical plants and refineries, mining operations, and metal-refining.
Green power. An increasing demand for low-polluting energy means increasing demand for power from biomass and waste-to-energy, hydro generation, and wind power. The latter is growing at 25% a year.
An important factor to consider, however, is that Ontario Hydro still has a large debt on the provincial government’s books. Queen’s Park will not want to risk its credit rating by opening up opportunities for long-term development so fast that it will depress its cash flow. New large-scale plants may well be delayed while Ontario Power Generation reduces its liabilities.
As well as the political and organizational changes, new technology will influence the power industry. Developments include the high-efficiency gas turbines and combined cycle technologies. Incorporating solid oxide fuel cells, these generators will move efficiencies from the current 58%- 60% to between 70%-80%.
The above trends will create new opportunities for consulting engineers with Ontario Power Generation and independent power producers. Also benefiting will be equipment manufacturers, contractors, industrials, financial and legal services and foreign companies.
There will be equally far-ranging developments in wholesale power delivery. One of the biggest changes in Ontario will be the creation of the Independent Electricity Market Operator (IeMO). It oversees a market by matching buyers and sellers, and contracts power through the grid operated by another descendent of Ontario Hydro: Ontario Hydro Services Corporation (OHSC). This regulated wholesale transmission company will have to cope with aging networks and increased network congestion where supply and demand may be in imbalance. It will also have to invest in revenue metering and other information technologies.
Technology factors at work in wholesale delivery include:
power electronics — improving power line quality;
high voltage direct current;
flexible AC transmission systems — unified power flow controllers;
telecommunications, including need to lay fibre optic cable along rights-of-way;
energy management systems, for load and time of use.
Since the market must be transparent to all users, organizations must be highly visible in their dealings. This means a demand for real-time communications with customers, involving internet and intranets. Wholesalers will also have to have modern system-control centres, with back-up centres and new revenue metering systems.
At the retail level one of the biggest changes will be the privatization of the municipal electrical utilities (MEUs). Some will be sold to the private sector, some will be retained as companies owned by their municipalities, and others will amalgamate for economies of scale.
Competing with the municipal utilities and their descendants will be aggregators, brokers and marketers (ABMs). These will be from a variety of sources, including not just other energy providers but also organizations as diverse as telecommunications internet and cable providers who are intent on diversifying their offerings. As in many other areas, technologies are converging, with electrical power provision becoming blurred with cable television, telecom, internet access and natural gas service.
Business opportunities in the near term will include consulting on equipment leasing, automated meter reading systems, and outsourced construction and maintenance.
Longer term opportunities will be in distributed power, time-of-use billing systems, energy management systems and power quality services.
Because billing will be related to “time of use,” with higher prices at peak times, energy efficiency will become a big issue to both homeowners and businesses. This change will create a need for energy management solutions that might, say, allow a homeowner to program his or her household system to heat water at an off-peak time such as 2:00 a.m. Improved automated meter reading systems will provide detailed usage records of peak and off-peak sales and even coincidentally measure gas and water flows.
Power quality, particularly in the industrial sector, is an important issue that will demand solutions. Some industries, such as sawmills and anything requiring arc welding, tend to introduce power fluctuations. Others, such as computer chip manufacturing, require very high-grade power without fluctuations.
In the next few years we should see the development of industrial “power parks,” greenfield sites that provide a guaranteed grade of power quality to their resident organizations. Green power will become important. Because users will be able to choose their power provider, some will opt for generation based on green power and renewable technologies. And finally distributed power generation will build demand for micro turbines and cell technologies s
uch as solid oxide fuel cells, proton exchange membranes, batteries and photovoltaic systems.
For consulting engineers, success in seizing the many opportunities that are presenting themselves will depend on being properly informed and then making the right choices. CCE
Thomas Beese is a manager of Power Business Development with UMA/B&V in Toronto (e-mail email@example.com).