A Saskatchewan resident contemplating optimal generation portfolios

A Saskatchewan resident contemplating optimal generation portfolios

At the beginning of this month the Conference Board of Canada released ‘Finding the Mix: The Choice of Generation Technologies in Canada’. The report makes interesting use of an arcane econometric model hence, and as you can probably imagine, it's dry. So if it all gets a bit heavy you can skip direct to the Conclusion.

The report sets out to examine the role that a diverse portfolio of generation technologies, primarily in Saskatchewan and Alberta, can play in meeting growing demand for electricity while 'adapting to environmental policies and market structures'. The Conference Board of Canada also helpfully notes that;

The results can be used to inform policy and industry decision makers about the most attractive options for reducing dependence on fossil fuels.

A (strong) hint, regarding the conclusion one can expect from this analysis, is contained in the Acknowledgements on page 4. They note that the report was made possible by funding from four companies - SaskPower, TransAlta Corporation, Enmax Energy Corporation and Atco Power.

SaskPower: enough said. As for TransAlta, Enmax and Atco: all are Calgary-based. TransAlta and Enmax are utility companies the bulk of whose assets are invested in coal and natural gas generation capacity. Atco is a developer, construction manager, owner and operator of independent power generation plants – mainly coal and gas.

With that 'health warning' out of the way - let's take a look at the report;

The good

Harry Markowitz receiving his Nobel for what was, it would seem, quite an interesting financial model. And he is a Baruchian to boot.

Harry Markowitz receiving his Nobel for what was, it would seem, quite an interesting financial model. And he is a Baruchian to boot.

The most interesting aspect is its attempt to employ an econometric model, more commonly used in financial portfolio analysis, to optimise the risk/return profile of electricity generation portfolios in a number of Canadian provinces. The model employed is referred to in the report as Mean Variance Portfolio Theory (MVPT) although its inventor (Harry Markowitz) referred to it simply as 'Portfolio Theory'. 

Behind the theory lies a simple concept: diversity reduces risk.

In the world of finance any asset can be characterized by its inherent risk (i.e. stock price volatility measured by Beta (β) and the return the stock is expected to generate (typically expressed as an annual percentage). The theory maintains that rather than holding a single asset with a specific risk/return profile – the most efficient financial portfolio will contain a mix of assets with a diverse set of risk/return profiles. i.e. don't put all your eggs in one basket.

In the last few years generation planners have increasingly sought to apply MVPT to the power generation sector – albeit with some modifications. Generation assets are not traded in a liquid stock market and hence they have no price volatility such as the β value of stocks. However it turns out that the cost of the electricity they generate (and hence the value of the underlying generation asset) depends almost entirely on fuel price volatility. As a result fuel price volatility becomes the risk proxy. Return can be estimated based on revenue (given estimated wholesale power prices) and known capital and operating costs of the different generation options.  With these modifications one can then apply the Monte Carlo method to MVPT, to estimate the optimal mix of power generation assets required to achieve the desired risk/return outcome. 

Wagon leaves the rails in Moscow Suburbs. 26 September 2015. (and, in case you are wondering, no-one was hurt.)

Wagon leaves the rails in Moscow Suburbs. 26 September 2015. (and, in case you are wondering, no-one was hurt.)

All fine in principle but, and as the saying goes, Garbage In - Garbage Out. Translation: if your initial assumptions are wrong then your model results will also be wrong. And this is where the Conference Board of Canada analysis starts to come off the rails. 



The bad

The fundamental failing of the report is hinted at by this from page II of the executive summary;

Alberta and Saskatchewan face the challenge of reducing their dependence on coal generation or drastically reducing greenhouse gas emissions from coal plants. The two provinces also face a limited ability to increase generation from renewable technologies, such as hydropower and biomass. Neither of the provinces currently rely on solar power, and both face the challenge of integrating wind power into a system that is primarily thermal and heavily dependent on coal.

This negative view of wind and solar is manifest in the report as hard caps on the amount of both wind and solar which can be employed in Alberta (page 17); 

Overall constraints have been imposed on the total share of wind (10% due to ramping issues) and solar (1% because of a lack of experience in Alberta).

The same constraints are employed for Saskatchewan (page 32). 

..and the ugly

No valid justification is offered within the report for the 10% and 1% constraints on wind and solar. In fact there are several reasons why the limits as stated are hopelessly wrong. Here are just six of them;

1)    US States Record Monthly Generation from Wind and Solar

As we show in this post, states with substantially more old, inflexible, coal-fired baseload than Saskatchewan (notably Iowa and North Dakota) are already seeing wind turbines generate more than 20 percent of total monthly electricity: In Iowa's case - 42 percent for the entire month of November 2014.

Source: US Energy Information Administration: Electric Power Monthly - multiple months.

2)    US States 2014 Generation from Wind and Solar

In case month average peaks don't do it for you: try this post - the graph from which is reproduced below. It shows that over an entire year wind energy in those same coal-heavy states (Iowa and North Dakota) generated 28.5 and 17.6 percent of total annual electricity. Saskatchewan's current 2.7 percent from wind is shown for comparison. Not too flash - eh?

Source: US Energy Information Administration - Electric Power Monthly (Feb 2015 with data for full year 2014). SaskPower 2014 Annual Report.

3)    North Dakota Generation from Wind Energy

The Conference Board report uses inflexible coal baseload in Saskatchewan and Alberta as part of its justification for limiting the role of wind to 10 percent (Page II of the Executive Summary).

That argument is flawed as demonstrated by the experience of North Dakota and Iowa. The following graphic  shows that, in 2014, North Dakota generated 74 percent of its electricity with inflexible, baseload coal but also generated 20 percent of its electricity from wind. Also of note is Iowa which generated 54 percent of its electricity from coal but 33 percent of its electricity from wind turbines.    

Note that the Washington Post numbers are slightly different than ours due to differences in calculation methodologies. Nonetheless the point is the same and it is that the data in no way supports the Conference Board of Canada's claim that the inflexibility of Saskatchewan's coal - which in 2014 generated 44 percent of total electricity - requires a 10 percent cap on wind and solar. 

Source: The Washington Post 'Mapping how the United States generates its electricity'. 31-July-2015

Source: The Washington Post 'Mapping how the United States generates its electricity'. 31-July-2015

4)    International Energy Agency (IEA)

In this post we profiled an extensive IEA study which found, in brief, that;

Based on a thorough assessment of flexibility options currently available for VRE (Variable Renewable Energy) integration, a major finding of this publication is that large shares of VRE (up to 45% in annual generation) can be integrated without significantly increasing power system costs in the long run.

Hmmm - that hardly sounds like a good basis for imposing an arbitrary cap of 10 percent and 1 percent on wind and solar respectively.

5)    Grid Studies on the US Eastern and Western Interconnections

The US Government has led two major, multi-year, electro-technical studies which looked at the electrical integration of very substantial amounts of wind and solar power on the US Western and Eastern Interconnections which, for the non electrical folk out there, is basically the entire United States electricity grid.

In summary: they found that the integration of 30 percent wind and solar is possible with minimal cost increases and substantial health + environmental benefits.

6)    US Government: 35% wind by 2050

So confident is the US Department of Energy, in the findings of the aforementioned studies on the Western and Eastern Interconnections, that earlier this year it announced its intention to build on its groundbreaking national '20 Percent Wind by 2030' study by launching '35 Percent Wind by 2050'. 




In this study SaskPower/the Conference Board of Canada impose a 10 percent limit on wind energy and a 1 percent limit on solar in Saskatchewan and Alberta. The stated justification for this limit is the rapid change in electrical output of these two renewables and the inability of coal to respond to those output swings.  

However practical experience from a number of US States in combination with numerous electro-technical studies conducted under the aegis of the International Energy Agency and the US Government by companies such as General Electric, do not in any way support the proposed wind and solar caps. 

One might reasonably wonder why SaskPower/The Conference Board of Canada would, in the face of abundant evidence to the contrary, propose an arbitrary limit to wind and solar power in Saskatchewan and Alberta.   For an answer one need look no further than the report's funders: all four have significant interests in the natural gas industry and/or in the construction management of large, complex and expensive power generation stations. That fact alone explains both the report's dismissal of wind and its conclusion; 

This shift in mix reflects limited renewable energy options in both provinces as well as the diversity benefits of natural gas and nuclear.

Oh dear!