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Prices in Ontario's recently deregulated electricity market were lower than some neighbouring jurisdictions in May, a new study concludes.

A report by energy consulting firm Navigant Consulting Ltd. of Toronto says Ontario's wholesale electricity price averaged $29.19 per megawatt-hour in May, compared with the fixed price of $43 per megawatt-hour that consumers paid prior to the May 1 market opening.

Navigant managing director John Dalton said consumers should not draw conclusions yet about lower costs in a deregulated market.

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"One should not read too much into these price levels, other than the wholesale market appears to be operating well," he said. "This summer poses significant market price risks, given anticipated tight reserve margins."

The Navigant report found that prices in Ontario tracked other deregulated northeastern U.S. markets closely in May, although its prices were lower and less volatile. Ontario benefited from mild weather and spring runoff that increased output at hydroelectric stations.

May prices in the New England trading hub averaged $53.33, while the western region of New York State averaged $30.17 and the western region of the Pennsylvia/New Jersey/Maryland trading hub averaged $34.70.

In May, Ontario's Independent Electricity Market Operator (IMO) reported good electricity reserves of 20 to 30 per cent above demand. A reserve margin of 20 per cent is generally considered adequate to cover uncertainties from demand fluctuations, weather changes and generator outages. Lower reserve margins mean that more expensive generating plants have to operate, increasing market prices.

This happened on Tuesday, when an unexpected increase in demand momentarily pushed prices as high as $700 per megawatt-hour. The IMO had to draw on expensive reserve sources until lower-cost power plants were able to ramp up. The spike lasted less than an hour, and prices quickly fell back, averaging $76.15 per megawatt-hour for the day.

"It [Tuesday]was kind of an eye-opener," Mr. Dalton said. "Prices have been low, but this is a spot market and we're prone to volatility."

More volatility is on its way. The Navigant report says July reserve margins are expected to fall to 11 per cent to 12 per cent. As well, a number of power plant units are expected to be unavailable in the next few weeks for scheduled maintenance.

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"Prolonged hot weather or high levels of generator outages will expose the market to significantly higher prices," the report warns.

The report also notes that the IMO's costs for its operating reserves -- payments to electricity producers to keep reserves available if needed -- are significantly higher than those prices in other regions.

Ontario's May operating reserve prices ranged from $3.99 to $6.54 per megawatt-hour.

In western New York State, by comparison, operating reserve prices were 43 cents to 68 cents per megawatt-hour.

Mr. Dalton said there are good opportunities for generators to serve Ontario's operating reserve market, which might help make Ontario more appealing to new generators who are concerned that spot market prices are low. Energy peaks and valleys
Hourly Ontario energy price, $ per megawatt-hour

              Minimum   Average   Maximum

2002

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Pre-May 1                 $43.00
May 1-7         $10.32    $28.43    $64.18
May 8-14        $16.01    $32.46    $99.08
May 15-21        $7.84    $25.25    $35.24
May 22-28        $9.13    $27.12    $46.39
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