Avoided Costs: Ontario Hydro's Experience

Abstract

Ontario Hydro regularly estimates avoided costs primarily for use in evaluating some design, operating, planning and domestic marketing alternatives. Avoided costs reflect increased or decreased use of existing facilities or the cost of delaying or advancing additional resources. The avoided costs are estimated to be about 2 cents/kW.h (in $1988) to the mid 1990s. Costs increase to 3 or 4 cents/ kW.h towards the late 90s (in $1988) as the nuclear construction program is completed and acid gas emission regulations become more costly to meet. By necessity, a lot of simplifications must be made in the calculation of avoided costs. Simplifications are necessary to approximate the complex nature of operating and planning a power system. As in many other jurisdictions, regulatory and policy making bodies in Ontario and developers of cogeneration and small hydro are interested in calculations of avoided costs. This paper briefly describes Ontario Hydro's experience in developing avoided costs: the methods, the assumptions, the results, and the difficulties.