ISSUE

The current design of customer rates to recover the fixed costs of electricity supply—the Global Adjustment or Provincial Benefit—is unfair to business customers, inconsistent with best practices in other jurisdictions and unnecessarily is eroding Ontario’s industrial competitiveness.

RECOMMENDATION

Industrial customers are recommending a principled solution that would immediately begin to remedy this problem and move Ontario’s electricity rates in a more sustainable direction for manufacturing competitiveness.

·         Principle: The fixed costs of electricity supply infrastructure—generation, transmission and distribution—should be charged to customers based on each customer’s contribution to peak system demand.

This “coincident peak allocation” principle would immediately reward customers who consume less power during high system peak periods, especially during hot, smoggy summer days, and provide a strong incentive to business customers to shift more consumption away from these high peak periods towards off-peak periods during evenings and weekends especially during the spring months, when the weather is mild and the spring run-off increases production by Ontario’s hydro-electric generators.

BENEFITS

Promote efficiency in Ontario’s electricity sector

·         Improve generation, transmission and distribution asset utilization

·         Reward efficient demand management by consumers

·         Support integration of new renewable energy supplies

Lower electricity costs for all consumers

·         Reduce the need for new expensive gas-fired peaking generation

·         Increase use of existing base load generation

·         Reduce the need for transmission and distribution system reinforcement

·         Reduce losses on the transmission and distribution system

Help Ontario businesses compete

·         Reward efficient customer demand management

·         Improve operating margins

·         Attract investment

·         Save existing jobs and create new ones

Improve environmental quality

·         Reduce reliance on old, high-emitting, low efficiency generation (e.g., coal)

·         Reduce reliance on older, higher-emitting and lower efficiency coal-fired generation upwind of Ontario in Michigan and other Midwest states

·         Reduce emissions leading to smog and climate change

BACKGROUND

Electricity generators in Ontario that participate in the wholesale electricity market are paid the Hourly Ontario Energy Price (“the HOEP”) for each megawatt hour produced. Customers pay the HOEP based on each megawatt hour consumed. Many generators also receive payments based on contracts with the Ontario Power Authority or regulated rates approved by the Ontario Energy Board. Customers are charged these additional costs via the “Global Adjustment”, for wholesale customers including local distribution companies, or the “Provincial Benefit” for customers of distribution companies. The Global Adjustment and Provincial Benefit are charged to customers based on each customer’s total consumption during a month.

The concern is that placing a flat charge on every megawatt-hour of consumption for every customer regardless of when they consume power eliminates the valuable economic opportunity for demand-side responses to market dynamics and imposes a significant and unjustified cost burden on manufacturers.

BEST PRACTICES FOR RATE DESIGN

In the planning process for electricity systems, the normal practice in most jurisdictions is to plan capacity additions to meet the system’s peak demands (otherwise known as the coincident peaks). Both transmission and generation planning are generally done on a coincident peak basis, which continues to be necessary given the trend in utility load profiles to a more peak-based load due mainly to expansion of air conditioning and electronic loads in the commercial and residential sectors Because long-term supply and the associated costs are driven primarily by forecasts of peak demand, utilities allocate those costs on the basis of a customer’s demand at the time of system peak demands.

This approach is not new. This is the way that rates were designed prior to the opening of Ontario’s electricity market in 2002. These principles also are applied by the Ontario Energy Board in setting rates for transmission and distribution service by Hydro One and by local distribution companies. Many jurisdictions with competitive electricity markets use demand-based approaches to recover fixed costs. Examples of this can be found in the United States (New York, Michigan, Mississippi, Indiana, Georgia, California, North Carolina, etc.) and abroad in places like New Zealand.  Experience has shown this approach to be successful in promoting more efficient use of electricity.

Moving towards a demand based approach to allocate GA is consistent with other electricity pricing mechanisms in Ontario.  For example, Time-of-Use (TOU) pricing, facilitated by the roll out of smart meters, is based on the same principle.  That is, electricity prices should rise when demand is high and fall when demand is low to better reflect actual costs.  A demand-based approach to GA allocation, like TOU pricing, will encourage consumers to shift demand out of peak periods and into off-peak periods, thereby increasing efficiency and reducing the total cost of the system.

Allocating the Global Adjustment based on a customer’s contribution to peak system demand will immediately place a higher value on load shifting and peak load reduction, reward appropriate customer behaviour, reduce system costs, and level the competitive playing field with other jurisdictions.

FOR MORE INFORMATION

Adam White

Association of Major Power Consumers in Ontario