commercial electricity customers

Commercial electricity customers mull decision

Newly eligible candidates weigh opportunities and risks of Ontario program
Monday, May 8, 2017
By Barbara Carss

The Ontario government’s promised electricity cost adjustments have transformed a projected 3 per cent increase into a 17 per cent reduction for the average residential customer. New rates kicked in May 1, shaving 2.8 cents per kilowatt-hour (kWh) off the price that the Ontario Energy Board would have otherwise pegged for on-peak power consumed between 11 a.m. and 5 p.m., and 1.4 cents/kWh from the lowest priced, off-peak rate between 7 p.m. and 7 a.m.

Potential savings for commercial electricity customers are more difficult to quantify, but May 1 represents something of a watershed for them also. Many owners/managers of larger office buildings and shopping malls will soon have to make a first-time decision about joining the Industrial Conservation Initiative (ICI), while newly expanded eligibility for the program’s perks may be even more punitive for smaller customers on the losing side of cost redistribution.

Previously, as the name suggests, industrial customers were the majority of participants since program rules essentially disqualified all but very large commercial facilities — typically at least 1 million square feet — and/or buildings that house data centres. Now, with the threshold for eligibility reduced to a monthly peak demand of 1 megawatt (MW), energy management specialists advise most office towers in the range of 350,000 square feet would meet ICI entry requirements.

“It presents a great opportunity,” Bala Gnanam, director of sustainable building operations and strategic partnerships with the Building Owners and Managers Association (BOMA) of Greater Toronto, told attendees at a recent seminar to examine some of the possibilities. “We foresee that many of our members could end up saving hundreds of thousands of dollars, but, at the same time, there is confusion about it in the marketplace.”

That perhaps parallels the confusion surrounding the Global Adjustment — the largely opaque bucket of costs that ICI participants can mitigate through curtailment of electricity consumption during periods of high demand. While Gnanam describes the Global Adjustment (GA) as “one of the most difficult costs to understand”, its impact on electricity bills is easy to see. In the 10 years between 2006 to 2016, it soared from a province-wide monthly average of $54.5 million to more than $1 billion, equating to a 1,786 per cent increase.

Looking back to summer 2016

May 1 marks the beginning of a new benchmark year for the ICI program, although a few other key dates are also in play. This is a time for current and prospective new participants to look back at their electricity loads during the five identified hours between May 1, 2016 and April 30, 2017 when the highest province-wide demand was recorded. Local distribution companies (LDCs) will be required to supply this information no later than May 31 so that eligible customers can meet a June 15 deadline for opting in.

Those who choose to do so will be designated as Class A customers. As such, their monthly share of the GA from July 1, 2017 to June 30, 2018 will be calculated with a consistent mathematical factor, derived from their energy demand during the five peak hours in the 2016-17 period. Non-participants remain in the vaster ranks of Class B customers, paying the GA on a volumetric per-kWh basis.

Commercial electricity customers won’t necessarily be making their inaugural decision from a position of strength. It’s commonly acknowledged that it is easier to curtail power consumption in industrial operations, where production can be shut down with relative ease, than in office towers or shopping malls, where energy demand tends to rise in step with the peaks.

“Our analysis of dozens of properties suggests that commercial properties with mechanical cooling that operate during normal business hours will not benefit by opting in as Class A customers,” reports Neal Bach, president of the energy data management and consulting firm, Energy Profiles Limited.

Moreover, when the 2016-17 peaks occurred — on July 13, August 10, 11 and 12 and September 7 — commercial customers in the 1 to 5 MW range weren’t aware that they’d be deemed eligible for the program. By the time the Ontario government made the announcement on September 13, 2016, they’d missed the window for knowingly strategizing. Nevertheless, the generally disadvantageous allocation of costs to Class B should prompt all potential Class A customers to consider their options.

Cost redistribution

Customers who don’t qualify for the program are the subsidizers of ICI beneficiaries. After Class A customers’ Global Adjustment is calculated each month, the remainder of the costs is simply apportioned to the Class B base. In 2016, this worked out to an average of 9.75 cents/kWh.

“Theoretically, if the majority of Class A customers don’t have a good peak demand factor, Class A would actually pay more and Class B would get a break, but I don’t think that’s going to happen,” observes Scott Rouse, managing partner of the consulting firm, Energy@Work.

Ultimately, energy efficiency is Class B’s best and perhaps only defence. “The more electricity you use, the more Global Adjustment you will pay,” Janet Young, a communications advisor with Ontario’s Independent Electricity System Operator (IESO), reminded seminar attendees.

Buildings connected to Toronto’s deep lake water cooling network could be particularly good candidates for Class A. “Deep lake water cooling decreases electricity over traditional cooling by 90 per cent. On peak days, there are no chillers running,” Richard Palu, director of partnership development with the system operator, Enwave Energy Corporation, told the gathering.

Beyond this niche of potential winners, Rouse offered some past examples of large customers that have seen rewards or suffered losses based on their choices. Typically, facilities that have relatively consistent energy demand will achieve better results in Class A than buildings in which demand rises and falls throughout the day.

Because the peak demand factor used to calculate Class A costs lags real time by about a year — i.e. demand during the peak hours of summer 2016 determines Class A’s share of the GA in 2017-18 — changes in occupancy could also influence outcomes. If an energy-intensive tenant like a data centre has moved in since September 2016, Class A status should translate into lower electricity costs than Class B. If there has been a significant and sustained loss of occupancy since September 2016, Class B could be more cost-effective.

“Some people don’t consider what their future operations profile may look like,” Young said. “In the end, this is a business decision. It’s hard to say that this (Class A) would be good for all offices across Toronto.”

Eligible customers are required to annually state their intention to participate by the prescribed date in June so it is possible to switch classes at that time. Ontario’s Minister of Energy also has the discretion to allow a Class A customer to withdraw from the program, but that is likely to occur only in extraordinary circumstances such as an unforeseen calamity. The financial consequences of simply making the wrong decision will have to be borne for the full annual term.

Repercussions of residential relief still unclear

Currently, it’s still unclear how the Ontario government’s new hydro rate strategy will flow through to non-residential customers. Some previous components of GA costs — the Ontario Electricity Support Program and the Rural or Remote Rate Protection Program — will now be funded via general provincial revenues, which, the Ministry of Energy states will “provide savings” for all electricity ratepayers. Other cuts reflected in the new residential/small business rates may not be shared so universally.

In an April 10 letter to the Ontario Energy Board, Energy Minister Glenn Thibeault gave instructions for approximately $2.5 billion in GA relief for the period of May 1, 2017 to April 30, 2018 “to benefit all Ontario customers that are eligible for the RPP (regulated price plan), including those that have opted out of the RPP in favour of market-based pricing or a retail contract as well as non-RPP eligible customers that are eligible for the 8 per cent rebate (of the provincial portion of the HST).”

That would encompass residential, multi-residential, small business and farm accounts, but would not include commercial customers that use more than 250,000 kWh annually. Thus, the Class B Global Adjustment allocation for May is expected to be revelatory.

“Is the GA relief going to apply to all consumers, or will it all be allocated to the RPP?” Bach muses. “Or will the RPP decrease be added back into the GA, thereby increasing costs for commercial customers?”

Barbara Carss is editor-in-chief of Canadian Property Management.

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