Ontario electricity prices hold steady despite dropping demand

Ontario electricity prices flout sliding demand

Global adjustment climbs as energy loads plummet
Tuesday, April 14, 2020
By Barbara Carss

An hourly Ontario energy price (HOEP) of $0.00 per kilowatt-hour (kWh), like the one posted yesterday afternoon, doesn’t translate into windfall savings for commercial electricity customers. Rather, it signifies that the global adjustment (GA) — the opaque bucket of costs for contracted supply, nuclear facility refurbishment programs and conservation and demand management initiatives that accounted for more than 85 per cent of the commodity cost in Ontario electricity prices last year — is set to climb higher still.

“The negative HOEP is interesting, but not especially relevant for commercial and institutional consumers,” advises Michael Lithgow, manager, energy and climate change, at Sunnybrook Health Sciences Centre. “It’s inversely correlated to the GA and, for every kWh, you’ve still got to pay the usual regulated (transmission and distribution) charges.”

Despite a steep drop in province-wide energy consumption due to COVID-19 triggered business shutdowns, many building owners/managers expect a more modest flow-through dip in operating costs. The GA is central to that forecast, both due its quirky apportionment and its track record as the repository for added, often unspecified costs the Ontario government needs to cover.

In the latter case, that could be the burden recently removed from residential, small business and farm customers when the government flattened time-of-use pricing and set prices at the off-peak rate of 10.1 cents/kWh for at least 45 days. “It’s a great initiative, but one consequence could be that the GA goes up to cover the cost,” says Neal Bach, president of the energy analytics firm, Energy Profiles Limited.

Blended rates snare some Class A consumers

There may be another shock for some Class A customers who enjoy a locked-in factor for calculating their monthly GA allocation. The select group of large industrial and commercial consumers with average monthly peak demand of at least 1 megawatt (MW) and smaller manufacturers with average monthly peak demand of at least 500 kilowatts typically includes commercial buildings in the 350,000+-square-foot range.

However, the formula for apportioning the GA, which will be in place until June 30, doesn’t align well with a sudden sharp decline in province-wide demand. Bach suggests the larger group of Class B customers — generally encompassing small and mid-sized commercial buildings — which pays the GA on a volumetric per kilowatt-hour (kWh) basis, may now be in a preferred position compared to some Class A consumers.

“Some Class A commercial customers are currently experiencing much higher blended rates because the GA costs are fixed until June 30. Consumption has dropped considerably at most properties — e.g. largely vacant office towers — but costs for borderline Class A customers are dropping to a much lesser degree,” he observes. “On that basis, for March to June 2020, Class B consumers with significantly reduced consumption will end up paying less than they would have if they opted in for Class A.”

Under the rules of Ontario’s Industrial Conservation Initiative (ICI), Class A customers pay a share of the GA prorated to their energy demand during the five hours of system-wide highest peak demand in the period from May 1 to April 30. That’s then used to calculate their GA allocation in the ensuing 12 months from July 1 to June 30. Thus, current Class A customers pay GA that’s tied to five hours in the summer of 2018 when system-wide demand peaked at 23,240 megawatts (MW) to 21,885 MW.

After Class A customers’ allocation is calculated each month, the remainder of GA costs is simply apportioned to Class B customers as a straightforward per-kWh charge. With Ontario’s daily peak demand hovering in the 14,000 MW range thus far in April, it’s expected that Class A customers will take on a larger than usual share of GA costs — a scenario that has always been possible, but never really anticipated. In 2018, for example, Class B paid about 35 per cent more of total GA costs than Class A.

“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,” Scott Rouse, managing partner of the consulting firm, Energy@Work, mused in 2017.

Now, he projects Class A customers with relatively stable energy consumption should continue to benefit from their status. “However, those Class A customers that have been forced to shut down are going to be in for a surprise,” he notes.

New ICI cycle soon to begin

This also occurs within the context of anticipated price adjustments for industrial customers, following last year’s consultation process and strong hints in the Ontario government’s fall 2019 economic outlook and fiscal review. “The government is proposing to take near-term action to reduce the red tape burden in the electricity system by working with the Independent Electricity System Operator (IESO) to simplify and streamline industrial electricity billing and the Global Adjustment settlement process,” it stated.

With the COVID-19 crisis delaying the release of the full Ontario 2020 budget and putting other provincial business on hold, that action is unlikely to occur before another one-year cycle of the ICI program begins on July 1. Class A customers have already carved out their share of the GA for the 2020-21 period since the five determining peak hours from May 1, 2019 to April 30, 2020 period all occurred last July.

Now it’s just a matter of waiting for their local distribution companies (LDCs) to confirm their performance — known as the peak demand factor, based on their energy demand during those five hours. Conventionally, LDCs report to Class A customers by May 29 so that they, in turn, can decide whether to opt into the ICI program by a June 15 deadline.

“If they’ve guessed the correct five hours and curbed their energy loads accordingly, they’ve reduced their global adjustment charge, which can be particularly beneficial for companies that have large pieces of energy-consuming equipment, like an arc furnace, for example,” says Andrew Pride, an energy management specialist who consults on energy efficiency and strategic conservation programs. “If all use drops 10 to 15 per cent and a Class A customer hasn’t picked the correct peaks, it would be on the hook for a larger bill than last year.”

Even so, others speculate that could still be the best option.

“With demand so low, the HOEP can be expected to drop even lower than it already is, which would put more upward pressure on the GA and cause costs to go up for Class B consumers as well,” Bach says.

“If the Class A consumers have a fixed amount based on their peak demand factor and the residential rates are capped, who will pay the increased GA costs?” Rouse ponders. “Class B is left.”

The Building Owners and Managers Association (BOMA) of Greater Toronto will once again host its annual workshop to weigh the  possibilities, which, this year, will take form in a May 12 webinar.

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

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