A temporary adjustment to Ontario’s electricity pricing scheme eliminates cost-saving opportunities that many operators of large commercial buildings were anticipating this summer. Instead, an estimated 90 per cent of customers eligible to participate in the Industrial Conservation Initiative (ICI) will be locked into the formula that currently dictates their share of the global adjustment (GA) for an extra year, and will not realize the benefits of any recent investments they’ve made to manage peak energy demand until at least July 2022.
As announced in late June, the ICI cycle that began on May 1 has now been cancelled for the vast majority of eligible participants. This follows earlier COVID-19-related interventions, including capping the global adjustment — the envelope of fixed costs for contracted supply, nuclear facility refurbishment programs and conservation and demand management initiatives that accounts for upwards of 80 per cent of the commodity cost of electricity — at 11.5 cents per kilowatt-hour (kWh) for the months of April, May and June, with the deferred amount above that threshold to be collected beginning in 2021.
Under conventional ICI program rules, commercial electricity customers with average monthly demand of at least 1 megawatt (MW) and manufacturers with average monthly demand of a least 500 kilowatts (kW) have an annual opportunity to reduce their next year’s GA costs based on how effectively they can curtail energy loads during the five hours between May 1 and April 30 when highest overall system demand is recorded. The temporary rule change postpones that exercise until May 1, 2021 for all except prospective participants that don’t have an existing result — known as a peak demand factor — that can be applied again next year.
“Today’s announcement will allow large industrial employers to focus on getting their operations up and running and employees back to work, instead of adjusting operations in response to peak electricity demand hours,” Greg Rickford, Ontario’s Minister of Energy, Northern Development and Mines, maintained in a statement released on June 26th.
However, a larger share of commercial building owners/managers won’t be able to take advantage of a drop in energy demand resulting from COVID-19-triggered business shutdowns. With the expectation that office towers will remain partially or predominantly empty this summer, many had foreseen lower-than-usual loads relative to the five peak hours. That could have resulted in a highly favourable peak demand factor, which would be used to calculate their share of the GA for the entire year from July 1, 2021 to June 30, 2022.
“Commercial properties would have seen peak demand factors go down with low occupancy this summer,” contends Jon Douglas, director of sustainability with Menkes Developments. “This change provides stability to the market, but I think calling it ‘fair’ is questionable. It takes away mechanisms of the market.”
Eroding clean-tech investment and employment
Beyond losing the strategic advantage of low occupancy, many owners/managers will be foregoing payback on investments they’ve made over the past year. Current peak demand factors are prorated to ICI participants’ (known as Class A for the purposes of the program) energy demand during the five peak hours of the 12 months between May 1, 2019 and April 30, 2020, all of which occurred in July 2019. Advocates for the commercial real estate sector suggest program participants could have been given a choice whether to retain that peak demand factor for an extra year or pursue a new one.
“We are not pleased that this was made mandatory for all Class A. Economic benefits from conservation measures implemented by any of our members since the last assessment period will now have to be deferred until 2022-23,” says Bala Gnanam, vice president, energy, environment and advocacy for the Building Owners and Managers Association (BOMA) of Greater Toronto. “This might also significantly slow down the advancement and adoption of energy storage and other behind-the-meter curtailment technologies.”
Investments made since last summer would otherwise have delivered energy management paybacks in July 2021 when new peak demand factors were applied. As for capital budgeting priorities, the near-term business case for investing in demand management may have lost some of its persuasive sway for the handful of buildings within Crossbridge Condominium Services’ portfolio that qualify for the ICI program.
“We were talking to all of our Class A buildings about adopting technology to reduce their peak demand factors,” reports Rob Detta Colli, manager of energy and sustainability with Crossbridge. “We were looking at solutions to balance the delivery of electric heating. Instead of allowing the entire building to come ‘on’ at once, this technology cycles 50 per cent of the building through ‘on’ and ‘off’ every 15 or 20 minutes. This cuts the demand in half with an imperceptible impact on temperature thanks to the thermal mass of the building itself.”
There could also be challenges for energy management and clean-tech companies with service contract business models that derive their cash flow from clients’ energy-related cost savings. “Many of these companies sold the technology fully financed to end-customers so their banks are now expecting to get a payment every month,” observes Tomas van Stee, founder and chief executive officer of the energy forecast and analytics firm, EnPowered.
Likewise, consultants who provide clients with guidance on the timing of peaks and when to curtail energy loads will face a dip in demand for their services — adding to COVID-19’s negative fallout for the energy management sector, which the public education and advocacy organization, Efficiency Canada, estimates accounted for approximately 436,000 Canadian jobs as 2020 began.
Potential upside for beleaguered hotel sector
On the flipside, van Stee identifies some clear and potential winners. The first group is expected to include many of the large industrial customers Minister Rickford references in his June 26th statement. Additionally, some of commercial real estate’s most beleaguered players could be in line to catch a break.
“Anyone who did really well (responding to peak demand) last year is laughing,” van Stee says. “They’ve got an advantageous peak demand factor that’s locked in for another year without having to do any additional work to achieve that.”
Indeed, he predicts that electricity demand will soar this summer since many of the largest consumers have no reason to try to shed load. Meanwhile, commercial operators are facing new COVID-19-related pressures for heightened ventilation, which will tax mechanical systems, and will still be cooling their buildings even if they aren’t fully occupied. Residential energy loads are also forecast to climb as the workforce ensconced at home cranks up the air conditioning earlier in the day.
All that actually works in the best interests of the small number of prospective Class A customers that will still be chasing the five peaks. Especially if their energy demand has dropped below last year’s levels due to low occupancy, their peak demand factor is likely to work out to a smaller portion of a higher peak and will position them favourably among the greater majority of Class A customers retaining peak demand factors derived in 2019. In one potential silver lining for a sector that’s suffered significantly due to COVID-19, many of the properties falling into this minority are hotels.
“For a variety of reasons, many hotels that qualified as Class A have never opted into the ICI program,” van Stee says. “They’re positioned to do well now without necessarily having to do much to respond to the peaks.”
Class B customers remain wary
Under the ICI program rules, newly eligible participants won’t have to make the decision to opt in until next June after Ontario’s local distribution companies advises them of their peak demand factors. Notably, for the July 1, 2020 to June 30, 2021 period, many Class A-eligible customers opted for Class B — joining the larger ranks of small and mid-sized commercial buildings that are charged global adjustment on a volumetric cents-per-kWh basis — because peak demand factors prorated to their energy use in July 2019 could translate into an unfavourable share of the overall GA bill if province-wide energy consumption remains low.
“Once you’ve opted into Class A, your GA costs are locked,” van Stee reiterates.
Nevertheless, there is plenty of speculation that Class B is also in line for electricity price increases. Beyond the looming requirement to make up for April, May and June’s deferred GA costs in 2021, Class B consumers are wary of what the ICI program adjustments could mean for them since they are left to pay all remaining GA costs after Class A’s fixed share has been subtracted. That could be problematic over a coming year when Class A has less incentive to try to manage demand and the cost of the vague components of the global adjustment may continue to escalate.
“I would be very surprised if the total GA does not increase,” Gnanam says. “This means that Class B will face a higher than normal rate of increase in their GA costs.”
Barbara Carss is editor-in-chief of Canadian Property Management.