Profits offered for curbing electricity demand

Ontario's new conservation overseer expands potential perks for commercial customers
Thursday, April 30, 2015
By Barbara Carss

Ontario’s Industrial Conservation Initiative (ICI) has been a point of contention, bordering on insult, for commercial electricity customers since its 2010 inception. The program was designed to encourage the province’s largest consumers to curtail their electricity loads during periods when soaring demand saps supply and pushes up prices, but it relegates a larger majority of mostly commercial customers to carry a disproportionate share of the so-called Global Adjustment that now accounts for about 60 per cent of the commodity cost of electricity.

The pending introduction of a capacity auction for demand response does not right that wrong, but it should offer a wider range of consumers an opportunity to profit from peak reduction. Account managers from the Independent Electricity System Operator (IESO) provided an update on both programs at a recent seminar, sponsored jointly with the Building Owners and Managers Association (BOMA) of Greater Toronto.

Notably, some data centres may qualify for the ICI under expanded rules of eligibility that have come into effect this spring. Considerably more real estate operators will have to the potential to participate in the capacity auction, either individually, if they can deliver a portfolio-wide curtailment of at least one megawatt (MW), or through an aggregator.

“We really have tried in the market design to make this as accessible as possible,” the IESO’s Ryan King told seminar attendees. “For a successful auction, we want broad participation.”

Demand response might best be typified as the IESO’s first stage of triage. While conservation and renewables are goals for long-term sustainability, demand response —or peak reduction — is a strategic temporary fix to relieve pressure on the system.

Ontario’s long-term energy plan calls for 2,400 MW of demand response capacity by 2025 to avoid or postpone investment in additional generating facilities.

“We have (occasionally) seen 1,200 megawatts of peak demand reduction,” King reported. “That is significant. A Darlington reactor generates about 900 MW.”

Capacity auction

The capacity auction is a new approach to replace expired or expiring contract-based programs that the now-defunct Ontario Power Authority previously administered. Enrollees in those programs — sequentially labelled DR1, DR2 and DR3 — had five-year contracts, committing to shed load or divert generation to the grid for up to 100 or 200 hours per year (depending on the chosen contract option). This came with a two-tier compensation scheme: a constant payout for simply being on standby; and a higher per megawatt-hour (MWh) rate during actual periods of response.

DR3 (the last remaining OPA program, now in its final stage) required participants to commit a minimum of 5 MW of curtailment, meaning that the majority of commercial customers could enter the program only through one of five authorized aggregators. In practice, few chose to do so.

The capacity auction will also rely on aggregators, but the lower 1-MW threshold for entry should increase the number of direct participants. In any case, market overseers promise the process will be straightforward. Details were released in early April with a request for proposals (RFP) for an initial pilot project.

The auction model is analogous to the electricity market itself, in which the costliest supply sets the price that all generators receive in any hourly period. Participants submit bids to indicate the price ($/MWh) at which they would agree to cut their electricity loads, and these are ranked from lowest to highest. In a peak demand event, system administrators would call on bidders, beginning with the lowest prices, to shed load until the required reduction target is met. The last bidder needed to meet the target — i.e. the highest price — sets the price that all participants receive.

Like the predecessor DR programs, participants will also receive a monthly payment for being on standby. With the first auction tentatively scheduled for December 2015, prospective participants are urged to explore the possibilities.

“We are hoping for a diversity of offerings,” noted Alexandra Campbell, the IESO’s manager of stakeholder & public affairs.

“The idea is it’s a competitive platform,” King explained. “If you want to think about it (the bid price) as your opportunity cost, that’s probably the best way to think about it. You do the math and figure out your risk.”

Global adjustment calculations

Successful exploitation of the Industrial Conservation Incentive depends on effective forecasting and the flexibility to cut electricity loads quickly. In many ways, it’s similar to the DR3 program except that the timing of power curtailment is determined internally within the electricity customer’s facility.

Power use during the five hours of the year with the highest recorded electricity demand determine each eligible consumer’s peak demand factor. This factor is then used in the next year’s billing period to calculate the customer’s share of the Global Adjustment — the premium added to the market price of electricity to account for contracted prices with various power generators and the cost of conservation and demand management programs.

“The lower your peak demand factor, the better you will do over the entire year,” IESO account manager Hanna Smith observed.

Until now, the ICI has applied only for consumers with demand loads of at least 5 MW, labelled Class A for the purpose of allocating the Global Adjustment. On the flipside, Class B, which is primarily comprised of commercial customers, covers the remainder of the Global Adjustment based on a $/MWh formula that has consistently allocated a disproportionately higher share of the costs to the ratepayers of the class.

Last year, Ontario’s Ministry of Energy expanded Class A eligibility to include a limited number of mostly industrial and/or agricultural operations with demand loads greater than 3 MW. Data processing is the one new inclusion with an upside for commercial customers.

“For a traditional data centre that has a flat load, it’s absolutely an advantage,” affirms Neal Bach, president of the consulting firm, Energy Profiles Limited. “Even if they don’t curtail on the five peak hours, the percentage of the Global Adjustment will be less than paying on volume, which is what they are doing right now.”

Meanwhile, large commercial customers with Class A status are less likely than their industrial peers to reap the benefits of the ICI because electricity demand in office buildings tends to be in sync with system-wide demand. Industrial facilities have the flexibility to shut down production lines during epic heat waves, while building managers have considerably less leeway to turn off cooling systems.

This article was originally published in the April/May 2015, GTA & Beyond section of Canadian Property Management.

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