Coming soon to YOUR electricity bill ... in Ontario

A couple of perspectives on the large increases occurring in what the system operator refers to as the "commodity charge" - consisting of HOEP (Hourly Ontario Energy Price) and the Global Adjustment Class B rate.

The article below is the result of a collaboration between myself and Parker Gallant; I think it features Parker's knack for focusing on how all these figures, and the actions of government, are, and will increasingly be, impacting residential and small business consumers' electricity bills

As I worked with Parker I was snared by the realization that aspects of Ontario's electricity contracting meant prices would fall only if emissions rise - and vice-versa.  I attempt to communicate the absurdity of the situation on my original content site in The Capacity Trap: Ontario's Electricity Costs Soar as Emissions Drop.

Coming soon to YOUR electricity bill:OEB spin (originally posted at Wind Concerns Ontario)

The Ontario Energy Board (OEB) is responsible for setting Ontario's time-of use (TOU) and regulated price plan (RPP) electricity rates, and it does this twice annually, in April and October. The announcements are made slightly in advance of the effective dates of May 1st and November 1st and reflect what the OEB anticipates will occur in the upcoming six months. The reset rates are based on what the OEB feels will be required to pay the generators over that period of time. 

The OEB preface their announcement by saying that “the increase will add [insert amount] to the average ratepayer’s bill per month or [insert percentage] of the total monthly bill.” They never specify that it is only the cost of electricity and that other items on your bill will/or may have already gone up! Their last announcement on TOU and RPP rates indicated an increase of 2.9% for the May 1, 2013 bills but it was actually an annual increase of 11% for many residential consumers. 

The upcoming announcement in late October will accordingly reflect an adjustment to what has actually occurred (during the six months from May 1st to October 31st) and what is anticipated in the next six months.

Based on the first three months (May through July 2013) of the current period, Ontario's ratepayers should expect another significant increase. Data from the Independent Electricity System Operator (IESO) indicates this period has seen a drop in Ontario's demand of 4.7% or 1.7 terawatts (TWh) which is equal to 1.7 billion kilowatts (kWh). In any sane industry, a drop in demand normally signals the providers that the product/service needs a price reduction, or suppliers to exit the market, but the electricity sector is not ruled by “sane” individuals. It is a instead a centrally mismanaged industry run by the McGuinty/Wynne Liberal government with support from the NDP.
The cost of electricity to Ontario's ratepayers consists of: the Hourly Ontario Electricity Price (HOEP) plus the Global Adjustment (GA). While the former reflects a trading market for electricity, functionally only the profitability of the “unregulated” hydro production from provincially owned Ontario Power Generation (OPG) is affected by the HOEP.

The GA on the other hand is loaded with costs that bear no relevance to the generation of electricity-items like the cost of picking up your neighbour's old fridge, the monies handed out to gain aboriginal involvement in “wind” and “solar” production (referred to as “price adders”), the costs of the “conservation” initiatives, the costs of paying for the non-production of electricity generation from gas, and nuclear, plants, the costs of erecting meteorological stations at wind turbine developments so ratepayers can pay the developers for not producing power. And of course, there is the cost of supporting wind and solar production when it actually produces power at prices that are well above market, and five to six times what we sell that power for to our neighbours in New York, Michigan, Quebec, etc.

(NB: Not included in the GA is the cost of erecting and connecting transmission lines, adding transformers, etc. for the wind and solar generators. Those costs reflect themselves in the “delivery” line of your bills and they too keep increasing to pay for the billions that Hydro One has spent, and will continue to spend as more of these go into commercial operation.)

While the market value (at HOEP) increased nominally from the three comparative months in 2012 to 2013, the GA increased by over $400 million—a 26% rise. With demand also down, the per-unit impact should be ~32%, or 1.4 cents per kilowatt-hour (twice the debt retirement charge). The $135 million per month increase in the GA, if extended for a full year, will add almost $1.6 billion annually to the GA pot and would almost equal three “gas plant scandals” each year for the next 20 years.

The other factor playing into the continuing rise in our electricity bills is the unalterable fact that the $135 million per month increase only reflects about one-third of what the Ontario Power Authority (OPA) has already contracted for in respect to wind and solar generation. According to the OPA, wind power in commercial operation as of March 31, 2013 was 2,059 MW, representing 36% of the contracted supply of 5,797 MW and 764 MW of solar represented 38% of the 1,996 MW contracted for.

Despite the fact that only about one-third of contracted wind and solar are in commercial operation they are already driving up the costs of electricity. Independent Electricity System Operator (IESO) data shows that over the three-month period in 2013, wind produced 2.5% of Ontario's total generation. At a price of $135 per megawatt hour wind production would be directly responsible for approximately 5.4% of the total GA. There is no comparable data from the IESO for solar, which can be seen as a huge shortcoming as our estimates range from solar producing from 0.7%-1.2% of all generation, but contributing from 6.5-11% of the global adjustment. Wind and solar generation together likely produced 3-4% of generation and directly accounted for around 15% of the global adjustment charges.

Indirectly the cost is higher: natural gas-fired plants have been contracted, guaranteeing Net Revenue Requirement (NRR) that make them profitable whether or not they produce power (the hope being they are used only for backing up low/no carbon emission sources).

The conclusion one can draw from the foregoing is that renewable energy (wind and solar) producing intermittent electricity (80% of the time when we don't need it) costs ratepayers four times what it costs for conventional sources and when those remaining contracted 3,739 MW of wind and 1,232 of solar are in commercial operation, we should expect they will produce (on average but 80% of the time when it’s not needed) 10.5% of Ontario's demand and represent about 40% of the GA costs. Those GA costs have climbed to the point where they now represent in excess of 65% of our electricity costs.

At that point it will be interesting to see how the OEB spins the increases that will be trotted out in the spring and fall announcements. For starters we should expect an interesting announcement in October as it is now appearing they missed the mark with their 2.9% in April 2013 (actual 11%) by a pretty wide margin if the following three months are similar to those just past. The OEB announcement will need to include the 20% plus they missed to simply catch up and whatever is expected in the six months, November 1, 2013 to April 30, 2014, when a further chunk of those wind and solar contracts will suddenly impact our electricity prices.

Ontario's ratepayers should expect to be dazzled by the “spin”!

Parker Gallant and Scott Luft
August 22, 2013