Tuesday, November 1, 2011

Ontario’s Electricity Policies Bite Into Municipal Budgets

I read an article in the newspaper the other day that began; “The skyrocketing cost of lighting city streets is the result of Ontario Energy Board (OEB) rate changes, city councillors were told Monday.”  The previous week the same council had heard of $130,000 associated with annual electricity bills for the new local twin-rink.  I hadn’t dwelled on it until I read it out loud to a visiting relative; “Street lighting costs are budgeted to increase to $645,500 next year, an increase of 41% since 2009.”  Then the nickel dropped – duh!  I’d written, a week earlier, “OEB Hikes Electricity Rate … 41% in the Past 2 years.”  

Winter 'Years' starting Nov. 1 (ie. 2011 is Nov. 1, 2010, to April 30, 2011)
The two figures shouldn't match.  My understanding was that the Municipalities, Universities, Schools and Hospitals, known as the MUSH sector, were no longer offered regulated rate plans.  They are to pay the actual rates (Hourly Ontario Energy Price -HOEP), with the global adjustment (GA) mechanism applied to ensure recovery of all generation costs (plus a couple of  other things).  The story I read claimed the that, "the number of connections, not the amount of power used, has the greatest impact on cost..."  Regardless of the reason for streetlight costs escalating at the same rate as residential off-peak rates,  some investigating shows rampant contracting of supply, facilitated by the global adjustment mechanism, is destroying the attempt to differentiate off-peak rates in both the regulated consumer market, and the wholesale market.

Winter 'Years' starting Nov. 1 (ie. 2011 is Nov. 1, 2010, to April 30, 2011)
A very short review of the global adjustment.  Most electricity production in Ontario is now contracted, or regulated.  The difference between the market recoveries (HOEP), and the contractual commitments to suppliers, is recovered through the global adjustment charge.  The OEB publishes, each fall, a document explaining the rates beginning November 1st (here).  Part of that document demonstrates the anticipated share of purchases from suppliers without contracts, or regulated pricing.  Reviewing the past 6 OEB RPP documents, the near total elimination of unregulated, free market, suppliers is apparent.

October 2011 comes to a close with demand, production, and the Hourly Ontario Energy Price (HOEP), very close to both 2009 and 2010 levels.  The difference in the overall commodity charge for electricity is entirely the monthly global adjustment, which has moved for $34.49/MWh, up to $40.34 and up again to an estimated $45.59 for October 2011.  I'll review the October data separately, but it is noteworthy that much of the supply that doesn't receive contracted rates comes from publicly owned Ontario Power Generation hydro resources.  The output of those resources appears, inexplicably, sharply reduced over the past 9 weeks.  It appears, to me, that we are passing on cheap public hydro due to extravagant over-contracting of far more expensive private supply.

The idea of TOU rates, or other period billing schemes, such as real-time pricing (RTP), is that electricity will be more expensive when demand is higher.  The GA, on the other hand, is primarily based on factors that have little to do with demand.  Most of the GA pot is recovered on a proportional use basis - so 64% of the largest GA pot is to come from off-peak hours consumption.  Driving the increases in generation capacity are demand-agnostic nuclear, wind, and solar contracts, along with capacity payments to attract natural gas-fired generation - these the OEB documents refer to as Net Revenue Requirements (NRR's).  Along with depressed demand, Ontario's politically dictated procurement policies have largely eliminated any market pricing distinction between TOU periods.  Smaller pots exist to recover the costs of coal units still online for capacity, as well as Lennox GS, which is essentially an emergency reserve generating station.  Those pots are primarily charged to peak use periods, and are therefore the primary difference between on-peak and off-peak pricing; market valuations are a minor difference.

The OEB documentation on rates seems very thorough.
That strikes me a thoroughly unnecessary.

Winter 'Years' starting Nov. 1 (ie. 2011 is Nov. 1, 2010, to April 30, 2011)
The contracts are driving price changes.  The forecasting might split the HOEP and the GA differently, but the two combined should equal the contracted prices regardless of the split.  They don't usually - although the margin of error put into the OEB planning covers off the difference.  The RPP price setting is presented as a very complicated process.

Yet it looks like they just take the figure from the previous year - there's a stronger relation between the plan and the previous winter season than there is to plan and actuals.

Winter 'Years' starting Nov. 1 (ie. 2011 is Nov. 1, 2010, to April 30, 2011)
The variance should be surprising, because each year (bi-annually), the OEB has Navigant Consulting Ltd. prepare an "Ontario Wholesale Electricity Market Price Forecast,"  and then the OEB incorporates that in setting the rates for the residential price plans.  
The HOEP figures don't have as strong a correlation to the figures from the previous year, but the relationship still looks more to previous year than to actuals.

This is all ridiculous.
The expenses are known because they are overwhelmingly based on contracts.
There is no functioning market so there can be no consideration of market pricing in establishing variable pricing schemes of any sort.  They are a too-complicated whim which has led to an extensive, and utterly meaningless, process for setting electricity pricing - inclusive of outside consultants who have no history of accuracy.  We have this process so a regulator that can't control pricing can pretend to mimic the pricing of a functioning market, instead of regulating towards a functioning market.

The contracts are known, the generation totals can be estimated, and Ontario demand is stagnant.  The main factors in an equation anticipating costs are't even in the pricing scheme.  Those are the prices in external markets where we'll need to dump excess capacity if we aren't simply to pay contracted suppliers to curtail production.
Regulating a functioning market, including supply, would be a far more worthwhile pursuit than inventing schemes to suck money out of municipalities, and all consumers, in the middle of the night.


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