Midway into 2014, a lull in Ontario's electricity price hikes

There are a lot of lessons that might be learned from Ontario electricity system data for the first half of 2014. This post will show what I suspect are the most surprising numbers from the period.

Pricing

The Independent Electricity System Operator (IESO) June Monthly Market report that the year-to-date (YTD) weighted average Hourly Ontario Energy Price (HOEP) was $53.24/megawatt-hour (MWh).

That is up 89% from the $28.15/MWh in the June 2013 report.

The increase in the HOEP sounds expensive, but most Ontario ratepayers will see little inflation in the rate they pay for the commodity portion of their electricity bill. This is because Ontario applies another charge in addition to the HOEP, currently called the Global Adjustment (GA) charge. The GA exists to ensure the full cost of procuring supply is recovered by electricity consumers.

The GA is collected by different rates for different classes of customers and, for some classes, depending on where their billing cycle dates falls into the dates of the global adjustment process, but the most relevant rate is the "Class B" Rate: that rate averaged $32.65 for the first half of 2014, down 42.5% from the $56.86/MWh in 2013.

The Class B total "Commodity Charge" (the HOEP plus the GA) thus averaged $85.89 over the first half of 2014, up only 1% from the $85.01 for the first half of 2013.

The explanation for how an 89% rise in market pricing occurred concurrent with the lowest inflation in the actual commodity price in many years is not an easy one.

Customer Classes

There are many electricity prices in Ontario, with the most significant being export pricing; preferential "Class A" pricing for very large users of electricity; and the Class B pricing that was essentially flat over the first half of the year.

Building a total picture of the pricing from all these classes, costs were not flat during the first half of 2014. Estimating with only IESO figures the total costs of supply can be estimated to be up nearly half a billion dollars, which is roughly 8%.

"Class B" global adjustment customers saw less inflation because the cost inflation in other customer classes was very significant.

Ontario realized ~$135 million more revenue on reduced exports of electricity.

Revenue from "Class A" customers must also be up sharply. These customers see their share of the global adjustment costs reduced to their share of demand during 5 system peak hours [1]. The higher market pricing (HOEP) would have resulted in ~$300 million more in charges to class A customers, and the reduced global adjustment pricing likely only halved that increase.

Most residential and small business customers in Ontario are on a Regulated Price Plan (RPP), which is set in advance but should balance out to the Class B average over time.

Collectively the market costs increased by the 8% stated previously, on reported demand growth of ~1.5% - with the average rate increasing about 6%


The Supply Mix impact on pricing

My estimates of global adjustment component costs are in line with reported values over the first half of the year (although not on a monthly basis).

One reason average cost increased less than expected is that supply with significant fuel costs was down the most; the end of coal in Ontario saw that fuel produce 1.7 terawatt-hours (TWh) less in the first 6 months of 2014 than the period a year earlier, but natural gas-fired generation was also reduced by near 1.5 TWh.

Nuclear led the increased supply sources in my tracking (1.9 TWh), followed by imports, wind, hydro and solar.

The IESO's latest 18-month forecast optimistically noted; "The amount of nuclear and import curtailments for SBG in Q1 of 2014 was only slightly more than Q1 of 2013 by 4,500 MWh." This continuing need to curtail surplus while reducing production from fossil fuels during a very cold winter indicates a continued surplus of capacity. [2]

Capacity payments are, in my estimation, a main savings in the fist half of 2014, due to the retirement of coal plants. Only coal-fired generation saw a total cost decrease in my supply cost estimates.

It must be noted that the increase in costs is not proportional to the increase in generation; solar added the most cost, followed by hydro (due to OPG's unregulated hydroelectric assets benefitting from a higher HOEP); while nuclear generation increased the most, the costs of nuclear procurement appears to have increased the least.

The global adjustment charges in 2013 were particularly unpredictable, and that was likely because the ~$250 million charges associated with relocating contracted gas-fired power plants. The lack of miscellaneous charges in 2014's global adjusment pool is also likely to contribute to holding down the inflation.


Conclusions

There are some useful messages that can be taken from the half-year data, but there can't be an expectation the pause in Class B commodity price increases is sustainable. Two key contributors to holding rates down were the removal of capacity as coal-fired generators were retired, and the presence in 2013 of charges related to moving the gas plants (this could also be considered as deferring capacity additions). A third contribution came from transferring a greater share of supply costs to class A customers, but the government has already signalled the expansion of the Industrial Conservation Initiative (ICI), with the expectation of the program lowering electricity costs for the ICI participants.

One lesson that should be taken from this review of the numbers is that an increase in the Hourly Ontario Energy Price (HOEP) benefits smaller consumers because a low HOEP means more heavily subsidizing exports, and a shift of total system costs from large ICI consumers to small business and residential customers.

While nuclear power had the highest growth in the first half of 2014, this won't continue indefinitely, and there will be some upwards price pressure in nuclear when the Ontario Energy Board eventually deals with the rate hikes requested by Ontario Power Generation for July 1st.

There is little chance that the next big price move will not be up.

Endnotes

1. I wrote A Class A Crap Shoot concurrent with this post to explain a separate issue with that rate mechanism.

2. The IESO gained the ability to curtail grid-connected wind (and solar) is September 2013, so their statement on "nuclear and import" curtailment is somewhat deceptive. I estimate they curtailed ~45,000MWh of wind in Q1, which would push up curtailments to 50,000MWh

Solar costing has been a particularly focus of mine this year, which I communicated in Estimating production from Ontario's solar panels

I displayed one impact of solar powered generation on IESO demand forecasting in 45 million cups of coffee and I wrote on the impact of solar to IESO peak, and thus class A pricing, in Thumbs down on finding high fives: a Class A problem and A Class A Crap Shoot

This post skipped over the problems with measuring, and reporting, of "demand" in Ontario - which I wrote on separately in Demand Ain't what it used to be: Ontario's increasingly inadequate electricity reporting

I also took time, having compiled the data for a mid-year review, to update the status of wind supply in Ontario, in Against the wind: One more $1 billion estimate, plus...

Finally, I wrote a tongue-in-cheek post on the compilation of the global adjustment pool The rapidly changing composition of Ontario’s global adjustment charge takes an approach of anti-nuclear propagandists is displaying a misleading subset of cost data.