Monday, December 16, 2019

a little nonsense: Ontario’s Demand Response auction

The Independent Electricity System Operator (IESO) recently announced the results of its latest Demand Response Auction. They communicated the pricing trend this way:
The average annual clearing price of this year’s auction was $58,725/MW, a 36% decrease since the first auction in 2015.
Sound good? How about in comparison to the similar message from the previous year’s news release:
The average annual clearing price for availability payments of $52,810/MW represents a 30% decrease from last year, and a 42% decrease since the first auction in 2015.
Context changes things: the price of capacity in the IESO's demand response auction rate rose this year, for the very first time. There are two main reasons prices would rise: the IESO, and the OEB.

The Ontario Energy Board (OEB) regulates the province's energy sectors to ensure maximum harm to consumers and minimum efficiency- or at least some days it seems like that’s what they’re doing. Late in November the OEB ruled to suspend changes to the IESO's auction procuring capacity which were intended to expand participants. The changes were objected to by, primarily, the Association of Major Power Consumers in Ontario (AMPCO). The objection seems to be that AMPCO's membership would lose the benefits of what they've stolen fair and square in the past, although they didn't use precisely that language in their appeal of the change to market rules that would transition the Demand Response Auction (DRA) to a broader transitional capacity auction (TCA).
3. Generators receive payments for energy services provided to the [IESO Administered Market]. [Demand Response] resources do not...
4. The effect of implementing the Amendments to broaden the DRA to a TCA without first addressing the inequity in treatment between generation resources and DR resources in the IAM energy market is to unjustly discriminate against DR resources, and in favour of generation resources. This is because the Amendments would allow the latter to effectively and unfairly displace the former in the capacity auction platform which was developed for DR resources and through which such resources have been successfully and competitively participating in the IAM since 2015.
"Successfully" is a funny term. The OEB includes a Market Surviellance Panel which produces some excellent reporting, unlike the organization's multiple Hamlets endlessly stringing out decisions on things like rule changes and rate applications. the panel's most recent report shared this:
Ratepayers will pay $161 million to resources procured under the first four Demand Response auctions. The Panel continues to question the value of this program for ratepayers, given that none of the hourly demand response resources have been activated to provide DR and reduce their consumption.
The just-completed auction was the 5th. So what the OEB is solemnly hearing now is the argument that changes to a mechanism that has never produced any value to ratepayers in the province are unjust - to the largest power consumers in the province. We could call this group, just for the sake of bucketing, Class A consumers.

It should not be entirely irrelevant that demand response does not have the same economic value as actual generation. I won't argue that point extensively here, simply because it'd take a lot of space, but those with interest can read the arguments discussed in this article by Jesse Jenkins from 2014, and/or the amici curiae filed by 21 leading energy economists cited in the article. I will note the first argument made against a rule requiring paying the full market rate for demand response is titled: "Excess Demand Response Causes Customers To Forgo Socially Valuable Activity."

The IESO's recently completed fifth capacity auction ran under the old rules. Not only did the cost for demand response (DR) go up from the fourth auction, so did the amount of DR cleared in the auction - which makes some sense as the targeted DR amount also rose. What makes no sense, as far as I can tell, is that the amount cleared exceeded the target amount by record amounts for both summer (27%) and winter (36%) commitment periods. Even without diving deeply into the volumes of rules for the market it's possible to see some excess commitment: all bids are ranked by price and the cumulative capacity is measured until the target capacity is reached - and all equal bids are taken at that point instead of creating another volume of rules for the auction to break ties. So what must of happened in this auction is multiple bids were raised from last year's level, with many of those bids raised to the same amount.

They're ought to be an investigation.

If you've made it this far you might be of the impression their are many large power consumers participating in the demand response auction. You'd be wrong - at least in terms of direct participation.

Two companies have been awarded over half of all DR capacity in the 5 years of auction history. Historically Rodan Energy Solutions, a company with a specific product for the IESO's DR auctions, headquartered in Mississauga (hey - so is the IESO!), has won 28% of all auction capacity. Enel X Canada is not far behind, having won 26% of all historical DR capacity. Enel is based in Italy - where they've been fined for abusing market power. Both these companies have offerings aggregating demand response for multiple end consumers to use the DR auction to benefit their customers.
Among the 4 companies that have won almost 80% of capacity auctioned off over the half-decade only one is a specific large consumer (Gerdau Ameristeel Corp.)

It appears to me that in order for the IESO to have cleared 919.3 MW for the Winter period (Nov. 2020- April 2021) when the target was 675 identical bids would need to have come from 2 of: Enel X Canada, Rodan, and NRG Curtailment Solutions Canada Inc.

That'd be quite a coincidence - two of the dominant forces in the market both risking everything by raising their bids from the previous auction!

It is not that the large industrial consumer of electricity in Ontario doesn't require affordable electricity if they are exposed to trade (although many large consumers, in the MUSH sector, do not); it is that the ridiculous tools invented to provide them with an escape from the rapidly rising costs of 2008-2016 can't be precedents for a better future. The DR auction costs are a tiny fraction of annual electricity supply costs in Ontario, but it seems to me they could have an oversize impact in maintaining a culture of bureaucratic incompetence that facilitates private profiteering devoid of any real wealth creation - on some vapid notion from the 1970's that negawatts should have the same value as megawatts.

A Naughtomobile should not be worth the same amount as an automobile!


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