Government manufactured high electricity demand should end the ICI

Each day from July 7th to 10th saw an IESO "Ontario Demand" peak higher than any day since July 2013, and July 6th saw the 7th highest peak since 2013's summer. The government had made some announcements that encouraged this month's higher peaks:

• On Saturday, May 30th, the government announced the suspension of time-of-use (TOU) electricity pricing, replacing it with a flat rate until the end of October, and,
• On the afternoon of Friday June 26th the government announced, "companies that participate in the Industrial Conservation Initiative (ICI) will not be required to reduce their electricity usage during peak hours"

The second of these announcements was the most impactful in spurring higher peak consumption, but a review of multiply pricing impacts, and our ability to measure them, will provide a perspective for controlling systemic costs.

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The system operator's "Ontario Demand", "Represents the energy supplied by the IESO-Administered Market to meet demand within Ontario." This is not all the energy supplied in the province, and the share of consumption that was met by supply from the "IESO-Administered market" has been shrinking over the past decade. Putting the "Ontario Demand" peaks of July 6-10 this year in a historical perspective requires an explanation of the changes impacting that metric.

The IESO (a.k.a. the system operator in Ontario) hold contracts, written after 2006, for nearly 3,300 MW of generating capacity embedded in distribution networks, of which almost 3,100 MW has entered commercial operation. That supply, when operating, acts to reduce the need for "energy supplied by the IESO-Administered Market ." The bulk of the embedded generation (~68%) is solar, and that significantly reduces Ontario's peak summer "Ontario Demand". The IESO offers no reporting on hourly embedded generation - aside from long after-the-fact totals for 5 hours each Industrial Conservation Initiative (ICI) adjustment period (discussed below) - but I estimate the hourly output. Illustrating the "Ontario Demand" on July 9, 2020, with and without estimated embedded generation, and the "Ontario Demand" on July 13, 2005 (which contains the second highest daily peak on record), indicated Ontario consumption has not changed nearly as much as "Ontario Demand" indicates - at least not during heat-driven peak demand periods. The "Ontario Demand" curves are different, but including embedded estimates the two merge at 11 a.m. Eastern Prevailing Time (EPT).

Contracting embedded generation is not the only way the IESO has been negatively impacting demand for supply from the generators connected to the IESO-controlled grid (ICG). There's also been programming to encourage Behind-the-Meter Generation (BtMG or BMG), and that capacity had reached 1,100 MW a couple of years ago. While there's even less visibility on BtMG production than there is on embedded generation, I'll assume it's impact is mainly in providing consumers a tool to avoid drawing from the ICG at peak hours, due to the ICI.

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The government has suspended time-of-use billion (TOU) this summer, and the similarity in the demand profiles to pre-TOU times indicates that if (big "if") the TOU structure had caused any movement of consumption away from peak periods, it didn't persist during the suspension of TOU pricing.

A detailed study delivered to Ontario's system operator (IESO) concluded there had been little load shifting accomplished by TOU rates, and that the impact had declined the longer TOU was implemented:

For the province as a whole there was a statistically significant reduction in usage during the EMandV peak of 2.11 percent in the pre-2012 period, 1.89 percent in 2012, 0.82 percent in 2013, and 0.73 percent in 2014 relative to what usage would have been in the absence of TOU.

It would be very hard to spot a difference of a couple of gigawatt-hours in comparing demand profiles on different peak days of different years, largely due to the impacts of other programs, but evidence suggests there hasn't been much of an impact to spot regardless.

If a review of this summer's supply situation during peak hours indicates a need for more demand response the government would be wise to direct the creation of a critical peak pricing option for consumers who feel they could control consumption during periods of stress on the system.

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I have long been critical of the Industrial Conservation Initiative, but it is very easy to spot the impact of suspending the requirement for ICI, or Class A, consumers to reduce consumption during the five highest daily peak hours in prior years in order to reduce their future global adjustment charges. Two days with similar demand profiles from 6-11 am, and after 9 pm, are July 5th, 2018 and July 10th, 2020: during the peak hours in the middle of the day 2018's Class A consumers were curtailing their demand from the grid to avoid future global adjustment charges, but that incentive was negated two weeks before July 10th, 2020.

The demand reduction at peak appears to be, from this comparison, a little over 1500 megawatt-hours (MWh) at the usual peak hour, which should be expected due to claims made by the IESO in its Annual Planning Outlook:

In 2018, the ICI delivered an average demand reduction of approximately 1,600 MWh in the top 10 demand hours, and a maximum ICI reduction of 1,717 MW. The maximum ICI reduction on the peak demand day, and during the peak demand hour, was 1,347 MW and 1,330 MW, respectively.

It's unclear how much of the peak demand reduction had been due to switching to Behind-the-Meter Generation (such as generators and/or batteries), and how much was actual demand reduction.

The good news is there's evidence the ICI reduced peak demand by what the system people said it did - but the system performing well without Class A consumers reducing consumption at peak is an indictment of the program's high cost.

While "Ontario Demand" averaged 19,877 MW from July 6-10, the Hourly Ontario Energy Price (HOEP) averaged only $40.17 per megawatt-hour (approximately 4 cents/kWh), The highest the HOEP reached was $203.46/MWh, which is lower than time-of-use On-Peak rates would have been had TOU not been suspended for the summer.

So... how could one justify the $8 billion of cost transferred from Class A consumers to Class B consumers since the ICI was introduced?

The current government is unlikely to justify anything - they'd just blame the previous government if they found the courage to design a new pricing system that protected trade-exposed industrial consumers from uncompetitive electricity pricing. A good design should recognize the actual capacity needs the Industrial Conservation Program provided - but also that it provided that capacity far more expensively than Class B consumers could have procured it at.

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There has been some concern about the supply situation during the peak hours this July.

A post on Linkedin by Travis Lusney astutely noted:

Last week during Ontario's heat wave, the IESO declared an Energy Emergency Alert Level 1 on multiple days ([link]) and twice activated [Demand Response (DR)] resources to meet capacity needs. 

I believe the level 1 alert is a requirement for activating contracted Demand Response resources. This would be sensible under a scenario where the system operator operates a functional market. Considering the vast majority of the cost of Ontario's supply is recovered outside of the market (through the Global Adjustment charge), and essentially all supply is contracted outside of the market, it's probably more sensible to simply look at DR being activated in the absence of any other impacts of the emergency alert.

The average cost of DR capacity for this summer was around $59,725 per megawatt, which is roughly 1/10th of the rate the ICI program costs Class B consumers.

As a class B consumer, I'll take the DR - even with the requisite level 1 "Emergency".

Louder criticism of the government's suspension came from the Lovins sect that always claims conservation is the cheapest supply no matter the costs. Mark Winfield, P.H.D. wrote of the suspension of the need to reduce consumption during peaks this summer:

The government’s announcement therefore effectively constituted a major electricity rate break for the province’s industrial consumers, leaving residential and smaller commercial consumers to cover a larger portion of the province’s electricity costs than ever.

That's ridiculous: freezing ICI participants' share of global adjustment costs won't of itself leave Class B consumers better or worse off, and if consumption rises (the reason for suspending the need to seek peaks) it'll likely push up the Hourly Ontario Energy Price which will benefit Class B consumers - and taxpayers.
It's complicated - apparently in stark contrast to Environmental Studies at York.

Professor Winfield, P.H.D., continues in his pvbuzz article:

Quite unintentionally, the opportunity to “GA-bust” had created what had turned out to be a critical space for innovation and entrepreneurial behaviour in the province’s electricity system. With the abandonment of its renewable energy development efforts and energy efficiency strategy and recommitment to established technologies like nuclear, the system was otherwise increasingly perceived as what has been called in other contexts an “innovation wasteland.”

Again - the ICI is capacity 10 times more expensive than demand response for the classes that don't benefit from the program. It's the next re-working of Ontario expensive electricity mistake after the feed-in tariff orgy: we overpay thinking it will build an industry only to end up with an ecosystem of self-confident low-productivity people in a shrinking domestic industry of no relevance in export markets.

9 years into the ICI it could be halted with no perceptive negative consequences - and it's not because demand didn't materialize.

9 years - of escalating cost.

If we have an innovation wasteland in the province it is because of the intellectual wasteland inhabited by the Free-riders of the soft path at our universities, related think tanks, and the entrenched "stakeholders" crowding the system operator. The next time these people want to drive a technology of the future they somehow know let's hope we have a government demanding a coherent value proposition first, a market that demands value of participants, or both.



peak days xlsx
class A cost shift sheet