Saturday, October 22, 2022

Ontario Residential Electricity Rates are dropping. Bills aren't.

The Ontario Energy Board (OEB) released Regulated Price Plan (RPP) rates for the next 12 months, and they're down 10% from the current period. Other changes were not as clear from the material published along with the new rates, which I've come to realize is necessary for residential consumers to understand that their bills will change very little. I was waiting to see what the mainstream media would publish regarding the steep, and internationally rather unique, decline in rates, but I've seen nothing - which is somewhat of a blessing given the poverty of understanding demonstrated in recent reporting on Ontario electricity. I'll explain what is happening to rates, why they're dropping for one category of consumer, why it won't change individuals' bills, and the impact on other categories of consumers from recent changes in the so-called market's pricing.

I've added summary columns to the OEB's presentation of rate changes in the following tables, to demonstrate the reduction is rates. For those hoping to find information of which rate plan is best for them I'll point to my work 2 years ago as there's no real change in the mechanics: if your usage is primarily in the lower threshold of the tiered pricing plan, use that plan - if it's mostly in the upper tier, stay with the default time-of-use (TOU) rate plan.

The rate changes alone will mean a lower charge on a residential consumer's bill for their "Electricity" line. There are four other lines determining the total bill: "Delivery", "Regulatory Charges", "HST" (tax), and a credit line called "Ontario Electricity Rebate" (OER). Here's how the OEB described OER pricing in their news release:

the Ontario government’s Ontario Electricity Rebate (OER) will be changed to 11.7%. The OER is a pre-tax credit that appears at the bottom of electricity bills. For a typical residential customer who uses 700 kWh of electricity per month, the OER would decrease bills by about $13.91 each month.

A quick calculation for the typical residential customer who uses 700 kWh of electricity on their savings from a price drop of 10.1 cents/kWh shows a savings of  $7 on the electricity line. Here's what the prior year's OEB press release on those rate changes said about the OER:

the Ontario government’s Ontario Electricity Rebate (OER) will be changed to 17.0%. The OER is a pre-tax credit that appears at the bottom of electricity bills. For a typical residential customer[1] who uses 700 kWh of electricity per month the OER would decrease bills by about $20.90 each month.
Another calculation also yields $7 per month as the OER drops for the average consumer from $20.90 to $13.91 on their average bill - so the decrease in the OER credit line fully cancels out the savings on the electricity line. 
One could be forgiven for thinking this is all some shell game but that's not entirely true.

In the last fiscal year (2021-22) the Ontario government reported the cost of the OER at $2.3 billion, so the subsidy being dropped 31% should yield a taxpayer savings of over $700 million. 

One could be forgiven for thinking that electricity costs dropped $700 million, but that's not true either. The nominal cost of electricity supplied to the Ontario system has changed very little from 2019 through today and the latest RPP price report didn't forecast it to change next year either. If taxpayers are going to pay $700 million less, somebody else will be paying $700 more.

There are two classes of consumer in Ontario: Class A (large) and Class B (second). Regulated Price Plan (RPP) consumers are the largest subset of Class B consumers which the latest RPP report treats as consuming 64 TWh annually. The rates set out by the OEB are forecasts of Class B pricing in the upcoming year. The non-RPP class B consumers, neglected by previous governments, pay monthly "actuals" (as calculated by the IESO), and have in fact already been experiencing lower than expected electricity rates - but also not lower than expected total costs. I'll return to that discrepancy after dealing with the other Ontario consumer groups.

Approximately half of the decline in electricity rates for RPP consumers is due to an overage built in the variance account over the past year, with the other half being due to cost forecast in the coming 12 months. Therefore non-RPP Class B consumers have realized half of that benefit already. The RPP report produced for the OEB explains the drop in rates this way:

When [Hourly Ontario Energy Price (HOEP)] increases, generators’ wholesale market revenues increase, and they receive lower out-of-market payments funded through the Global Adjustment. Class B consumers, including RPP customers, pay most (approximately 83%) of Global Adjustment charges, so the decrease in Global Adjustment charges more than offsets the increase in HOEP, decreasing overall RPP supply cost.

This, I'm told, is confusing. The supply cost is mostly determined by contract. The so-called market recovers some of that cost through sales settled at the HOEP, and whatever cost is not recovered through sales at the HOEP is recovered through a mechanism called the global adjustment.

HOEP is impacted on the down side be excess committed supply, meaning when nuclear, hydro, wind and solar exceed all demand the HOEP doesn't function very well. When gas is necessary, it is the fuel cost of generating with it that sets the HOEP, and it's the rise in the price of natural gas that has the HOEP higher than was anticipated 1 year ago. Note the disproportionate impact of the cost of natural gas on electricity market pricing is true many places, and a very serious source of energy poverty in some (such as Europe). Unique to Ontario is the increase in the price of natural gas reducing costs for the smaller consumers' group.

The reason that gas pricing increasing results in reduced Class B pricing is the Industrial Conservation Initiative (ICI), which is the mechanism designed to create lower costs for larger, Class A, users. Controlling their consumption during the highest demand peaks allows Class A users to reduce their global adjustment charges, and an impact of that has been that the class' share of the global adjustment (17%) is far below its share of consumption (29%). Given that most supply is a fixed cost, and in Ontario even the majority of the cost of supply from natural gas generating stations remains a fixed costs, the small cost impact of more expensive natural gas generation is more than cancelled out, for class B consumers, by the reduction in the cost shift to class A consumers as the global adjustment reduces and HOEP grows.

Hopefully that's clear. The implication is that the $700 million reduction in the Ontario Energy Rebate subsidy is possible in a system where costs aren't reducing because Class A consumers are paying more. While industrial pricing would generally be a concern, the increase is probably true everywhere. It will become a concern if Ontario's pricing becomes uncompetitive with jurisdictions competing to locate manufacturers. There will be public finance impacts as many class A consumers are in the MUSH sector, but I've never approved of subsidizing public facilities this way so I won't be trying to estimate that costs.

I noted earlier that Class B consumers weren't realizing the benefit of the drop in their electricity line charges due to increases on other lines of their bills, and I'll return to that to transition to the non-Ontario export consumer group. The September year-to-date class B "commodity charge" dropped $2.63/MWh from 2021 to 2022, but this has been more than cancelled out by a rises of $2.14/MWh on the Wholesale Market Service Charges (WMSC) line and $1.46/MWh on the wholesale transmission Charge line. This is disappointing. 

I've previously written on the dowdy topic of  establishing an Export Transmission Rate. The regulator was struggling on this and invited testimony from the IESO which argued "Congestion Rents Collected from Exports" among the reasons to minimize, or eliminate, such a rate. Wholesale transmission charges to Ontario market participants are up this year. The Wholesale market service charges, where I understood the benefit of congestion rents would appear, are also up. Estimating congestion rates, as the value of exports at the real-time price (by intertie) less the HOEP, reveals that by September 2022 year-to-date congestion rent value exceeded $300 million, which is over 40% beyond the previous full-year record. Where is that export benefit?

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