A Complicated Mess

July 20, 2022

If you are new to the Ontario electricity industry, or you step back and look at it objectively, you quickly come to the conclusion that in many ways it is a mess.

Let me give a few examples.

Residential = 8  
TOU rateswith OESPwith net metering
Tiered rateswith OESPwith net metering
Retailerwith OESP 
   
Small Commercial (< 50 kW) = 5  
TOU rates with net metering
Tiered rates with net metering
Retailer  
   
Large Commercial (< 5,000 kW) = 12  
Multi-residentialwith a retailerwith net metering
Farmwith a retailerwith net metering
Intervalwith a retailerwith net metering
Interval with OERwith a retailerwith net metering
   
Large Industrial (> 5,000 kW) = 1  
Class A (industrial customers under the ICI program)= 1  
Streetlights = 1  
Unmetered loads = 1  

Subsidies

There are a number of subsidies flowing within and into the Ontario electricity system.  The existence of significant subsidies within a system is usually an indication that it is not working as it should.  These subsidies include:

Renewable Energy Subsidy – The Government of Ontario is subsidizing the high cost of the renewable energy contracts signed largely under the Green Energy Act to bring their cost down to acceptable rates.  This is costing around $3 billion a year and is a direct payment from the Government to the IESO to pay the generators.  This means these costs do not show up in the cost of electricity and all consumers benefit.

Ontario Electricity Rebate (OER) – This subsidy is provided to all residential, small business and farming customers and shows up as a credit on their bill.  This subsidy costs around $3-4 billion and is paid for by the Government of Ontario so the reality is it, and the Renewable Energy Subsidy, is paid for with tax revenue.

Both these subsidies were discussed in more detail in my February 13 blog https://www.notlhydro.com/subsidized-electricity/

Industrial Conservation Initiative (ICI) – This is a subsidy provided to large users of electricity in Ontario.  This is available to any business that has a demand over 1 MW or 500 kW in certain industries.  A business is required to reduce their demand at certain peak times to get the subsidy.  This subsidy costs around $1 billion a year and is paid for by all other consumers through the Global Adjustment.

Rural or Remote Electricity Rate Protection (RRRP) – This is a subsidy provided to electricity distributors that have customers who are very remote and whose delivery cost would otherwise be exorbitant.  The biggest recipient is Hydro One Remote Communities Inc which provides services to communities not connected to the grid.  There is a charge of $.0005/kwh embedded in the Regulatory portion of your bill to cover some of this cost.  This generates about $75 million across the province but that only addresses around $20% of the subsidy.  The rest is covered by tax revenues.

There are valid arguments both for and against any of these subsidies.  I am not taking a position on their validity.  However, their existence, the extent of the subsidies and the resulting cash flows is an indication that the underlying structure of the Ontario electricity industry has become a mess.

Rate Categories

We counted 29 different rate categories at NOTL Hydro. These are as follows:

OESP is the Ontario Electricity Support Program which provides some rate relief to some low-income consumers.

Other utilities may have even more rate classes depending on their customer base.  Each rate category is also very complicated on its own as I detail in my blog on February 16, 2022.  https://www.notlhydro.com/evolution-of-electricity-rates/

The number of required rate classes has grown over time as the regulations have been changed with more and more programs introduced by the provincial governments.  These programs include tiered rates, net metering, the OESP, the OER and the ICI. 

Again, there are valid arguments for this variety of rate categories.  They allow for the differentiation of the customer base and billing that is more closely tailored to the needs of the customer.  They also increase costs and increase the potential for errors.

Either way, this number of rate categories is an indication of a system that has been constantly tinkered with and become very complicated.

Global Adjustment and Tiered Rates

 When the new electricity market in Ontario was created one of the objectives was to have the price of electricity match the cost to produce the electricity at that time.  The hourly market was created and for a time prices largely reflected cost.  When the Ontario Government switched from the hourly prices to the Regulated Price Plan (RPP) or Time-of-Use (TOU) rates these were a good proxy for the average hourly price.  The goal in both rate systems was to encourage consumers to adjust their usage based on the cost of electricity at the various times.

The Global Adjustment (GA) has eliminated this incentive for large commercial and industrial customers while Tiered rates have eliminated this incentive for residential and small business customers.

In 2005, the government began paying Ontario Power Generation a contract price for their power instead of the market price.  The difference between the contract price and the market price is the global adjustment.  Initially, the contract price was lower than the market and this was actually a credit to customers.  That did not last long.  The Green Energy Act accelerated the growth of the Global Adjustment and by 2020 it represented 89% of the average cost of electricity.

The problem is the Global Adjustment is applied at the same rate no matter when the electricity is used.  When 89% of the cost is the same no matter when used there is no incentive to load shift.

Likewise, Tiered rates are applied no matter when the electricity is used so for residential and small commercial customers who select Tiered rates there is also no incentive to manage when they use electricity.

One of the biggest challenges with electricity is that it has to be used when generated.  There is still very little storage as it is still very expensive.  This means that you have to have enough generation capacity available to supply electricity at its peak use.  This is very expensive if you have to have a lot of generation available that only gets limited use.  The whole goal with market prices is to encourage consumers to adjust their usage so that less electricity is needed at these peak times.  This reduces the cost of electricity for everyone.

The use of electricity is rising again and expected to continue to do so.  The cost of new generation is expensive.  The best tool for modifying behavior and reducing the requirement for new peak generation is price.  This has been lost which makes a system with hourly pricing that has no consumer impact a mess.

In fairness, I will note that the Ontario Energy Board (OEB) has begun a consultation looking at replacing the flat GA rate with something that may have some TOU characteristics. This is currently forecast to take four years but better late than never.  The OEB is also looking at a second set of TOU rates designed to give customers more choice in order to influence behavior. 

Conclusion

The complex mess I note above was not deliberately created.  It was the result of successive governments trying to fix problems in the system during their time in office with band-aid solutions.  Each solution sounded beneficial on its own (except the Green Energy Act) and achieved its stated goals.  Over time, and collectively, all these actions have created this mess.

There is also no simple solution.  Each new government program creates a set of consumers who have come to rely on the programs.  For example, companies have made investments based on the ICI program, some utilities have set rates based on receiving the RRRP and all consumers prefer the lower prices.  These will not be easily unwound.  All I can suggest is that we should try determine how the electricity system in Ontario should be structured and then ensure decisions are made that move the system in this direction instead of away from it.

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