I am a believer in the value of markets. They bring innovation and cost management skills that no government run organization can match. I recognize that a market is not the answer to everything; the electricity market and the very high need for reliability is an example where some management of the market is still required. However, where there are opportunities the market should be allowed to flourish. I recently came across two examples where the current structure of the electricity market is preventing potential investments and resulting in lost opportunities for Ontario.
Air Conditioner and Battery Combo
The Carrier air-conditioner company just made an interesting announcement. They are looking to integrate batteries with their A/C units so that the battery charges at off-peak times and then the battery power is used at peak times to reduce the electricity demand of the air conditioning. There are a number of appealing aspects to this idea:
- One of the big costs of installing a battery in your house is the installation. By pre-installing the battery and integrating it with the A/C this cost is substantially reduced.
- Carrier can buy the batteries in bulk so the unit cost will be much lower and a step in the sales process will also have been eliminated thus further reducing costs.
- Air conditioning is one of the biggest uses of electricity (just compare your summer and winter use of electricity, assuming you do not use electricity for heat as well). Just mitigating the impact of air conditioning at peak times will have a big impact.
I am not endorsing Carrier, I just think it is a great example of innovative thinking that a market brings. Carrier wants the electric utilities to pay for the batteries in return for benefit of the peak load reduction. Whether this value proposition for the utilities works will have to be seen. For consumers, the benefit is clear as they can charge when power is cheaper and use the power at the peak times.
For a good portion of consumption in Ontario, this opportunity is not as valuable as it should be. For residential and small commercial customers, who get the (Regulated Price Plan) RPP rates, this opportunity works. I am a fan of the RPP rates as it allows this customer set to determine the value of opportunities like this with some certainty. Non-RPP customers (all large commercial and industrial) do not have that certainty. The problem for these customers is not the market price, that follows a predictable pattern, but the global adjustment (GA). The GA is the same no matter the hour in the month. As some months it can be up to 80% of the cost of power, it serves to make the variations in the market price largely irrelevant. This removes the benefit that could be derived by peak shaving in this manner.
If the Ontario market price was the full market price (no GA) and better reflected the actual cost of power, then innovative opportunities like Carrier has created could be taken advantage of by Ontario customers and have some impact.
Solar Power
NOTL Hydro recently built a new garage to better manage our fleet and inventory. An analysis was done to see if it was worth adding solar panels to the garage to reduce the cost of electricity. It was determined that the payback period was too long to make the investment worthwhile. Though the cost of solar panels is falling there were a number of factors contributing to the long payback including the connection costs and the small size of the planned installation (no economies of scale).
One of the major factors was the cost of electricity that could be avoided. Electricity in Ontario is highly subsidized with an annual subsidy of around $7 billion. This works out to around 5 cents per kwh. Half of this subsidy is to cover the extra costs from the Green Energy Act and is a direct reduction in the cost of electricity that is paid by all customers. The other half is a credit on the bills of residential and small commercial customers. These subsidies reduce the benefit of solar generation by reducing the value of the electricity no longer being purchased from the grid. It should be noted that customers in Ontario are still paying for the full cost of the electricity, it is just that some of this payment is in the form of income taxes.
I cannot say that we would have installed the solar panels if the subsidies did not exist. I can say that the idea would have been much more attractive. In many other situations, or in the near future, the difference in attractiveness due to the subsidies may mean the difference between investment or no investment. Multiply this across all the opportunities like this across the province and Ontario could be losing out on substantial investments.
Conclusion
With a market like electricity that is dominated by the government, it is easy for the market design to reflect the government’s needs rather than what might have the most positive impact for customers going forward. I believe that is the case in Ontario. Unfortunately, I do not see this changing anytime soon.