The Price of Electricity

November 23, 2022

Electricity pricing in Ontario is complicated.  I have mentioned that many times.  Generally, the price of electricity is made up of the Hourly Ontario Energy Price (HOEP) plus the global adjustment (GA).  This is shown in the chart below.

The cost of the commodity is a pass-through from generation to end user with no mark-up throughout the process.  Residential and small business customers pay what is known as the Regulated Price Plan (RPP).  Until 2017, the RPP was very close to the sum of HOEP and GA.  The consultant for the Ontario Energy Board did a good job of forecasting when setting the RPP.  In 2017, the Ontario government of the day implemented the Fair Hydro Act and began subsidizing the cost of electricity for this set of consumers.  The RPP no longer matched HOEP plus GA.  This subsidy, in a different form, continues currently.

As can be seen in the chart, the overall cost of electricity rose continuously from 2007 to 2020.  In 2020, a different subsidy was implemented that reduced the global adjustment by moving certain costs to the tax base.  This brought down the total cost of electricity.  These subsidies were discussed in detail in my February 3, 2022 blog: https://www.notlhydro.com/subsidized-electricity/ along with a bit of a history on the GA. 

Since it was introduced, the GA has come to dominate the total price of electricity.  One of the issues with this is that the GA is charged as a flat monthly rate rather than on a time-of-use basis.  I discussed this in more detail in my July 20, 2022 blog:  https://www.notlhydro.com/a-complicated-mess/ .  Lately, the GA has come down as HOEP has risen.  This can be seen better with the monthly rates.

The relationship between HOEP and GA is structural.  Most of the electricity generated in Ontario is either on long-term contracts or, in the case of Ontario Power Generation, on guaranteed prices.  GA is therefore largely the difference between these costs and HOEP.  As HOEP rises the GA falls.  Given that most of the electricity is on these contracted or guaranteed pricing, HOEP is largely irrelevant from an electricity billing perspective. 

I have been told that HOEP is largely set by the marginal cost of gas fired generation.  The increase in HOEP is a reflection of the increase in the cost of gas; particularity since the war in Ukraine. 

For most customers the split between HOEP and GA is irrelevant.  There is one set of customers for whom the relative prices of HOEP and GA is very important:  large customers who get the Industrial Conservation Initiative (ICI) subsidy.  Depending on their particular circumstances, these customers pay some fraction of GA.  The lower the GA then the lower their subsidy.  For some, this may be just a matter of how much of a subsidy they get to book to improve their bottom line.  For others, whose business case may be partially based on the subsidy or who have made investments in order to get the ICI subsidy, a low GA could have an impact on the financial viability of their operations.

Subsidies for large industrial customers are common across many jurisdictions.  In the United States they are often just lower rates for that rate class.  The GA is unique to Ontario as is the industrial subsidy being derived from the GA.  On the one hand, the impact of the rising GA could be viewed as a lesson on why not to design subsidies that are dependent on other variables as the world does change.  On the other hand, the cost of these subsidies is passed on to all the other ratepayers so at least this cost has declined.  Either way, Ontario seems determined to make electricity pricing as complicated as possible.

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