The Province of Ontario recently floated the idea of allowing some customers to be charged a variable global adjustment charge instead of the current fixed charge.
To explain. Ontario does not have a true market for setting the price of electricity. It has a partial market that covers some of the costs of generating electricity. The rest is covered by a charge known as global adjustment (GA). Some months the GA can be over 80% of the total cost of generation. Residential and small commercial customers are charged a variety of Regulated Price Plan (RPP) set rates. RPP rates average out to be close to the hourly price plus the GA. All other customers must pay the actual hourly rate plus the actual GA. The GA is set at a fixed price per kwh that is the same for every hour in the month. Larger industrial customers can participate in the Industrial Conservation Initiative (ICI) that reduces the GA based on the ability of these customers to reduce their electricity usage at certain times.
The idea being floated is that for those customers who do not participate in the ICI and are not eligible for the RPP, they could now opt to have a GA that is preset and varies based on the time of day. The theory is that they could save money by adjusting when they use electricity.
This concept has been posted on the Ontario Regulatory Registry which is a forum on which the Government posts regulations it is considering and invites feedback. Based on this feedback, the Government can then decide if it wants to make any changes, to proceed with the regulations or to just drop them.
I want to acknowledge and gives kudos to the thinking behind this regulation. I have long argued that the flat rate GA is a problem. This is trying to address that. For this reason, I support it.
There are two problems with this regulation. The first and biggest is that it is treating a symptom and not the cause. The real problem is the very existence of the GA. If we had a true market price that covered the entire cost of generation then we would not have this issue. As it is, more and more complexity is being created to overcome the issues being created by the GA. The first level of complexity is the GA itself. Industrial customers do not know their true cost of power until well after the end of the month. The IESO provides estimates but these can be very different from the actual final price. Then there is the ICI which pushes some of the cost of power from industrial customers to all other customers. And now we will have a variable by time-of-day GA that will be set once a year so could be much higher or lower than the actual GA. We are trying to mimic an actual market.
The second problem with this regulation is that the uptake is likely to be small. For many industrial customers, the cost of electricity is not high enough to warrant changing their production schedules to take advantage of any pricing mechanism. For those whom it makes financial sense to make these adjustments, the ICI offers much larger and more tangible savings. The ICI offers real reductions in the cost of electricity while this regulation only offers savings from arbitraging the price of electricity across different points of time. Therefore, the only potential users of this option will be industrial customers not big enough for the ICI, for whom electricity is material and who can make the adjustments to the timing of their processes to realize the potential savings.
I support this regulation as it is better than not having it. But I would much rather they had a true market price and did away with the global adjustment. Then all the complexities of playing with the application of the global adjustment, like this regulation, would no longer be needed.
There is another option. Almost all the generation in Ontario has a set price of some sort or other. The IESO market does not determine the revenue for most generation but rather the split between the hourly price and the GA. One the customer side, all residential and small commercial customers already have set prices and this would allow larger commercial customers to have a set price for the GA component. It would not be a big step to move back to having the entire market have a set annual price and no more market. As we have smart meters, the full price could be set with hourly and seasonal variations similar to what is proposed here. This option would reduce some of the unnecessary costs and provide more certainty. I prefer a market as in the long run they deliver the best price and choice signals but a market needs both time and confidence to work. It has had neither in Ontario. This alternative is not a good option; but it would be more honest and better than the convoluted mess we have now.