Beware the Electricity Cost Iceberg

March 2010

• The Ontario Government's recently announced green levy or tax of $4/year for a typical residential consumer is only a small part of the total electricity bill increase that will occur by the end of 2011.
• By the end of 2011, green levy, smart meter, generation and HST-related increases will cause the typical residential bill to rise by 26% or $304.
• Residential consumers moving to the Smart Meter Regulated Price Plan will see their costs rise by $50/year.
• Pending generation cost increases will cause the typical residential bill to rise by $30/year, and future generation cost increases will cause a further increase of $122/year.
• Combined with near-term cost increases, the HST will add $98/year to the typical residential bill

On March 20, the Ontario Government announced a green levy or tax on electricity that will take effect soon. The levy is intended to help cover the government's conservation and green energy program. The cost to a typical residential electricity consumer is only $4 per year and yet many are up in arms over it. The problem is this cost is only a small portion of what consumers will see over the next eighteen or so months - the tip of an approaching iceberg.

Above the Water Line

Although it has drawn a lot of attention in the press, the new $4 levy for a typical residential consumer with modest, annual consumption of 10,000 kWh is relatively minor. The charge is based on a total annual collection of about $54 million. Spread across all Ontario users, it works out to about 0.04 cents/kWh. This cost increase is insignificant compared to other, less-obvious increases, some pending and others expected in the future.

Ontario Power Generation (OPG) has announced an application for a 9.6% increase (about 0.5 cents/kWh) on the rates paid for its regulated generation, which represents about 47% of Ontario consumption. In the past, OPG has not received its full requested increase. If this time around they were to receive say 2/3 or about 0.3 cents/kWh of the increase, the residential bill impact would be 0.15 cents/kWh or $15/year.

Also pending is the Harmonized Sales Tax (HST) that will take effect July 1, 2010. It will add 8% or $92 to a current typical residential bill. The HST will also have the compound effect of adding 8% to all other cost increases that are incurred down the road. The HST is a fiscal policy, not an energy policy, but consumers will see that as a distinction without a difference when their energy bill arrives in August.

Below the Water Line - Smart Meters

In May 2009, the Ontario Government set targets for the number of consumers on time-of-use rates under the Regulated Price Plan (RPP). This plan is also commonly referred to as the Smart Meter RPP. As of the end of 2009, Ontario utilities had installed about 3.4 million smart meters and about 350,000 residential consumers were on smart meter rates. By the summer of 2010, 1 million consumers are to pay these rates while by June 2011, the target is 3.6 million consumers.

Unfortunately, there are cost impacts with the Smart Meter RPP.

Typical residential consumers will see a cost increase when moving from the conventional RPP rates to the new Smart Meter RPP, because of a difference in how the rates allocate costs. The conventional RPP rate charges a lower energy cost to smaller volume users, something that tends to benefit residential consumers because they are subsidized by commercial or institutional users (whose use is greater). When they move to Smart Meter RPP rates, these customers will pay for energy based on time of use, and will no longer get a small volume discount rate. Residential consumers will see a cost increase of 0.38 cents/kWh or $38/year from the loss of this small volume discount that was imbedded in the conventional RPP rate.

The second Smart Meter cost impact is the assumed load profile used to set the Smart Meter RPP prices - currently 9.3, 8.0 and 4.4 cents/kWh for the on-, mid- and off-peak periods. Ostensibly, the OEB set these rates to recover the same average revenue used in setting the conventional meter rates. In so doing, the OEB identified two different load profiles - one for a typical Smart Meter RPP consumer and one for those with conventional or energy meters. If not on the RPP, the latter group would be charged for electricity based on an assumed load profile; namely, their utility's Net System Load Shape or NSLS. Close examination of Toronto Hydro's 2009 NSLS, however, indicates that if that collective group switched to Smart Meter RPP rates, they would pay 6.34 cents/kWh. The additional cost of 0.12 cents/kWh equates to $12/year for a typical residential consumer.

(Once all RPP consumers have moved to the Smart Meter RPP, revenues will reach an equilibrium state and the 0.12 cent/kWh or $12/year increase should disappear.)

Individual consumers who move to the Smart Meter RPP may in fact see an energy cost decrease based on their energy use profile. Our comments here address the overall impact on the average residential users.

The total impact of the Smart Meter increases is therefore 0.50 cents/kWh or $50/year for a typical residential consumer.

Below the Water Line - Pending Generation Cost Increases

A number of factors have caused the actual costs underlying the Regulated Price Plans to be higher than anticipated. General RPP rates will therefore rise to cover these higher actual costs and the unfavourable variance that has accumulated since November 2009. The new rates that take effect May 1 will be announced in mid-April. Aegent's current estimate for the RPP increase is 0.30 - 0.40 cents/kWh. Choosing the lower value, the increase for a typical residential consumer is $30/year.

It's worth noting that the RPP rate increases could be higher, depending on the extent to which the OEB anticipates future cost increases and includes them in the rates established for May 1.

Below the Water Line - Near-term, Future Generation Cost Increases

A number of generation plants are coming online, under a variety of Ontario Power Authority programs. All plants will be paid above-market rates or receive other supporting payments. The estimated cost impacts are shown in the table that follows.

Notes and Assumptions:

1. increases calculated relative to base spot price of 4.0 cents/kWh
2. costs spread across Ontario total annual consumption of 141 TWh
3. natural gas-fired: Clean Energy, Combined Heat and Power; cost is conservative Deemed Dispatch Payment
4. nuclear capacity factor of 85%
5. RESOP is Renewable Energy Standard Offer Program, precursor to Feed-In-Tariff program (FIT); majority of RESOP projects assumed to be paid FIT prices
6. wind assumed to be 90% onshore, 10% offshore with combined capacity factor of 31%
7. wind assumed to require natural gas fired back-up and enabling wires investments
8. solar assumed to be ground-mounted and less than 10 MW, capacity factor of 15%

As noted earlier, some of these cost increases could affect the new RPP rates that will take effect on May 1, 2010.

Summary of Cost Increases

Aegent's analysis indicates that by the end of 2011, a typical residential consumer could see a total cost increase of 3.04 cents/kWh or $304/year in their electricity bill. This represents a 26% increase over their current total cost of electricity. The components of the increase are:

Looking Ahead

In a future article, look for Aegent to discuss a cost increase wildcard: largely-fixed costs such as transmission and distribution and how Ontario's recent step-change drop in total consumption could cause associated unit cost increases. We'll also discuss how conservation may generate lower savings than expected and how non-conserving entities will see their total electricity costs rise as they shoulder more of the fixed-cost burden.

Ontario's Green Energy Act: A Major Shift Read more »