Changing Nature of Electricity Demand in Ontario

March 2010

• As economic conditions improve, it is uncertain whether demand for power from the industrial sector will return to pre-recession levels. It is anticipated the commercial and residential sectors will become the predominant consumers of power.
• As a result, Ontario's demand profile will likely be "peakier".
• The expected impact of the changes in demand patterns is a rise in the volatility of the Hourly Ontario Energy Price, with the likely outcome being higher energy costs overall.

While Ontario's economy slowly shakes off the effects of the latest recession, power producers are already looking ahead and preparing for supply-demand conditions reflective of better economic times. However, this should not be interpreted as a sign that demand patterns will revert to what they were before the onset of the recession. Indeed, more recent demand outlooks from the Independent Electricity System Operator project that peaks in demand will be lower, as consumers become increasingly aware of the environment and as the provincial government's conservation policies take hold. While post-recession peaks in demand are expected to trend lower, this does not mean that volatility will automatically follow suit.

Another key component to consider in the examination of trends in energy demand is the division of total power demand in the province among the various sectors. Power output is shared almost completely among residential, commercial, and industrial consumers, with net exports of power making up the small remaining source of demand. Much has been made of the decline in power demand from the industrial and commercial sectors as a result of the recession.

As economic conditions improve, it is uncertain whether demand from the commercial and industrial sectors - and especially the industrial sector - will return to pre-recession levels. Indeed, industrial consumption of power per unit of output has been falling gradually over the last 50 years as the share of highly energy-intensive manufacturing activities (e.g., steel, pulp and paper) within Ontario's industrial sector has been shrinking relative to less energy-intensive activities (e.g., auto parts, mechanical appliances). The recent recession hit manufacturers hard, forcing many large energy users to shutter capacity forever. In addition, surviving manufacturers have had to become more energy-efficient thus reinforcing the trend of decreasing power consumption per unit of industrial output.

As a result, it is anticipated the commercial and residential sectors will become the predominant consumers of power as Ontario maintains a large service-based economy and its population grows. The effects on future power demand patterns are expected to reflect this evolution in the province's economy.

Industrial energy use tends to be more sensitive to price than residential or commercial demand. Large industrial energy users in Ontario have in the past used their production line flexibility to shift production to overnight hours to avoid the hours of high demand and high electricity prices, which tend to occur during business hours on very hot or very cold weekdays. A reduction in the size of this type of flexible power demand will likely mean that Ontario's demand profile will be "peakier", with bigger differences between overnight lows and peak hour highs in energy demand.

So what might be the impact on wholesale electricity prices of these changes in demand patterns for power?

Over the coming years, expect to see a rise in the volatility of the Hourly Ontario Energy Price, particularly as Ontario's present generation surplus is absorbed. Higher volatility brings the perception of greater risk. To a large degree, the contracting strategies used by the Ontario Power Authority for procurement of new supply would insulate generators from much of the risk associated with this increased volatility. For consumers, the Global Adjustment would also tend to offset the impact of higher price volatility on the bottom line. However, it is more difficult to manage economic dispatch in a more volatile market, with the likely outcome of higher volatility being higher energy costs overall.

Global Adjustment: Problem or Symptom? Read more »

Global Adjustment: Change in Behaviour Has Implications for Hedging Read more »