Conservation: Antidote to Electricity Cost Increases?

January 2014

• Pursuing conservation continues to appear to be a good cost-saving bet for most Ontario electricity consumers, with one caveat.
• To save money, you have to do a lot more conserving than the average consumer.
• Only by outrunning the other guy will you actually reduce your share of the largely fixed costs in the system, and lower your bill in absolute terms.

Ontario Premier Kathleen Wynne was quite busy the first few weeks of September. On September 25 she released thirty mandate letters addressed to her cabinet ministers. One of those letters went to Minister of Energy Bob Chiarelli.

Not surprisingly, continuing to implement a “Conservation First” approach remains a cornerstone priority of the new government.

As we discussed here, pursuing conservation continues to appear to be a good cost-saving bet for most Ontario electricity consumers. There is however one caveat: To save money, you have to do a lot more conserving than the average consumer.

Conservation as an antidote to the cost of the Global Adjustment

Back in 2009 in response to criticism that the Green Energy and Economy Act would drive up Ontario electricity costs, then-Minister of Energy George Smitherman responded in a committee meeting that “We anticipate about 1% per year of additional rate increase associated with the bill’s implementation over the next 15 years”. In at least one public venue, Smitherman clarified his position by stating that the GEA-related unit price increase would be higher than 1% but that consumers’ bill increases in dollars would be held to 1% as consumers reduced their quantity of energy consumed. That assertion seemed to defy logic.

The problem: fixed costs

Electricity is a very capital intensive business. In Ontario, the super-majority of capital costs are recovered through contracted and regulated rates. The only other cost recovery that takes place is a very small portion – for generators through the energy spot market administered by Ontario’s Independent Electricity System Operator.

Due mainly to capacity payments and take-or-pay requirements, the dollar amounts for capital costs recovered through contracted and regulated rates are largely fixed. These costs are allocated to users based on energy consumption or demand. For the remainder of this discussion, we will focus on the costs allocated on energy consumption.

For a number of reasons, Ontario today finds itself in an over-built position – mostly in generation but also to a lesser extent in wires. We have a lot of fixed cost growth inertia – fixed costs will continue to grow. It won’t be until major nuclear fleet changes planned for later this decade are undertaken that there will be the opportunity to offset some of the costs of earlier GEA-related investments.

If the vast majority of costs are fixed (and if those fixed costs are growing), and if all consumers share in those costs in proportion to their consumption, then reducing one’s consumption means one is transferring some of these costs to other users. If we assume 95% of electricity costs are fixed then it follows that if all users in Ontario were to reduce consumption by a uniform 10% and contracted and regulated costs were instantaneously rebalanced, then:

• Total system dollar costs would drop by 0.5%
• Unit rates would rise by 10.6%
• Consumer total bill dollars would drop by 0.5%

The reality of this dynamic means that in the short and mid-term, conservation will not save much in the way of total system costs.

Save -- by outrunning the bear

The old joke goes: “How does one outrun a bear? … Outrun the other guy!”

The same applies in Ontario electricity. To save, conserve – but conserve a lot more than the average user. Certainly, using less will mean your bill won’t rise as fast as it would have. But only by outrunning the other guy will you actually reduce your share of the largely fixed costs in the system, and lower your bill in absolute terms.

If one goes with the herd, one’s bill won’t change much. If one splits from the herd, changes occur:

• Reduce consumption more (or increase less) than the average consumer and pay less
• Reduce consumption less (or increase more) than the average consumer and pay more

Therefore, one’s ultimate savings from conservation will be determined by one’s own efforts but also by what other consumers do.

Other ways to save

Of all costs, the Global Adjustment (the GA) is the largest and so avoiding it is the key method of transferring fixed costs to other consumers. To reduce GA costs through means other than conservation, consumers can:

• Choose to be treated as a Global Adjustment Class A consumer
• Develop a behind-the-meter generation project

For assistance in determining if these or other methods can produce results for your operation, please contact Bruce Sharp, Aegent’s Director - Electricity at bsharp@aegent.ca or 416-622-9449, x 112.

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