End of OPG Rebate Is Approaching - How Will Consumers Be Affected?

January 2009

• When the rebate ends, consumers will see their net cost of electricity rise, likely by $1 to $2/MWh.
• Consumers' exposure to spot market prices will rise by roughly 20%, the portion of consumption on which the rebate provides effectively fixed pricing
• A surprise extension of the rebate could cause risk-averse consumers, who have put significant hedges in place to deal with the increased risk, to find themselves overhedged.

The Ontario Power Generation (OPG) Non-Prescribed Asset Rebate, also known as the OPG Rebate, is one of two Ontario electricity market mechanisms currently used to transfer costs between the Ontario electricity market at large and consumers. The OPG Rebate is scheduled to end on April 30, 2009 and many consumers are wondering ... how they will be affected.

OPG Rebate explained

The rebate currently provides effectively fixed pricing of $48/MWh or 4.8 cents/kWh on 85% of the output from OPG's peaking hydro and coal-fired plants. This impacts about 20% of one's electricity consumption and applies to customers both on and off the electricity Regulated Price Plan (RPP).

Consumers pay the spot market price for their electricity and then, when the price of electricity produced by the underlying generation is above $48/MWh, a rebate or credit is paid. When the price averages less than $48/MWh, no rebate is paid and any future rebate payable is reduced by the notional debit that arises.

Net cost will go up

During 2008, the OPG Rebate averaged just under $2/MWh or 0.2 cents/kWh. The projected rebate for January to April of 2009 is a little over $1/MWh or 0.1 cents/kWh. When the rebate ends, consumers will then see their net cost of electricity rise, likely by $1 to $2/MWh.

Less coverage means increased risk

With the rebate gone, one's exposure to spot market prices or spot market risk will rise by roughly 20% - the portion of one's consumption on which the rebate provided effectively fixed pricing.

For consumers who had previously done no electricity hedging (fixing the price on some portion of their supply portfolio), the new risk level may not be acceptable and so now they may want to hedge.

For consumers who had previously done some electricity hedging, to lower their spot market risk to an acceptable level, the increased risk level is probably not acceptable and so they should consider additional hedging.

Looking down the road

OPG's coal-fired generation, included in the generation underlying the OPG Rebate, is already scheduled to be phased out by the end of 2014. The Ontario Power Authority is tasked with offsetting this phase-out, by adding new generation and implementing conservation and demand management measures. The costs of these mechanisms will be included in the Global Adjustment / Provincial Benefit. This will increase the effective coverage arising from the Global Adjustment and in turn, partially replace and therefore mitigate the disappearance of the OPG Rebate coverage.

Understanding the quantity and timing of these dynamics is important in determining spot market exposure, the related risk and appropriate hedge quantities.

Timing caveat

The OPG Rebate end date of April 30, 2009 has been on the books for some time. Poor understanding of the mechanism and low forward prices that reduce the magnitude of the expected credit that will be lost both serve to dampen potential unhappiness related to the end of the rebate.

Still, while there have been no public rumblings on the subject, it is possible the rebate could be extended. A precedent is the little-publicized and eleventh-hour one-year extension to designated consumers' inclusion in the RPP.

A surprise extension could cause risk-averse consumers, who have put significant hedges in place to deal with the increased risk, to find themselves overhedged.

Spot market exposure, proper hedge quantity complex

The OPG Rebate and Global Adjustment / Provincial Benefit mechanisms greatly complicate the processes of determining spot market risk and appropriate hedge quantities. The April 30, 2009 end to the OPG Rebate will increase costs and consumers' spot market price exposure and risk, thereby adding new uncertainty to electricity hedging.

Explaining the Global Adjustment Read more »

When is it a good time to hedge? Read more »

What Is the cost of energy price risk management? Read more »