Explaining the Global Adjustment, Part 1

March 2008

To understand the true cost of the power you use, you have to look at more than the "energy cost" portion of your bill.

The Global Adjustment is one of two Ontario electricity market mechanisms used to transfer costs between the market at large and customers. The other mechanism is the Ontario Power Generation Non-Prescribed Asset Rebate. The Global Adjustment is not well understood by consumers at large, yet this mechanism has a large and growing impact on the true cost of the electricity you use.

The provincial government and local distribution companies also refer to the Global Adjustment as the "Provincial Benefit". The motivation behind this alternative name was likely political, with it intended to connote something favourable. This was the case early on, but of late the Global Adjustment has seemed to be anything but a benefit.

The Global Adjustment reflects the net financial impact of three main types of costs:

• Ontario Power Generation receives regulated prices on the output from its nuclear and base load hydraulic generation. The difference between the regulated price and the market price is captured in the Global Adjustment.
• Other generators, such as Bruce Power, older non-utility generators, and renewable power sources also receive revenue supports or price guarantees which are financed through the Global Adjustment.
• Certain programs of the Ontario Power Authority are intended to procure new generation capacity or to promote conservation and demand management. Costs of these programs also are recovered in the Global Adjustment.

For example, the price for OPG's nuclear output is regulated at $49.50/MWh. If the market value of the nuclear power that OPG produced in a period was only $40/MWh, then OPG's revenues would be augmented by $9.50/MWh, and the cost of doing so would be put in the Global Adjustment and collected from all consumers on a per MWh basis. If the market value of power was $55/MWh, then $5.50/MWh would be "clawed back" from OPG, and credited to all consumers on a per MWh basis through the global adjustment.

Ontario uses about 155 TeraWatt-hours of electricity in a year, and about 86 TWh are covered under regulated prices or price supports of some kind in the Global Adjustment. The average price in the agreements for all this generation is about $60/MWh, although the price received for each kind varies significantly (see the table).

Generation type	$ / MWh	TWh
OPG nuclear	$ 49.50	47
OPG base load hydraulic	$ 33.00	13
Bruce Power	$ 74	11
Legacy Non-Utility Generators (NUGs)	$ 95	11
Renewable Energy Supply (RES)	$ 86	2
Clean Energy Supply (CES)	$ 185	2
Renewable Energy Standard Offer Program (RESOP)	$ 110 +	0
Clean Energy Standard Offer Program (CESOP)	tbd	0
Other new sources	varies	0
GA total (weighted average)	$ 60	86

(sources: public information, OPA Integrated Power System Plan (IPSP) projections for 2008; some values estimated/derived from future OPA values)

The consequence of these generator-related cost transfers in the Global Adjustment is that 55 - 58 % of a typical customer's consumption is fixed at a blended price of about $60/MWh. How does that work? The following example is an over-simplification, but it will give you an idea.

Assume you use 155,000 MWh of energy in a year, and assume you paid an average price for power that equalled the average market price for the year of $50 per MWh. The energy cost line on your bill would add up to $7,750,000.

However, the generators with price supports were guaranteed an average of $60/MWh on their 86TWh of output, so the Global Adjustment needs to recover 86 TWh times $10/MWh to make up the amount necessary to top up revenues for these generators. This amount is recovered through a charge to consumers spread over the 155 TWh of consumption by the market. The charge to consumers through the Global Adjustment would be:

$10/MWh x 86TWh/155TWh = $5.55/MWh

So your true cost of power would be the $50/MWh you paid on the energy line of the bill, plus a cost of $5.55/MWh contained within the Global Adjustment or about $55.55/MWh in total.

This is the same cost as if you paid a fixed price of $60/MWh on 55% of your consumption and the market price on the rest:

0.55 x $60 + 0.45 x $50 = $55.50/MWh (the 5 cent difference is due to rounding)

So you can think of the Global Adjustment, at least in part, as a fixed price hedge at $60/MWh on about 55% of your consumption.

If your average price for the year and the average market price were $70/MWh instead of $50, then your net cost would be about $64.50/MWh. Just substitute $70 for $50 in the above calculations to see that result.  Your net cost would only have gone up by $9/MWh even though the average market price had gone up by $20/MWh

This effect of the Global Adjustment is one reason why consumers are less exposed to electricity price uncertainty than they think they are. Looking only at the energy cost line of the bill, one would think that volatility in electricity prices has a big impact on electricity costs for consumers. In fact, the Global Adjustment negates more than half of the impact. This is good if prices are high, but not so good when prices are low.

Understanding the operation of the Global Adjustment is essential to understanding your electricity price risk and to assessing whether to hedge electricity purchases and how much to hedge. Critics of the current electricity market structure in Ontario point to this aspect of the Global Adjustment as one reason why a robust forward hedging market has failed to develop in Ontario. With the government-imposed Global Adjustment removing over half of the impact of changes in electricity prices on the bottom line, hedging just isn't nearly so necessary.

Part 2 of our examination of the Global Adjustment will look at the fixed (non-price related) costs that are recovered in the Global Adjustment, the trend for these costs, and some of the implications of that trend.

For additional information about energy related issues including the IESO's outlook for Ontario electricity, visit our news page.