Global Adjustment: Update for 2012 and IESO Consultation

February 2013

• Total Global Adjustment costs for 2012 were $6.456 billion, an increase of 22% over 2011.
• For consumers in Class A, their aggregate share of total GA costs for 2012 was 10.0%, with Class B consumers paying the remaining 90.0%.
• Total GA costs for 2013 are forecast to be $7.05 billion, an increase of 9% over 2012.
• The IESO is currently conducting a review of the Global Adjustment mechanism including how GA costs are allocated.

In January 2011, changes were implemented to the way Global Adjustment (GA) costs are allocated within the Ontario electricity market. Twenty-four months of post-change operating information has been accumulated and Aegent regularly reports details of its analyses. The latest update is provided below, as well as other GA Class A/B news.

Global Adjustment – Background

To review the Global Adjustment mechanism and the changes that were made in 2011 to the allocation of GA, please see Changes to Allocation of Global Adjustment Will Increase Costs for Most Consumers and Reallocation of Global Adjustment Costs: Updating for 2011 and Looking to 2014.

Global Adjustment for 2012

For 2012, total GA costs were $6.456 billion, for a monthly average of $538 million. This was up $1.146 billion or 22% from 2011. Total Ontario GA-related consumption for 2012 was 141.3 million MWh, meaning that if GA costs were spread evenly over all consumption in 2012, the uniform unit rate would have been $45.68/MWh.

Under the GA allocation methodology adopted in 2011, two classes of consumer were created. Class A consumers were generally those with a demand greater than 5 MW, while Class B was everyone else. Class A’s 2012 aggregate share of total annual GA costs was 10.0%, with Class B paying the remaining 90.0%.

The average Class A unit cost for the Global Adjustment was $27.74/MWh in 2012. The average Class B unit cost paid was $49.23/MWh.

Global Adjustment for 2013

For 2013, we forecast total GA costs of $ 7.05 billion - an increase of 9% over 2012 - with expected unit rates for Class A and B of $30.12/MWh and $53.75/MWh.

IESO Consultation SE-106

In response to recommendations outlined in the Electricity Market Forum’s Report released in December 2011, the Independent Electricity System Operator has undertaken a review of the Global Adjustment mechanism. As part of this process (called SE-106), the IESO held its first meeting on December 11, 2012. 

Aegent is participating in the consultation, with interests that include how GA costs are allocated between GA Classes A and B. 

The current GA mechanism rewards Class A consumers for their ability to reduce their load in peak demand conditions. A Class A consumer’s share of the GA is based on its usage during Ontario’s highest 5 hours of consumption in the year, so they are incented to reduce in these hours. The benefit paid to the Class A customers for reducing their peak demand is paid by all other consumers (Class B customers), since these consumers pay the remaining GA costs.

In Aegent’s view, a key consideration in evaluating the GA mechanism is whether the price paid to reduce demand by this mechanism is comparable with the cost of meeting peak demand by other means.

For example, the Ontario Power Authority’s report on 2011 conservation results indicates that OPA programs achieved demand reduction at a cost of about $150,000/MW/year. Adding power generation capacity in the form of a simple cycle gas turbine (SCGT) plant if needed to meet peak demand would also represent a cost of about $150,000/MW/year.

Under the current mechanism, the Class B customer class pays a cost higher than $150,000/MW/year for peak demand reduction, and the cost will continue to grow as total GA costs increase sharply over the next few years. Aegent estimates that the current mechanism reduced peak demand at a cost of $274,000/MW/year in 2012, and that the cost under the current mechanism will grow to $299,000/MW/year in 2013 as overall GA costs rise.

As part of its initial submission to the IESO consultation process, Aegent has proposed a different GA cost allocation methodology, whereby the total cost would be partitioned into capacity and energy components. The capacity component would be equal to the prevailing benchmark SCGT unit cost ($150,000/MW/year) multiplied by the provincial High 5 demand (~ 23,600 MW) and allocated between classes as is done currently. The energy portion would be the remainder of GA costs and would be allocated to all consumers (Classes A and B) on an energy or “postage-stamp” basis. This method places a value on demand reduction that is consistent with the cost of demand reduction by other means.

Aegent looks forward to the IESO’s mid-February release of its first draft report.

Reallocation of Global Adjustment Costs: Updating for 2011 and July 2012 to June 2013 Read more »

Counter-Intuitive Pricing in Ontario’s Electricity Market Read more »