IESO Stakeholder Engagement on Global Adjustment: An Update

June 2013

• The IESO released a draft report as part of its review of the Global Adjustment mechanism, in which it assesses the impact of changes in GA cost allocation from the original to the current framework as well under three possible alternatives. A second draft is scheduled for a June release.
• The report content and its recommendations notwithstanding, the potential exists for the expansion of eligibility for Class A GA treatment. Lowering of the GA Class A threshold to 1 MW is a possibility and would mean a large group of consumers would become eligible but not required to be treated as GA Class A consumers. Newly-eligible consumers could benefit should they be able to limit their High 5 demands or otherwise have a suitable load factor.

Stakeholder Engagement Process

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 (GA) mechanism. As part of this process (called SE-106), the IESO released its first draft report on March 28, 2013.

Possibility of Lower GA Class A Demand Threshold

The report content and its recommendations notwithstanding, the potential exists for the expansion of eligibility for Class A GA treatment. Currently, consumers with an average, monthly, all-hours demand over 5 MW are eligible for Class A treatment, which offers the opportunity for significant GA cost reductions for consumers who are able to control their load. Their share of total GA costs is a function of their average demand during Ontario’s so-called “High 5” hours – the five hours (occurring on different days) during which Ontario demand is highest. Lowering of the GA Class A threshold to 1 MW has been bandied about enough that it would not be at all surprising to see it implemented. A large group of consumers would become eligible but not required to be treated as GA Class A consumers. Should they be able to limit their High 5 demands or otherwise have a suitable load factor, these newly-eligible consumers could benefit.

SE-106 Draft Report Highlights

The draft report assesses the impact of the change in GA cost allocation from the original framework to the current framework (“Status Quo”), along with three potential alternatives:

1. an expansion of the Status Quo by increasing the number of consumers from whom the GA costs are recovered through a demand charge (“Expansion of Status Quo”);
2. reverting back to a volumetric charge, but allocating the GA to individual hours in proportion to HOEP (“Proportional to HOEP”); and
3. incorporating traditional and non-traditional cost of service principles to classify, allocate and recover the GA costs through multi-part tariffs (“Cost of Service with Externalities”).

The IESO’s consultant evaluated these alternatives against three guiding principles: administrative complexity, fairness and equity, and impact on short- and long-run efficiency.

Status Quo

The key report finding concerning the Status Quo - including charitable qualifiers - was that “For Class B consumers, the additional costs incurred today likely outweigh the benefits received because of the reduction in overall system costs over the long term. Put another way, the Class A demand charge is likely higher than the long-run marginal cost of new capacity.”

The report goes on to note the GA Class A price signal of $270,000/year/MW – in other words, the mechanism costs $270,000 per year for each MW of demand avoided in the market. This is far above the alternative generation option of about $150,000/year/MW.

Expansion of Status Quo

This option involves expanding demand-oriented GA treatment, by lowering the threshold all the way down to 50 kW and partitioning the current Class B into B1 and B2 Classes. The new Class B1 consumers would pay their GA share based on their transmission network billing determinant. 

For the report analysis period of October 2011 through September 2012, the average Class A GA rate would be unchanged while the B1 Class would see a 12% GA reduction and the B2 Class (mostly residential) would see a 12% GA increase.  The report seems to implicitly portray the expansion of the number of potentially demand-responsive consumers as positive – while ignoring the continuing disparity of the GA Class A demand price signal and not quantifying the demand price signal for the new Class B1.

Proportional to HOEP

Under this alternative, the GA would be established on an hourly basis, in direct proportion to the HOEP. If over a month the ratio of average GA to load-weighted HOEP was 2:1, then in each hour of the month the GA would be equal to two times the HOEP.

This alternative then has a price signal amplifying effect and so has its biggest impact at the HOEP extremes. When HOEP is highest, so is the GA – and so the signal to load to decrease demand is amplified. When HOEP is lowest, so is the GA – and so the signal to load to increase demand is also amplified.

The key quantitative report finding was that the load-weighted on-peak GA would be 10% higher than the overall, load-weighted GA while the off-peak GA would be 13% lower.

Cost of Service with Externalities

The foundation of this option is a demand price signal equal to an “equivalent peaker”. The magnitude of the price signal can be debated but it is in the order of $150,000 to $180,000/year/MW. All classes would effectively pay demand-related (60% of total GA costs) costs based on this price signal. The remainder of costs - “energy” (3% of total costs and so the minority of the remainder) and “external” (37% of total costs and so the super-majority) - would be allocated and collected on an energy basis.

The key quantitative finding was that for the report analysis period of October 2011 through September 2012, the average GA Class A rate would increase by 45% relative to the Status Quo. Should this option ever receive serious consideration for implementation, it is easy to see that Class A consumers would lobby to avoid paying for externalities.

Next Steps

The IESO has received comments on the first report draft and issued its responses to these comments. A second draft is currently scheduled for release sometime in June.

IESO SE-106 Communications and Documents  Read more »

Aegent’s January 2013 Submission in SE-106  Read more »