Managing Rising Electricity Costs: The Industrial Electricity Incentive

October 2012

• Ontario’s electricity infrastructure is expanding rapidly while demand is dropping, resulting in rising costs and excess power.
• The Government of Ontario is introducing an Industrial Electricity Incentive (IEI) to entice industrial consumers to use excess electricity at deeply discounted rates.
• The IEI Program can significantly reduce electricity costs, but comes with some risk.

Since 2005 Ontario’s electricity consumption has fallen by about 10% or 15 TWh. At the same time, the province has been rapidly expanding its generation capacity, creating surplus energy during off-peak hours and leading to an increase in the frequency of near-zero and negative market prices. The collapse in market prices has led to an increase in overall electricity cost as more fixed costs are passed through to consumers in the Global Adjustment (GA).

The Industrial Electricity Incentive (IEI) program utilises this excess energy while giving a discount to participants on new load, as long as that load can be tied to new employment. The program will consist of two streams: Stream 1 for companies new to Ontario and Stream 2 for existing Ontario facilities that are increasing production.

Stream 1 aims at bringing new investment to Ontario by offering long-term contracts at an all-in fixed price of $55/MWh. The proponent must invest a minimum of $250M in their new facility to participate.

Stream 2 is focused on increasing production at existing Ontario businesses by exempting proponents from the GA and transmission charges on incremental load, giving them an increasingly substantial discount on electricity. This could include facilities adding an additional shift, expanding operations, or increasing the utilisation of existing capacity.

The Ministry of Energy has indicated that draft program rules should be available this fall, with contracts being awarded in January 2013. This leaves little lead time for applicants to develop their projects, properly evaluate the risks involved, and consider strategic bidding aspects such as employment creation and the size and nature of the incremental load.

Early stakeholder consultations have shown an immense amount of interest in the program, yet only 5 TWh is available between the two streams. Program applicants will need to be competitive with their bidding parameters to get a piece of the 5 TWh pie, and realistic in order to minimise risk if a contract is awarded.

Most post-contract risk lies in details such as how employment commitments will impact contract prices, how incremental load will compare to baseline load, how market-based incentives will be built into the contracts, and how market evolution events will be handled. For example, if the mechanism for determining the market price of electricity changes, how will the IEI discount be impacted?

Over the next couple of months, stakeholder consultation, program rules review, and contract awarding will happen fairly quickly, if all goes according to plan. There is a chance the program might be delayed due to the aggressive proposed timelines and the prorogation of the Legislative Assembly. The tight time-frame will make proposal development difficult for some applicants, creating opportunity for those that are better prepared. It is important for applicants to fully evaluate all risks and potential downside to the program before submitting an application.

The IEI program is just one potential mechanism that can be used to mitigate rising electricity prices.

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