Reallocation of Global Adjustment Costs: An Update

June 2011

• A new mechanism is now in effect for allocating costs from the Global Adjustment. Large Class A consumers will share in the cost of the Global Adjustment depending on their electricity use in peak hours. Smaller volume Class B consumers will pay the GA costs not paid by the Class A consumers.
• Under the new cost allocation structure, Class A consumers pay a lower share of total GA costs - 10.9 % versus the 14.6 % they would have paid under the previous structure. As a result, they have paid a GA rate that is $9.87/MWh or 25.7 % less than the rate they would have paid under the old framework.
• Class B consumers pay a higher share of total GA costs - 89.1 % versus 85.4 % under the previous allocation. Consequently, they have paid a GA rate that is $1.69/MWh or 4.4 % more than the rate they would have paid under the old structure.
• For the first five months of 2011, a cost transfer of $86.14 million has taken place, from Class A consumers to Class B consumers.
• For calendar year 2011, the total GA cost could reach $5 billion or more. The annual value for a Class A consumer of avoiding an incremental MW during the top-five load hours is $213,000. Looking ahead to 2015, this value could exceed $300,000.

In January 2011, Aegent discussed changes to the way Global Adjustment costs are allocated within the Ontario electricity market. Since then, the Independent Electricity System Operator (IESO) has released certain previously-missing data and we now have five months of post-change operation under our belts. Using the additional data, we have updated our assessment of the impacts of the reallocation experienced by the two different customer classes.

Global Adjustment - What is it?

The Global Adjustment is an Ontario electricity market mechanism used to transfer certain types of costs among generators, agencies and consumers.

The large majority of GA costs arise from contracts the Ontario Power Authority has with generators. A good portion of these contracts are at fixed prices, or they have revenue guarantees that behave like fixed-price arrangements. When spot prices are low, the generator does not earn enough revenue from power sales to meet its revenue guarantee or fixed price. The OPA pays the generator to make up the difference, and the OPA recovers that cost from consumers through the Global Adjustment. So, in a month when the market price of electricity is low, the unit value of the GA will be higher and when market prices are high, the GA will be lower.

The remainder of the GA costs represents the cost of conservation and demand management programs that are passed on to consumers. These costs are largely unaffected by spot prices.

Changes to how Global Adjustment costs are allocated

Prior to January 1, 2011, all Global Adjustment costs were allocated to consumers on a "postage-stamp" or energy-consumed basis. Total costs in the month were spread across all energy consumed in the province for the month, resulting in a uniform unit rate per MWh that was applied on all consumption by all consumers.

Starting January 1, 2011, GA costs were grouped into two classes, with each class allocated a share of the GA costs. "Class A" consumers - those with average monthly demands over 5 MW - pay their share of the GA based on their demand or energy consumption during the 5 highest load hours that occur in Ontario each year. (Of note is that no more than one hour per day can fall into this category.) This share is called the "Peak Demand Factor". All other consumers fall into "Class B" and continue to pay for the GA on a postage-stamp basis. The aggregate GA dollar amount paid by Class B consumers equals the total GA dollars less the aggregate paid by Class A.

Current cost shares

Under the previous GA cost allocation structure, Class A would have paid 14.6 % of the total GA costs, with Class B paying the remaining 85.4 %.

Under the new arrangement, Class A's current aggregate share of total annual GA costs is 10.9 %, with Class B paying the remaining 89.1 %.

These cost shares apply to the first six months of 2011. As the five highest load hours did not change for the next base period (though there were very minor adjustments to each hour's total load value, due to the availability of more accurate data), essentially the same costs shares will be in effect for the period July 2011 to June 2012.

Cost impacts for first five months of 2011

For the first five months of 2011, the total GA costs were $ 2.229 billion, for a monthly average of $446 million.

Total consumption for the period was 57.920 million MWh, meaning that under the old postage-stamp GA cost allocation structure, the uniform unit rate would have been $38.48/MWh.

Under the new allocation structure, the average Class A unit cost paid was $ 28.61/MWh - a savings of $9.87/MWh or 25.7 % relative to the uniform rate.

Under the new framework, the average Class B unit cost paid was $40.17/MWh - an increase of $1.69/MWh or 4.4 % over the uniform rate.

For the first five months of 2011, a cost transfer of $86.14 million has taken place, from Class A consumers to Class B consumers.

Cost shares for July 2012 through 2013

Individual Class A cost shares for this period will be determined based on one's consumption during the five highest load hours during the base period May 2011 through April 2012, so the base period has already started. The IESO keeps a running total of the highest load hours; the list can be found at http://www.ieso.ca/imoweb/peaktracker/.

Of the current top-ten hours identified, only the current highest one (June 8, HE=16, with an Ontario demand of 22,765 MW) has much of a chance of ultimately being a top-five hour for the current base period. The other hours will almost certainly be eclipsed. Also, except in the event Ontario was to experience mild summer weather and extreme winter weather, the final top-five hours will likely come from the period June through August or September of this year.

During the base period for the current reporting or settlement period, the average top-five demand was 24,417 MW. This average was set during the somewhat extreme weather of the summer of 2010. A more normal top-five hourly load average is likely in the order of 23,500 MW. Assuming the automatic inclusion of some Class A-eligible loads that previously opted out and greater load response from Class A as a whole, the Class A aggregate share could rise slightly, though not enough that Class B consumers would notice the very, very small moderating effect this would have on their GA unit cost.

Implied value of an avoided MW

A Class A consumer looking to reduce their share of GA costs by reducing their load during the top-five hours would need to be prepared to reduce load for upwards of 50 hours. That is, there are about 50 hours that would be reasonable candidates to become peak hours, depending on the circumstances. A less-flexible load with behind-the-meter generation would have to be prepared to ensure it runs its generation for a similar number of hours.

Given the total GA cost of $2,229 million to date this year, and considering a few forward-looking factors, the total GA cost for all of 2011 could surpass $5 billion. Using that cost and an average top-five load of 23,500 MW, the implied annual value of a Class A consumer avoiding a MW of load (through a load reduction or generation increase) during top-five hours is $213,000.

Over the next few years, total GA costs will rise significantly since that is where the majority of pending Ontario electricity cost increases will "show up". Over the next four years, a total GA cost increase of 50% or more is quite possible. If that is the case and assuming the same GA cost allocation methodology with parameters similar to the current ones, the Class A annual value of an avoided MW could go well over $300,000.

Changes to Allocation of Global Adjustment Will Increase Costs for Most Consumers Read more »

Global Adjustment: Problem or Symptom? Read more »

Global Adjustment: Change in Behaviour Has Implications for Hedging Read more »