Reallocation of Global Adjustment Costs: Updating for 2011 and Looking to 2014

January 2012

• A new mechanism for allocating Global Adjustment costs has been in effect for one year. Large Class A consumers now share in the cost of the Global Adjustment depending on their electricity use in peak hours. Smaller volume Class B consumers still pay their GA costs (those not paid by the Class A consumers) on a "postage-stamp" basis.
• During 2011, Class A consumers paid a lower share of total GA costs - 10.4% versus the 14.6% they would have paid under the previous structure. As a result, they paid a GA rate that is $10.97/MWh or 28.7% less than the rate they would have paid under the old framework.
• Class B consumers paid a higher share of total GA costs - 89.6% versus 85.4% under the previous allocation. Consequently, they have paid a GA rate that is $1.88/MWh or 4.9 % more than the rate they would have paid under the old structure.
• For 2011, a cost transfer of $225 million occurred, from Class A consumers to Class B consumers.
• For 2011, the total GA cost was $ 5.31 billion. The current annual value for a Class A consumer avoiding an incremental MW during the top-five load hours is $225,000. Looking ahead to 2014, this value is forecast to reach $ 333,000.

In January 2011, changes were implemented to the way Global Adjustment costs are allocated within the Ontario electricity market. We now have 12 months of post-change operation under our belts and a much better idea of the GA cost transfer dynamics and the cost amount transferred from Class A to Class B.

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 to 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 five 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.

Cost shares for 2011

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 2011 aggregate share of total annual GA costs was 10.4%, with Class B paying the remaining 89.6%.

Cost impacts for 2011

For 2011, total GA costs were $5.310 billion, for a monthly average of $443 million. Of note is the December 2011 GA cost of $540 million - well above the previous monthly high of $498 million set in May 2011.

Total consumption for 2011 was 138.6 million MWh, meaning that under the old postage-stamp GA allocation structure, the uniform unit rate would have been $38.30/MWh.

Under the new allocation, the average Class A unit cost paid was $27.33/MWh - a savings of $10.97/MWh or 28.7 % relative to the uniform rate.

Under the new framework, the average Class B unit cost paid was $40.18/MWh - an increase of $1.88/MWh or 4.9% over the uniform rate.

The total cost transfer, from Class A consumers to Class B consumers, was $225 million for the year.

Cost shares for July 2012 through June 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/.

During the previous base period for the current 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. (Aegent determined that the top-five hourly load average under more normal conditions was likely to be 23,500 MW.) For the current base period (for the future settlement period), all top-five hours fell during the five-day period July 18-22, 2011. The average of the numbers is 23,300 MW and the IESO has indicated that their data do not include related embedded generation. In the previous reporting period, embedded generation during the top-five hours ranged from 259 to 344 MW. If we assume a value of 300 MW then the current top-five average, adjusted for embedded generation, is 23,600 MW. With the extent to which hot weather drives Ontario top-five hour loads, and even with about three months left in the current base period, there is little likelihood that any of the current top-five hours will change.

For the current base period then, the top-five hours have almost certainly been set, along with the Class A aggregated top-five demand. We won't know the latter however until the IESO either explicitly or implicitly discloses it -- likely following the first full month of the future settlement period, which means around mid-August 2012.

For the current settlement period, the implied aggregate Class A top-five load for the corresponding base period was 2,432 MW. Two primary drivers no doubt caused the number to change this past summer, with it going down as more Class A consumers worked harder to shed load during top-five hours and it going up as previously-optional and opted-out Class A consumers' loads were being tracked in preparation for their mandatory participation in Class A starting July 1, 2012.

If these two drivers cancel each other out then we can assume the Class A aggregated demand stays at 2,432 MW. In that case then, starting July 1, 2012, Class A consumers will in aggregate pay 10.30% of costs.

Implied value of an avoided MW

Based on the 2011 total GA cost of $5.310 billion and the new top-five average of 23,600 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 $225,000 per year. Of interest is that such a payment stream would pay for a simple cycle natural gas-fired power plant -- that would deliver the same benefit, in less than 5 years.

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". Aegent recently conducted a preliminary, updated analysis of future GA costs. For 2014 we forecast GA costs of $8.0 billion - consistent with the forecast made in the Ontario Auditor General's recent report. With GA costs at that level and assuming a normal, top-five demand with modest growth (to 24,000 MW), the implied annual value of a Class A consumer avoiding a MW of load will rise by 48% to $ 333,000. Such a payment stream would pay for a simple cycle natural gas-fired power plant in less than 3.5 years.

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

Global Adjustment: Problem or Symptom? Read more »