You're Approaching an Electricity Cost Iceberg - What Should You Do?

April 2010

• Over the next 18 to 24 months, the cost of electricity in Ontario will rise rapidly. An increase of $12/MWh, or 1.2 cents/kWh, in generation costs is easily identifiable. There will be additional increases related to the provincial government's recently announced green levy, transmission and distribution costs, smart meters and the Harmonized Sales Tax.
• These cost increases lead consumers to wonder what they should do to manage their electricity bill.
• Don't rush into a retail contract. The approaching cost increases are unavoidable. But do investigate conservation and demand management opportunities.

Over the next 18 to 24 months, electricity prices are set to rise by $12/MWh, or 1.2 cents/kWh, as a result of increases in generation costs. Other increases are also on the way: the green levy, transmission and distribution costs, smart meters, HST. So people are wondering what to do about this approaching electricity cost iceberg. There are two major Dos and Don'ts.

Don't ... rush into a retail electricity deal.

We lead with this piece of advice because of its urgent timing.

Headlines about rising energy costs are inevitably followed by increased advertising from energy retailers about locking in your price to save money. But because of the nature of the coming cost increases, a retail deal won't solve your problem...and may even make it worse.

You can think of your electricity bill as consisting of three main types of costs:

• Energy charges are the revenues paid to generators for the energy they produce, reflected in the wholesale price of power.

• Generator revenue guarantees are the charges that arise from Feed-in-Tariffs and contracts entered into by the Ontario Power Authority. These costs are the main component of the "Global Adjustment" or the "Provincial Benefit" on your bill.

The sum of the energy charges and generator revenue guarantees together make up your "total cost of power". If you are a customer on the Regulated Price Plan, the RPP rate you pay is calculated to recover the estimated total cost of power for the period.

• Regulated charges are the amounts collected to pay for the transmission and distribution companies, regulated levies, and regulatory agencies.

A retail contract fixes only the Energy Charge part of your cost. But the anticipated cost increases will show up on your bill as higher costs for generator revenue guarantees and higher regulated charges. So locking in with a retailer will not help you avoid the increases.

What's more, locking in a price for energy may actually cost you more. As we have discussed elsewhere, the wholesale price of power and the cost of generator revenue guarantees tend to move in opposite directions. When the average price of power goes down, generators are entitled to more revenue support from the revenue guarantees in their contracts with the Ontario Power Authority. So the cost of the generator guarantee portion of your bill increases and offsets the lower energy charge. But if you fix your energy charge with a retail contract, your energy charge will not go down when the market price goes down, while the cost to you of the generator guarantees (which the retail contract does not fix) will still increase. The net result will be a higher cost than if you had done nothing.

So, while the news is not great, it is important for all consumers to realize these increases are unavoidable. A retail contract will not help you avoid these increases, and may in fact make things worse.

Do ... take a close look at conservation and demand management (CDM) opportunities.

If the cost of energy is rising rapidly then the economics of CDM opportunities may be even better than they currently appear. There are however some not-so-apparent things to consider.

Impact of Conservation on Distribution of Fixed Costs

For a given time period and with certain factors held constant, the total cost to the Ontario Power Authority for all generator revenue guarantees is relatively fixed. Many other costs in the capital-intensive power business are also largely fixed, such as those related to transmission and distribution (so called "wires charges").

These costs are recovered from consumers by essentially dividing the fixed dollar costs into the units of energy consumed in the market.

Conservation will result in fewer units of energy available to spread these costs over. The overall impact on each consumer will vary, depending on whether a consumer pays for wires on a demand ($/kW) or unit ($/kWh) basis and on the extent of conservation uptake.

At least in theory, consumers who do not reduce energy consumption as fast as the average consumer does, will see their cost of energy increase faster than average, since an increased share of the sector's fixed costs will shift to those consumers.

Forecasting Savings Not That Easy

If you do participate in CDM, you know you will save something. The question is how much.

To properly evaluate the economics of your particular project, you need to understand how your change in energy use will affect your electricity costs. Using a single price derived from your total bill and total consumption is crude, and could cause you to understate savings (and miss out on an economic project) or overstate savings (and implement an uneconomic project). The following factors warrant close consideration:

• Hourly energy prices - The distribution of prices over the hours of the day and week is evolving and these changes will affect the economics of load shifting strategies.
• Demand impact - Depending on one's load profile and the local utility's demand rates, demand charges can make up 15-25% of one's bill. The rate structures and timing of reductions and/or load shifting will dictate the benefit (or added cost) of a project.
• Global Adjustment - Currently, there's a close relationship between average hourly energy prices and the Global Adjustment rate, a dynamic not widely understood but one that can affect the calculation of project savings. Also, Global Adjustment costs are spread across all Ontario energy consumption. This allocation method could change in the not-too-distant future and so this issue also needs to be considered.

As the electricity cost iceberg approaches, consumers should be aware that some of the upcoming costs are simply unavoidable. It is essential to understand all the hazards if you are to navigate safely.

Beware the Electricity Cost Iceberg Read more »

Global Adjustment: Problem or Symptom? Read more »