In this five-part series called "Tame the Beast," the goal is to help you understand:
Despite the immense electricity cost increases resultant from the Global Adjustment fee in Ontario, there is something that big businesses in Ontario can do about it. The Global Adjustment began in 2005, and has been a constant presence on the electricity bills of Ontarians ever since. It started out as a small cost component of the total electricity bill but grew to be more than the cost of electricity itself. It was intended to be a general fee which would be used to pay for various conservation initiatives and grid investments, as well as the cost of guaranteeing electricity rates to energy generators.
This fee was originally called the Provincial Benefit and funded three types of initiatives: the regulated rates for the Ontario Power Generation nuclear and hydroelectric generation facilities, fixed payments to existing generators, and fixed rate contracts to new generators that use alternative energy sources such as solar and wind.
The Global Adjustment is charged in two different ways to Ontario energy consumers depending on the volume of electricity that they consume. The largest volume electrical consumers in the Province are labeled as Class A consumers, whereas the rest of the energy consumers in the Province are lumped together as Class B. The definition of what qualifies as a Class A customer has been changing since the introduction of the classification system. The minimum energy demand that a consumer must use each month to qualify as a Class A customer shifted from 5 MW in 2011, to 3 MW in 2014, then to 1 MW in the beginning of 2017, and finally to 0.5MW in mid-2017.i
The primary difference between Class A and Class B market participants is in how their IESO Global Adjustment costs are calculated. For Class B customers, their Global Adjustment costs are simply charged as a fee per kWh consumed. Most businesses can see this fee as a line item in their bill, with current rates hovering around 10 cents/kWh. For smaller volume consumers, such as homeowners, their Global Adjustment costs are included within their time-of-use rates.
On the other hand, Class A customers do not pay a set rate for their Global Adjustment fees, instead paying a percentage of the entire Province’s monthly Global Adjustment costs based on how much electricity they use during certain peak hours. A peak hour is an hour where the Province of Ontario’s electricity usage is at its highest, usually due to extreme weather events. As an example, if ABC Corp.’s usage accounted for 1% of the total electricity demand during the peak hours, then ABC Corp. would be billed 1% of Ontario’s Global Adjustment costs each month for the entire year.
If managed properly, a business can save a significant amount of money by becoming a Class A customer. With Global Adjustment costs now contributing nearly 70% to a business’ electricity costs, the ability to reduce this cost can lead to significant savings. It is important to note, however, that the Class A designation can also cause some businesses to lose money instead. For this reason, Class A customers are able to opt-out of the program and can continue to be billed for their Global Adjustment costs as a Class B customer if they wish.
With that said, most Class A customers choose to remain in the program once they are selected for it. This is because if a company is successful in reducing their energy demand during peak hours, they can significantly reduce their energy costs for the entire year. For example, if ABC Corp. normally uses 1% of total electricity demand in the Province of Ontario, but during the five peak hours the company reduces its usage to 0.5% of the total electricity demand, then ABC Corp. will have reduced its Global Adjustment charges by 50%. If a company somehow avoids using any energy at all during all five peak hours, they would pay absolutely nothing in Global Adjustment costs. This means that a Class A customer can save up to 70% of their electricity costs.
This Class A Global Adjustment program is also often referred to as the Industrial Conservation Initiative, or the ICI Program for short, and is run by the IESO (Independent Electricity System Operator) which was described in Part 1 of this article series. The essential idea is to incentivize industrial users to reduce their energy usage during certain key peak hours. This is necessary because it reduces costs across the entire electricity grid.
The electricity grid of any region must be built so that it can meet the maximum expected demand for any given year. Naturally, electricity usage changes day-to-day, with usage increasing significantly during very hot or very cold days. What this means, is that the electricity grid must be built to supply enough electricity for these peak days, and the rest of the year the grid has a significant amount of excess capacity. This excess capacity is very expensive to install, and is part of the reason that electricity costs can increase.
As a result, it is beneficial for everyone in a region to reduce electricity usage during these peak hours. This is why the IESO ICI Program was created. By incentivizing Ontario’s largest businesses to reduce their electricity usage during peak hours, the entire Province could save money by building a smaller grid with less capacity.
According to the Long-Term Energy Plan (LTEP) issued by the Ontario government, there is currently adequate electrical supply for the Province’s energy needs. However, the Province cautions that there may be a shortage coming as soon as the 2020s.ii With that said, the lower the peak energy demand that occurs in the Province, the smaller and less wasteful the electrical grid can be. So, although this program does cost the Province money today, it is expected to reduce the future investments required to maintain the Ontario electricity grid.
Electricity usage is very volatile, and there are many variables contributing to these fluctuations. Naturally, the largest single variable affecting the Province’s electricity usage is weather. During extreme weather events, such as extremely hot temperatures in the summer or extremely cold days in the winter, electricity usage increases rapidly in the Province and creates a peak day. Other major factors include humidity, precipitation, wind speed, dew points, cloud cover, and many more.
When a peak day occurs, Class A customers attempt to reduce their electricity usage in an effort to be economical. Specifically, they need to reduce their usage during the single peak hour in that peak day (the single hour with the highest average electricity usage in the day). There are a number of potential solutions used by companies to reduce their usage during these peak hours. They can choose to invest in hardware, such as generators or storage solutions, to take their facility off-grid during these peak hours; or they can simply reduce their electricity usage during these hours by reducing or shutting down their electricity usage. This is described in more detail in part 5 of this series.
Although the Ontarian energy mix is typically 90% renewable, during days of peak energy demand, there is an increased reliance on conventional energy sources – particularly natural gas generating facilities. These are commonly referred to as peaker plants when used in this capacity. The reason for why the Province continues to use natural gas-powered facilities as peaker plants is because they have the capability of modifying the volume of their output easily. Therefore, when provincial energy demand goes up, the owners of the natural gas plants are readily able to increase their energy supply. In contrast, most of the other energy sources in Ontario, such as wind, solar, nuclear, and hydroelectric generators, have far more difficulty changing their output and are generally considered to be base load generators. A base load generator is either turned on or off, and is not expected to be able to change its output. This is the primary reason why nearly every electricity grid in the world still relies on natural gas-powered facilities, and is also why Ontario is unlikely to be able to remove these remaining power plants in the near future without further innovation. The cost of using storage to meet these peak hours is simply too high when compared to the cost of operating a natural gas peaker plant for a few short hours each year.
Similar to other electricity grids, the electricity usage in the Province of Ontario is very volatile day-to-day. It is not uncommon for usage to increase or decrease by as much as 30% in a single day.iii Given this, it is very difficult to predict when to reduce energy demand in advance and this is the principal difficulty that Class A customers face.
At the same time, the Industrial Conservation Initiative program provides a very significant incentive for large electricity consumers to do precisely that – to somehow predict the future energy demand and to reduce their energy usage during these key periods. This is not an easy task, but the opportunity to save hundreds of thousands of dollars makes this something that most large energy consumers are actively attempting to do each year.
As mentioned earlier, a business that is able to properly manage the ICI Program is able to save up to 70% of their annual electricity costs simply by reducing their usage a few times per year. It is important to note that despite the occasional references to “peak days,” in fact there are only five peak hours during the entire year that determine how much a Class A customer pays for their electricity. The better that a company can predict when precisely these five peak hours occur, the more savings they can unlock. To reiterate, this also means that a company only really needs to reduce their usage for a total of just five hours each year to save as much as 70% on their electricity costs.
As an increasing number of companies participate in this initiative, however, the difficulty of predicting when the five peak hours will occur is becoming increasingly difficult. These difficulties will be explored in more detail in the following section. In 2017, there were a few thousand potentially eligible individual organizations that could participate in the initiative as Class A customers.ii Examples of eligible entities include factories and industrial manufacturing facilities, large buildings such as condominium complexes, college and university campuses, and in general any facility that uses at least 0.5 MW of monthly average demand.
In the very beginning of the program, there were only a few dozen participants. However, the expansion of the program has resulted in a situation where there are now several thousand companies participating. There are now three different ways that a company can qualify for the IESO ICI Program, mostly depending on the amount of electricity that they use.
The first tier of Class A customers is referred to as Level 1 Class A Consumers. This type of customer has been eligible for the Class A program since the beginning, and qualifying organizations get automatically enrolled into the program. If the organization wishes to decline participation in the program, they must manually request an opt-out. The requirements for this tier of customers is that the facility must be located in Ontario and have a monthly peak demand greater than 5MW.
The second tier of Class A customers is known as Level 2 Class A Consumers. These organizations have become qualified to join the program in 2016 and 2017. Unlike Level 1 Class A Consumers, these organizations must manually request to enroll in the program. Apart from this factor, they are able to receive the same sorts of rewards as the Level 1 Consumers. For a company to qualify for this tier, their facility must also be located in Ontario and have a monthly peak demand between 1MW and 5MW.
Finally, the third tier of Class A consumers are called Level 3 Class A Consumers. These are organizations that have only recently become eligible for the program, in the beginning of 2017. Like the aforementioned Level 2 Class A Consumers, they must also choose to opt-in to the program. In addition, they must also meet the requirements of the facility being located in Ontario, having a monthly peak demand between 0.5MW and 1MW, and being denoted as a primarily manufacturing-oriented operation as designated by their NAICS code.
Read on to find out the struggles that nearly all Class A companies in Ontario run into when they try to predict energy demand peaks as part of their task to reduce their Class A Global Adjustment costs.
i “Global Adjustment Class A Eligibility.” IESO, www.ieso.ca/sector-participants/settlements/global-adjustment-class-a-eligibility.
ii Wong, Richard, et al. “The Electrification of the Economy: Ontario’s 2017 Long-Term Energy Plan.” OSLER, OSLER, 15 Nov. 2017, www.osler.com/en/resources/regulations/2017/the-electrification-of-the-economy-ontario-s-2017.
iii Xavier, Katrina, and Aslan Hart. “Ontario's Industrial Conservation Initiative (ICI).” News.ontario.ca, Government of Ontario, 15 Sept. 2016, news.ontario.ca/mei/en/2016/09/ontarios-industrial-conservation-initiative-ici.html.