Adjusting to the New Global Adjustment

The Global Adjustment (GA) was established by the Ontario government in 2005 to cover the cost of providing adequate generating capacity and conservation programs in Ontario. An annual pool typically in excess of $10 billion, the GA is set monthly to reflect the difference between hourly Ontario electricity price (HOEP) and financial obligations to generators. The obligations include regulated rates for Nukes and Hydro, payments to build and refurbish generating capacity, contracted rates paid to generators, and the cost of conservation programs. 

This $10+ billion-dollar annual pool is paid by Ontario electricity consumers, and is divvied up based on consumer categories. Class A consumers (5MW or greater demand) that have not opted-out of the Industrial Conservation Initiative (ICI), pay a GA charge based on their percentage contribution to the top five peak Ontario demand hours over the course of the year. The ICI provides an opportunity for Class A consumers to lower their cost of electricity, and acts as a market signal to reduce overall peak demand on the grid. Class B consumers (50kW-5MW) have typically paid GA through their regular billing cycle, and residential and small consumers have their GA charges embedded in the time-of-use (TOU) rates they pay. 

In an aim to further reduce peak demand and enable cost savings opportunities for consumers, changes have been made to the eligibility requirements of the ICI to allow for more consumers to participate in the initiative. Certain Class B industrial consumers with an average annual peak demand of 500kW or more, and any consumer with greater than 1MW average peak demand will be allowed to opt-in to the initiative, meaning GA charges will be removed from their consumption and assessed based on their peak contribution. Once opted in to the program, a participant can lower their monthly electricity bill by reducing consumption during potential grid peaks. Participants are welcome to employ any strategy they see fit to predict potential peaks and reduce their demand during these periods.

Strategies typically fall into two categories: reducing consumption by improving efficiency or ramping down on-site activity, and/or implementing behind the fence generation and storage systems to be used during potential grid peaks. Applying either or both strategies is an increasingly attractive option as GA costs continue to climb and the commodity price of electricity falls:

Figure 1: Change in commodity price of electricity and GA in Ontario (image produced by IESO)

Figure 1: Change in commodity price of electricity and GA in Ontario (image produced by IESO)

Enabling the on-site generation strategy are the great strides taken in lowering the cost and complexity of renewable generation and energy storage solutions. We’ve all seen the incredible cost decline in renewable generation over the last decade, and storage has begun its fall as well. According to the latest reports (Lazard LCOS 3.0), micro-grid sized lithium-ion storage systems have decreased 27% in cost of electricity and 101% in overall CAPEX in the last year alone.

This dramatic reduction in system cost is enabling more and more consumers to view participation in the ICI coupled with a technical solution as an attractive way to reduce their overall electricity bill without the need to interrupt business operations. With a clarified position laid-out by the Ontario government this year, some have argued the policy risk associated with investing in a technical solution has decreased (Osler).

Diminished policy risk does not setup an immediate home-run though; timely implementation of a solution should also be a concern. There is an element of Game Theory to be considered as part of a GA cost reduction play, since early adopters will be in a position to better predict peaks. Also, it should be noted that an early-adopters’ GA savings mean GA expense for a non-participant in the ICI. Those consumers late to the game will have to shoulder more of the fixed GA amount and can expect to encounter a peak-chasing effect that will increase the complexity of predicting peaks (the working assumption here is that enough consumers will have joined the ICI to have a material impact on when peaks occur). Becoming an expert peak-estimator could be incredibly important to ensuring that an investment in a technical solution is paid off in a timely fashion.

Multiple revenue streams from an installed technical solution can help alleviate the risk of a competitive ICI program. For example, a solar PV system can participate in the latest net-metering program. A battery system can take advantage of daily fluctuations in HOEP and perform energy arbitrage. And a combination of both technologies could help reduce GA charges, perform energy arbitrage, and provide net-metering!

What is fairly certain is that the pool of money that is the GA will exist for years to come. Even with a restructuring of the ICI (which would likely take several years to implement) the GA costs will have to be borne by consumers and allocated using a fair mechanism, be it through capacity (kw) or consumption (kWh). The multiple revenue streams of a behind the meter system and the ultimate reduction in consumption and capacity could be considered a way to hedge the risk of changing policy and increasing electricity costs.

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