Data-driven thoughts on mitigating electricity rate increases

The Ontario Chamber of Commerce (OCC) released a report last week:

Empowering Ontario: Constraining Costs and Staying Competitive in the Electricity Market, takes a look at the driving factors behind rising electricity costs in Ontario.

It’s about time – at best; it may be too late.

Near the end of 2015’s first quarter I wrote  Ontario’s new electricity pricing program essentially taxes businesses to fund social program, which concluded many of the OCC’s members would be walloped by coming pricing changes:

Businesses below 3 MW average monthly peak:

-get stiffed with the continuance of the debt retirement charge
-get stiffed with the OESP [Ontario Electricity Support Program]
-get stiffed with the expansion of the class A program

I’m sure that’s confusing to many, but that “Businesses below 3 MW average monthly peak” class of customer did see the commodity rate it pays for electricity rise 25% from 2014′s second quarter to 2015′s, so I’m not surprised there’s some motivation to address the issues. However, they’ve got some more work to do in getting through the confusion.

The OCC report was notably covered in The Globe and mail, The National Post (at least twice), The Toronto Star and by Toronto radio station CFRB. The Star picked up on one aspect of the report that could have been lifted from my work in March:

[The OCC] wants to ensure residential electricity consumers continue to pay their fair share of hydro costs

“Keep the debt retirement charge (DRC) on residential bills until it has been retired, spreading the burden of past government decisions across ratepayers,” the chamber urged.

I happened to be in the car for a while the day of the release (Wednesday) and one thing I found interesting, but disappointing, is the early afternoon host didn’t work beyond the businesses want to make “you” pay to give them a break spin, and the drive time team (including prominent Liberal Scott Reid) pushed electricity well back to lengthen pop talk – in this case literally talk about the price of pop at movie theatres.

CFRB was, more than The Star, supporting Minister of Energy Ciarelli’s spin responding to the report:

The Chamber’s recommendation that hardworking families and seniors pay higher electricity bills is not something our government will accept. We are proud of our commitment to remove the Debt Retirement Charge from residential bills beginning January 1, 2016 –two years earlier than planned. This is an important step in helping Ontario families reduce the cost of electricity by an average of $70 a year.

As a former actual smaller business guy (with a small ongoing stake in one), I don’t much like the people who vote frivolously and expect somebody else to work harder to compensate. Ending the payment for the voter and choosing to have businesses bear a greater burden is doubly reprehensible – it’s just wrong to decide non-voting entities should pay for the mistakes made by governments and it’s just stupid to think that won’t have a negative impact on the economy.

Reviewing for newbies:

Ratepayers have been given, with just the OCEB, twice what’s left of the alleged Residual Stranded Debt but the government wishes to claim the debt continues in order to wring more money out of businesses.

Hard working families should understand the OCC is right.

But there areother things the OCC is wrong about – things that do hurt decent people.

I created the following graphic, and well its story is complex, I think it would be worth the effort to follow along:

2nd quarter global adjustment distribution by hour of the day
2nd quarter global adjustment distribution by hour of the day

The global adjustment is getting described a lot lately. It is the difference between the costs of procured supply and the money recovered through the sale of that production; it indicates how poorly the market functions and demonstrates the quality of supply and pricing decisions. My estimates of hourly global adjustment totals demonstrates the cost spiral of the second quarter is disproportionately due to growth in the middle of the day – the hours of peak solar energy.

Two things can move the global adjustment – recovery of costs on the market dropping (with price) and the cost of supply rising. With solar feed-in tariffs, both occur: expensive unnecessary supply drives down market price. The graph demonstrates the cost impact exquisitely. The market is increasingly oversupplied with increasingly expensive, increasingly unnecessary generation.

The growth in the global adjustment during solar’s peak hours is exceptional in 2015’s second quarter, but it’s also a constant trend looking at past third quarters. Each year the global adjustment moves disproportionately higher in the middle of the day.

Third quarter estimated global adjustment composition by hour of the day
Third quarter estimated global adjustment composition by hour of the day

And in the fourth quarter… the same; the global adjustment has pushed higher every year and disproportionately the growth is in the middle of the day.

estimated composition of the global adjustment charges by hour of day
estimated composition of the global adjustment charges by hour of day

That big drop at hour 17 (the market always operates in Eastern Standard time) is a warning to watch for price spikes as wind and solar grow. If there’s a major blackout this year, I’d bet it occurs at dusk on a cold day later in the year.

The first quarter is slightly different due to very cold winters in 2014 and 2015, but the trend to the greatest global adjustment costs moving to sunny hours is the same. Note our supply has been better suited to higher demand colder winters, which is indicated by the global adjustment being lowest during the actual peak demand periods.

Estimated first quarter distribution of global adjustment charges by hour of the day
Estimated first quarter distribution of global adjustment charges by hour of the day

If Minister Ciarelli is worried about protecting consumers/voters from needless charges, he should halt solar and conservation spending. That would be a far more useful method than breaking laws set by honest people in order to screw businesses. From the Electricity act:

Duty to pay debt retirement charge

(4) Every user shall pay to the Financial Corporation a debt retirement charge in respect of the amount of electricity consumed in Ontario, to be calculated at the prescribed rate or rates…

I’ll try to quickly cover a couple of other points of what is largely a useful, and readable, report from the Ontario Chamber of Commerce. Two of their “High Potential” actions that could mitigate electricity pricing increases are:

1. Increase transparency of electricity pricing and system cost drivers

5. Unlock the power of smart meter data by capitalizing on data analytics at a province-wide level

That’s sweet, but step one should actually be to develop an organization capable of understanding electricity pricing and system cost drivers. I have some familiarity working with data, and it’s as much about discipline as it is about numeracy or systems competency. Here’s the meat of the home page of the IESO – the organization people suppose might be more transparent:

IESO home page - data summary section
IESO home page – data summary section

Highlights mainly indicate errors.

  • the IESO market is always on Eastern Standard Time (EST) – so the time is wrong throughout
  • hourly demand is the average of 12 intervals – there is always a most recent hour’s demand, but seldom a current hour’s demand
  • current hourly price is the same lax terminology. HOEP comes from 12 market control price intervals; there is always a most recent HEOP, seldom a current one
  • noting the huge cost impact of solar, as I have, I note they have a number for embedded generation that is over 6 months old

Not much discipline there, and reality is the IESO reports neither what people outside of their small circle would recognize as demand, nor what casual observers should think of as supply.

What is a smart meter to do when only curious outsiders can note the enormous increases in “On-Peak” global adjustment dollars?

I can’t imagine it could be programmed to advise severely increasing the on-peak time-of-use rate during the second quarter of 2015.

The OCC report errs in calling for both “unlocking the power of smart meter data” and “increas[ing] the peak-to-off-peak ratio under time-of-use pricing.” That error is indicative of the deeply confused culture the pop sensation policies of the past 7 years developed.

My data analysis indicates the highest potential action for mitigating electricity price increases is now sourcing technically qualified new people, from different cultures, to lead in policy and execution.

Note: the spreadsheet with graphics for this post is here

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2 thoughts on “Data-driven thoughts on mitigating electricity rate increases

  1. On the subject of the “stranded debt”, I agree with you that the official explanation for the DRC is bunk and that official reporting for stranded debt and residual stranded debt is bunk too. Very sadly, OEFC still has $26 billion in real, interest-bearing debt outstanding, up substantially over its debt level a few years ago. OEFC is a hungry maw that still must be fed somehow, notwithstanding the lies that have been told by the government about SD, RSD, and DRC. Your endorsement of the OCC’s recommendation for continuing to share the pain of the DRC makes sense to me.

    On the subject of hourly GA, your calculations help to explain where the cash is going. It sure would be nice if official Ontario would let us all in on the story of how much is paid to generators to not generate. In playing fantasy football with how power rates might be reformed to recover power costs, I would have big concerns with trying to recover all of GA through hourly charges. Consumers with flexible loads would shift lots of sunk costs onto consumers with less flexible loads.

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    • Thank you for commenting Tom.
      I used the term “farce” for the stranded debt, and not the term “lie”, because I recognize the OEFC situation.
      Farce: “a light, humorous play in which the plot depends upon a skillfully exploited situation rather than upon the development of character.”
      I think we have a residual stranded debt charge to indicate the cost issues originate in the past when somebody else ran up public debt to finance the electricity sector to camouflage today’s running up of public debt to finance consumers’ payments of electricity bills.

      On hourly global adjustment charges, I also agree with you despite presenting the situation differently. I enabled myself to estimate costs by breaking down what little information is available on power purchase agreements into either costs per unit of output (as with FIT contracts), or costs per unit of capacity (as with natural gas net revenue requirement contracts). It may be a cop-out to distribute capacity charges evenly across all hours, but it would be a real mess not to because, for instance, if gas capacity is worth more at noon and nothing at 2 a.m. why would the same conclusion not be made of nuclear output procured at regulated rates – or Saunders.
      The same issues present themselves with conservation spending.

      On consumer pricing, I’d advocate for choice. Some might chose time-of-use, and fewer real-time pricing, but most would choose fixed rates, and that would be fine.

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