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Murky Market Conceals Electricity Costs: Global Adjustment Hits Contract Holders Hard
July, 2009
By Barbara Carss
Sustained low wholesale prices haven’t translated into significant electricity cost savings for Ontario consumers this summer. In August, they’ll pay a premium that will add an extra 4.33 cents per kilowatt-hour (kWh) to hydro bills. That’s more than double the average market price of electricity, which has hovered around 2.01 to 2.14 cents/kWh for July and August.
The mechanism for purveying this added cost is known as the Global Adjustment or Provincial Benefit. It bridges the gap between the market price of electricity and the contracted price the provincial government pays to a growing list of generators. Customers receive a rebate when the market price is higher than the Province’s contracted price for that power, but they must also cover the shortfall when the market price falls below generators’ promised return.
The Global Adjustment applies to consumers using more than 250,000 kilowatt-hours (kWh) annually and to all consumers with electricity contracts regardless of volume of consumption. Small customers participating in Ontario’s Regulated Price Plan (RPP) also cover the Province’s contracted energy costs through electricity rates that are adjusted at six-month intervals.
Initially following the adoption of the Electricity Restructuring Act, 2004, the Global Adjustment pertained to supply from Ontario Power Generation (OPG) Corporation’s nuclear generating stations and large hydroelectric stations at Niagara Falls and Cornwall.
Since then, the Global Adjustment has been expanded to include contracted prices for electricity from Bruce Power’s nuclear generating station, new natural gas-fired generating facilities, renewable energy sources and incentives offered through conservation and demand management (CDM) programs. The rates for renewable power recommended for Ontario’s proposed feed-in tariff (FIT) program range from 10.3 to 80.2 cents/kWh and these will also be factored into the Global Adjustment when the FIT is adopted.
“It’s a witches’ brew with many different ingredients, which is all blended together to get the adjustment,” explains Mike McGee, President of the energy management consulting firm, Energy Profiles Ltd.
MORE PENALTY THAN PERK
The Global Adjustment took form as a benefit or rebate for customers in the spring, summer and fall of 2005 when market prices soared above the rates pledged to the designated generators. In September 2005, for example, the average market price hit 9.97 cents/kWh resulting in a 2.13 cent/kWh benefit for customers, which was calculated into their October hydro bills.
The now discontinued OPG rebate on non-prescribed assets – encompassing its coal-fired generating plants, small and mid-sized hydroelectric facilities – gave large-volume consumers a further small break. It was applied to the percentage of the market attributable to those sources that was priced in excess of 4.7 cents/kWh, and was paid out quarterly.
That rebate was formerly cancelled as of April 30, 2009, but customers have not collected it recently anyway. “In the past few rebate periods it has been almost a moot point because the reality has been that the market price has been below 4.7 cents per kWh,” McGee says.
Today’s market dynamics are very different from some past summers. Ontario’s shrinking manufacturing base and general economic downturn has reduced demand and moderate temperatures have similarly kept peak loads in check, while new generation and conservation achievements have increased supply.
The Global Adjustment has required customers to pay in almost every month since January 2006 – with the two exceptions of August 2006, when it provided a rebate of 0.066 cents/kWh, and June 2008, when it provided a rebate of 0.12 cents/kWh.
Until 2009, however, it rarely added more than 1 cent/kWh to hydro bills, whereas since April the Global Adjustment has consistently been in excess of 3 cents/kWh. It is also arguably out of step with the Ontario government’s efforts to encourage demand management.
“Customers managing their load to reduce their usage during peaks of demand get no relief from the Global Adjustment/Provincial Benefit because usage in off-peak periods bears the same burden as usage in on-peak periods,” observes Tom Adams, an energy policy analyst who was a member of the provincial committee struck to guide the design of a competitive electricity market in the 1990s.
HEDGE HINDRANCE
Current market dynamics are particularly disadvantageous for consumers with electricity contracts since contracted prices are now typically well above the market rate and they are further saddled with the hefty Global Adjustment premium. (In contrast, many contracts require customers to surrender any rebate to the contractor.)
Critics attribute much of this negative economic fallout to a market structure that isn’t really a competitive market. They maintain that consumers who sought contracts to hedge against price volatility are now victims of a contradictory and mandatorily imposed hedge on the provincial government’s part devised to cloak true prices and/or subsidies for some sources of power.
“It’s an adjustment charge that reflects what generators need be viable, so what does the spot market price really represent?” McGee asks.
“Only a portion of the Global Adjustment/Provincial Benefit can be independently verified,” Adams notes. “We know the rates paid to the OPG regulated generation component because it is subject to an Ontario Energy Board order. The rest, which is comprised of payments to old and new contract generators and Ontario Power Authority and CDM programs, is a black box from the perspective of how much the customer pays to the many ultimate beneficiaries.”
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