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Ontario takes further steps toward allowing consumers to realize the true price of power.
On Nov. 1 (recently postponed from May 1), Municipalities, Universities, Schools, Hospitals (“MUSH” customers) and other public-sector organizations will no longer be eligible to participate in the Ontario Regulated Price Plan (RPP). These customers, whose consumption is higher than 250,000kWh per year, will fall into the medium and large business consumer category and automatically move to Ontario’s market-based (hourly) rates—which means more customers will be paying for electricity when it is used.  

The Real-time Market
The Independent Electricity System Operator (IESO), the entity that is responsible for managing and balancing the real-time supply and demand for electricity in Ontario, directs generators and companies that deliver electricity when to operate their equipment to ensure that the electricity system as a whole functions in a stable and reliable manner.  According to the IESO, the market provides a fair and transparent means of pricing energy—with an hourly price that reflects the true cost of producing it.  Like other commodities, the price is influenced by supply and demand however since electricity cannot be stored, hourly power prices can be much more volatile than other commodities.

The Ontario Regulated Price Plan
The Ontario Energy Board (OEB) developed the RPP to “smooth out” real-time pricing and set an average price per kilowatt hour (kWh) for all those participating in this plan. This average or estimated price is recalculated every six months based on what the actual cost to supply the electricity was compared to the estimated price (RPP rate) during the previous 6-month time period.  Once the new estimate is determined, everyone participating in the RPP is then charged the fixed price rate per kWh, which helps to insulate customers from hourly or monthly volatility. 

Impact of these changes on Consumers and the Ontario Energy Market
Changes to the RPP will place MUSH and other public sector consumers who are not currently in a contract with a competitive supplier into one of two hourly pricing scenarios.  Facilities with an interval meter will pay the hourly price (see Fig. 1) for electricity which means paying for electricity when it is used. Those without an interval meter will pay a weighted average of the hourly price (see Fig. 2) based on the consumption patterns of consumers in the area (note: by 2010, all consumers will be required to have an interval, or “smart meter,” as part of an Ontario Government initiative).  With either scenario, customers leaving the RPP will be one step closer to realizing the a more market-reflective price of power and using it to their advantage. 

Fig. 1 Factors such as weather, consumer behaviour and available generation cause the hourly price to fluctuate over the course of the day. Many customers are able to respond to changes in the hourly price by shifting some of their demand to off-peak periods. Source: IESO   Fig. 2 Ontario Average Weighted Hourly Price (¢/kWh) Year Average Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2009 5.19 5.48 4.86                     2008 5.17 4.25 5.44 5.82 5.14 3.65 6.23 6.23 5.00 5.23 4.71 5.36 4.83 2007 5.05 4.62 6.08 5.69 4.80 4.11 4.80 4.72 5.73 4.76 5.12 4.85 5.18 Average Hourly Prices are weighted by the amount of electricity used throughout the province within each hour. Source: IESO

For some customers, exposure to an hourly-pricing model may encourage better management of energy consumption or load shifting through demand response initiatives.  To do this, an organization must have a thorough understanding of its peak demand (the highest rate at which an entity draws electricity from the power system) and overall usage to help determine what equipment or process may need to be adjusted in order to lower monthly delivery charges or to determine whether there are ways to avoid drawing a lot of electricity at the most expensive times of the day. (Note: some monthly delivery charges are based on peak demand).  This usage data can be found through the use of an interval meter, which tracks how much electricity is used on an hourly basis and the electricity costs for every hour of the day.

According to the Ontario IESO, demand response has the potential to improve the efficiency of electricity markets. Broader integration of demand in the market would allow customers to more directly communicate the value of electricity to the market and the market scheduling process. In turn, this would enable more efficient scheduling of generation resources in the short-term and more efficient investment decisions in the long-term. And, greater consumer participation in demand response allows consumers to impact the price of electricity in the same way generators do.

Realizing the true price of power may also encourage consumers to consider implementing energy efficiency measures to help contain energy costs and lower overall usage—especially during peak periods. This can help reduce the system load and also, in part, lower prices. Since the cost of power is directly influenced by supply and demand, energy conservation efforts—when implemented by a large number of consumers—can ultimately have a positive effect on overall demand (by lowering it). This can, in turn, translate to lower market prices as well as environmental benefits.

According to the IESO in the 2009 Ontario Market Outlook, successful markets need active participation from both the demand and supply side of the market and efficiency in electricity markets will increase when buyers can adequately react to price changes in the market.  Allowing buyers the opportunity to react to pricing signals in the market can promote efficient long-run investment, diminish price spikes, lower price volatility, and reduce consumers’ energy costs and environmental footprints.  More direct buyer involvement in the market will also provide reliability benefits and reduce the need for the IESO to intervene in the market to manage reliability.  

For MUSH-sector consumers in particular, managing and mitigating the risks associated with budget variables is an important part of ensuring that their organization meets its goals so that programs and projects don’t suffer from depleted f unds. Consumers like these with less appetite for risk may not wish to move to hourly rates but instead may wish to exercise the option to enter into a fixed-price retail contract with a competitive energy supplier. Canada’s restructured energy markets provide the opportunity for energy procurement choice, which means that businesses and organizations can select a competitive energy supplier to procure their power supply. Many alternative energy suppliers also offer energy management services and can analyze a company’s usage profile and devise a custom procurement strategy that includes energy conservation efforts, load shifting and a combination of fixed-rate and market-based buying strategies.

Businesses are increasingly recognizing that electricity costs aren’t just overhead but rather a key part of their overall business strategy. Through proper planning and analysis and the implementation of an energy purchasing strategy, businesses and organizations can not only save money but they can also have a positive impact on their bottom line.

Graham Leith, Senior Director of Energy Sales, Direct Energy Business, contributed to this article.

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