By Carmine DiRuscio & Tom Hilbig
Global adjustment has become a significant charge for Ontario electricity consumers, and what was once a small credit in 2005 has ballooned to the point where it now exceeds the cost of energy itself. Recent regulation changes now allow larger consumers to choose how the global adjustment is charged, giving them an option to be billed based on their consumption during the top five peak demand hours in the province.
By Carmine DiRuscio & Tom Hilbig
This presents a tremendous opportunity for many companies to save hundreds of thousands of dollars by implementing strategies to ensure they reduce or offset their load during these peak hours.
The potential for savings is significant: every 1 MW that a large consumer is able to either curtail load or displace it through approved onsite generation during the top five peak hours in 2012 will result in annual savings of over $300K. This is forecast to increase to over $400K annually by 2016.
What is global adjustment?
The global adjustment (GA) is a line item charge on your monthly electricity bill and is used to cover the difference between the market price and rates paid to regulated and contracted generators, and to pay for conservation and demand management programs. The GA was designed to assist the government in eliminating coal-based generation and greening the power system through conservation, demand response and cleaner generation sources.
When GA was first introduced in 2005, it included the existing Power Mitigation Rebate, which was paid by Ontario Power Generation back into the electricity market, and resulted in a net credit to consumers. However, this credit disappeared the following year and the GA became a minor charge. In 2009, the GA charge increased significantly as several new natural gas plants came online. In addition, with the introduction of the Green Energy Act, feed-in tariff (FIT) and micro-FIT programs in 2009, the GA continued to grow unabated to the point where it now replaces the net energy settlement charge as the single largest line item on the monthly bill.
During those same years, the Ontario Spot Market price for electricity dropped significantly, primarily due to the lower cost of natural gas, which tends to set the hourly market price. However, the GA is forecast to increase further over the next four years as those companies with contracts to upgrade or build new generation will finish their construction and begin to produce new energy at their contracted rates. (Figure 1 at bottom)
Changes to how global adjustment is charged
Prior to January 2011, all major Ontario consumers paid global adjustment on a volumetric basis, with the monthly cost spread equally across the total energy consumed by the loads in the province. However, with the passing of Ontario Regulation 398/10 amending Regulation 429/04, two separate classes of consumers were created: Class A consumers are defined as having a monthly average peak over 5000kW, while all others are considered Class B.
Class A consumers no longer pay their GA portion based on their total energy consumption, but instead are now charged based on their consumption relative to the total Ontario load during the top five hours (from different days) of any given 12-month base period. Hence, the program is referred to as the ‘5 Coincident Peak’ or 5CP program.
Little has changed for Class B consumers, whose GA amounts continue to be charged based on their total energy consumption within each month, except that they must also make up any difference in savings realized by the Class A group. In both cases, GA continues to be a separate charge item on the bill, identified as the Global Adjustment Charge.
When the new GA regulation was introduced in 2011, the Class A consumer was paying about $200,000 for GA per average MW consumed during the 5CP periods. For 2013, the GA is forecast to be about $350,000MW annually and is expected to rise to almost $400,000MW by 2015. That is an average increase of about 20% per year since 2011. The Independent Electricity System Operator (IESO) and Ontario Power Authority (OPA) determine the GA recovery charges required monthly, and provide these numbers to the LDC (local distribution company) who, in turn, charges and collects from their customers accordingly. The LDCs remit the collected GA dollars to IESO for settlement and disbursement.
In 2012, the regulation was further amended to allow Class A consumers to choose how they were billed for GA. They now have the choice of being billed on a $/MWh (Class B) or based on the $/MW (Class A) basis. Many consumers continue to select Class A, as they are able to save simply based on their inherent load profile, and are billed based on the peak MW method. This also allows them to have further control over the GA charges they may incur in the future.
This could present significant opportunities for savings. By anticipating when the grid peaks are going to occur, the Class A consumer could cut its loads during the 5CP days to reduce their GA contributions considerably.
Opportunities for significant savings
For most businesses, electricity costs represent a relatively small portion of their overall operating budget. It is often a challenge to balance the financial benefits of curtailing load during peak hours and the disruption this could cause to productivity. However, the opportunity for saving on GA costs is so significant that it has become an increased priority for consumers that qualify as Class A. Many are now looking at demand response (DR) strategies with new interest, and are considering the three main opportunities below:
• Direct production curtailment.
• Non-production baseload conservation and demand management.
• Load-displacing onsite generation (with full environmental approval to be used for this purpose).
Given the small number of hours upon which the 5CP program is based, directly scaling back production operations to reduce demand during peak hours is often the most effective strategy. This is particularly key for consumers that have a small number of large loads and may have slack in their production cycle or, alternatively, have the capacity to build up storage inventory of one component then shut down part of the plant for a number of hours without impacting main production lines.
This strategy involves careful analysis of the energy needs throughout all stages of the production cycle to identify opportunities for load curtailment, then setting limits on when and how long each stage can be shut down without significantly impacting the business.
Many consumers have production constraints that prevent even short interruptions to their operations. They must consider alternate solutions that focus on curtailing their non-production baseload, such as lighting, HVAC and compressed air. The key is to develop a strategy and select technologies that include a DR component. It is not simply about conservation or saving a few kilowatt-hours across the board anymore; it is about being able to curtail loads by having the proper controls in place that will allow for that flexibility when you need it most.
The good news for consumers is there are an increasing number of new technologies available on the market designed to control baseloads. Businesses are starting to assess new conservation & demand management (CDM) technologies for the purpose of DR to reduce non-production baseloads within their facilities, seeking to reduce demand without impacting production time. By focusing more on the benefits of DR, rather than efficiency and conservation alone, businesses can more easily justify investments in these new technologies.
Using back-up generators to curtail demand is not a new concept; for several years, customers who have environmentally approved generation capacity have been shaving their peaks by generating their own power. The difference now is that the use of generators is becoming more prominent as the 5CP and other DR programs provide an accelerated payback of the initial capital costs. Every kW of generation output during a peak hour has the same net benefit in reducing your GA costs than as a reduction in the consumer’s load itself.
Consumers wishing to utilize existing generators, or considering the purchase of new ones, must consider the additional costs of running the equipment during peak hours and ensure they have the appropriate environmental certification that allows them to use it for this purpose. In some cases, customers with existing backup generators may simply upgrade their equipment to meet the environmental certification requirements.
Challenges facing consumers
The challenge for most Class A consumers is knowing when to cut load so it will have the greatest impact on their GA costs. The balance is always between cutting too often, which impacts production, versus not cutting enough and missing the peaks. We are approaching the third year of the 5CP program and have noticed a significant impact on the grid. There are only five peaks during the base period that matter most when determining the peak demand factor. However, the peaks this past summer were wider and longer than ever, making it much more difficult to predict the peaks when compared to previous years.
The following is a guide to help customers to reduce usage during peak periods, all of which can alter when the peaks occur for the day:
• Assess the impact of GA on your overall bills. Analyze the sources of load within your company and their contribution during peak days. Assess your ability to reduce these loads during peak days. Identify opportunities for stockpiling with batch processes within some areas to make it easier to ride through a curtailment.
• Develop an energy management strategy that includes demand response. Evaluate using existing or new low-cost or no-cost methods for opportunities in curtailing loads.
• Engage the right departments. The strategy should involve the whole organization to execute your plan.
• Understand how electricity demand is reported in Ontario and establish your demand threshold (MW). The demand threshold will be your initial point in the Ontario demand where you will want to activate your curtailment actions. After the five peaks have been established that exceed the initial threshold, the new threshold becomes the lowest of the five. Setting the initial threshold is critical. When the threshold is too low, production will be unnecessarily disrupted; when it is too high, peaks will be missed.
• Monitor the Ontario electricity market in real-time. Understanding the market dynamics and what is happening during peak days is crucial in knowing whether to cut for any day. Some key elements to look for are:
- Monitor the IESO hourly demand forecast carefully. The forecast itself rarely equates to the final actual demand, so it is important to factor in confidence bands so you will not miss a peak should the final demand come in higher than the forecast, or should the peak shift to another hour.
- Track the actual demand very carefully during peak days. You are now competing with over 1000 MW of other Class A consumers that are all trying to avoid the peak while hoping the rest of the group do not. As a result, peak hours can shift radically throughout the day. When possible, it is best to monitor demand deviations in real-time so you can quickly detect and respond to such shifts.
- Monitor other components of the Ontario electricity market that will impact demand. IESO will warn of changes to the demand forecast in their System Status Reports. Also, large industrial customers may withdraw their market bids to consume energy for upcoming hours, indicating that they may also be curtailing load during those hours.
- Assess the impact of other Class A load actions on the system peak and DR programs on the system peak (e.g. impact of DR3 or PeakSaver Plus). These, again, will negate peaks or shift them to another hour.
Best of both worlds: elect Class B but behave like a Class A
Consumers over 5000KW will be classified as a Class A consumer by default; however, they can elect to be billed as a Class B consumer by June 15, prior to the start of the associated Adjustment Period. Class A consumers generally experience an advantage in lower GA costs but, in some cases, remaining on the volumetric approach that Class B consumers pay will be less expensive. The decision to be Class B should be based on your Peak Demand Factor (PDF) from the past Base Period, along with the energy volume requirements you foresee going into the next Adjustment Period.
Even as a Class B consumer, these companies can still implement an energy management strategy to shave some load during peak hours to lower their PDF for the current Base Period. When the strategy is successful, they can switch to a Class A for the next Adjustment Period; were they unable to shave peak load, they can select to remain a Class B consumer for that period. This provides a best-of-both-worlds hedging strategy, and allows consumers to test and implement energy strategies within their organizations with little consequences should the strategy fail.
Help to the rescue
Unless electricity is a major portion of an organization’s total costs, it is unlikely they have the dedicated staff and knowledge to implement a demand response strategy themselves. Fortunately, there are companies operating in the Ontario electricity market that provide the tools, services and experience that can aid in developing and implementing a successful strategy. This allows consumers to tap into a vast knowledge of expertise and existing skill sets—as well as powerful market tools—allowing them to execute their strategy more rapidly and more precisely than had they done it by themselves. The costs of most services are minor considering the potential savings offered through the GA 5CP program, and they increase the likelihood that the plans are ready to execute before the critical peak periods occur.
Some of the offerings available to consumers over 5000 KW include the following:
Analysis and planning consulting services
Energy experts are available to assess your energy bills and future energy requirements to determine whether you should elect to be a Class A or B consumer for the next Base Period. They can then provide energy audits that will identify areas that would benefit from CDM, targeting primarily demand response opportunities that will result in a lower GA cost.
These services can lead to the implementation of a sophisticated energy management strategy. It may include building automation systems that will help consumers monitor and report on load details, as well as control demand in several areas under computer control.
Peak avoidance services
Peak avoidance services utilize market experts that monitor Ontario demand and provide alerts to consumers that identify hours that are at risk of becoming peaks. These service providers should have an in-depth knowledge of the Ontario electricity market so they can establish initial demand thresholds with confidence using the latest long-term forecast information and tools. The initial threshold is established early in the season as the point where loads will be expected to curtail. The goal is to miss the peak hours while not over-curtailing to the point where the disruptions negatively impact the customer’s business. Market monitoring and communications are extremely important to ensure any changes to the demand are identified and discussed well ahead of the likely peak hours.
The service should provide assessments prior to the peak seasons, as well as several times during peak days as at-risk hours are approached or as forecasts are updated (e.g. Day Ahead and Day Of alerts). The provider should also monitor changes in the demand, the behaviour of large consumers and activation of other demand response programs throughout the day so it can alert its subscribers.
Market monitoring tools
Advanced market monitoring tools have been available to the Ontario electricity market for generators and large consumers for many years. These tools allow consumers to monitor for changes in Ontario demand, set thresholds and receive alerts, and detect variances in demand forecasts specifically for Class A consumers wishing to avoid peak hours. These systems are browser-based, requiring no additional software installation, and provide more insight into the market, including what other large consumers are doing to avoid the peaks.
DR3 aggregation services
Ontario Power Authority’s Demand Response 3 (DR3) program is available through several aggregators, and will pay a standby and activation fee for demand response. While both DR3 and GA 5CP programs are based on demand response activations, there are several key differences between these programs:
• GA 5CP is completely voluntary, while DR3 is contractual.
• GA 5CP based on the top five hours (different days) in the period. DR3 requires a maximum of either 100-hour or 200-hour commitments in curtailment.
• GA 5CP savings through reduction in GA avoidance (over $300K per MW yearly) are recovered the next year. DR3 contracts pay in the current year and range from $60-125K per MW, plus up to $200 per MWh during activations.
• DR3 activations are triggered by a combination of forecast market prices and a supply cushion (percentage of supply in reserve). During peak demand season, generator maintenance and outages have been completed and there is generally enough capacity, so supply cushion may not be an issue. DR3 activations often do not coincide with 5CP activations.
• DR3 curtailment is calculated using a baseline load prior to the activation. Voluntary curtailments for 5CP prior to a DR3 trigger can impact this baseline, resulting in a lower deemed curtailment and/or a penalty from the aggregator.
An energy management strategy can result in savings through both DR3 and GA 5CP. While the financial certainty of a DR3 contract is a benefit, consumers should take precaution that such contracts do not penalize them from taking actions to avoid the more significant GA costs. Aggregators receive no benefit from the 5CP program, but are compensated through DR3 revenue and may be in a conflict of interest and unwilling to provide candid advice to consumers.
Any energy consumer with an average monthly peak over 5000 KW can take advantage of the global adjustment 5CP program. Whether the company develops its energy management strategy alone or with the help of a third-party, the financial savings that result from avoiding the top five demand peaks can be extremely lucrative. Curtailing or displacing load for GA demand response can be accomplished in many ways, and can be the most cost effective way of reducing your electrical costs.
It is becoming more difficult for companies to ignore the program, as other industries and their competitors have already begun to take advantage of the GA, maximizing the opportunity to gain a competitive edge—particularly as GA is forecast to continue rising for the next four years.
Carmine DiRuscio is president of NRG Matters, which provides DR consulting and peak advisory services to distributors and large energy consumers. Tom Hilbig is president of Sygration, which provides the Sygration Dashboard, a market monitoring and alerting tool used by large energy consumers, generators and traders.