How much is a kWh worth to your plant?

Anatoli Naoumov
February 28, 2018
By Anatoli Naoumov
March 1, 2018 - This might seem like a trivial question, but there is no simple answer until you put the question into context.

Consider a plant that, in the last month, used 1 million kWh to produce 100,000 units and paid $10,000 for electricity. Does kWh cost $0.15? Is energy cost per unit $1.50?

The answer: Yes, No and Maybe.

The cost or value of a kWh depends on how this figure will be used.

While these may be not the answer(s) your CFO wants to hear, this is the reality of Ontario’s electricity market for businesses.

Structure of industrial electricity bill in Ontario
Before I go any further, let’s take a closer look at a monthly electricity bill. The exact bill structure differs from one utility to another; however, numerous lines can be aggregated into four categories:

1. Energy cost: calculated per total kWh based on weighted average spot market price.
2. Delivery cost: calculated per peak kW based on fixed rates.
3. Global Adjustment (GA): calculated per total kWh for Class B, based on a rate that varies monthly and per demand during annual peak hours for Class A.
4. Administrative fees: unrelated to peak demand and consumption.

Contrary to popular belief, the sum of all parts constitutes the cost of electricity used at the plant.

The energy cost/value in different contexts
With this structure in mind, let’s figure out the appropriate answers for the cost of energy question within several contexts.

Last-month product costing
What was the electricity cost per unit and per kWh last month?

•$1.5 per unit, $0.15 per kWh

Next-month product costing
What would be the electricity cost per unit and per kWh were production, consumption pace and volume to stay the same next month?

• Maybe $1.50 per unit and $0.15 per kWh, but it is hard to predict the exact numbers.
• Were peak demand to stay the same, then the delivery cost will stay the same.
• Energy cost will result from the weighted average spot market price.
• The GA will stay the same for Class A, but will vary for Class B based on consumption and allocation rate of that month.

Electricity cost in production
Were the plant to add a night shift next month to produce another 20,000 units, will the electricity bill increase by 20%?

Nope.

• Energy cost will increase by less than 20% due to lower nighttime rates.
• Delivery cost will stay the same.
• GA will be the same for Class A, or will increase by the product of 20% and next month’s rate for Class B.

If the plant cancels Friday shifts due to a 20% production drop next month, will the electricity bill drop by 20%?

Nope.

• Energy cost will drop by 20%, assuming consumption is fully flexible.
• Delivery cost will stay the same.
• GA will be the same for Class A, or will decrease by the product of 20% and next month’s rate for Class B.

If the plant reduces the number of machines it uses due to a 20% production drop next month, will the electricity bill drop by 20%?

Maybe.

• Energy cost will drop by 20%, assuming consumption is fully flexible.
• Delivery cost will decrease if the turned-off machines contributed to monthly peak.
• GA will be the same for Class A or will decrease by the product of 20% and next month’s rate for Class B.

The value of an energy efficiency project
The effect of energy efficiency measures on a bill are not, unfortunately, straightforward.

When a lighting retrofit reduces consumption by 100,000 kWh per month, will the electricity bill decrease by $1,500?

Depends on the Class.

• Class B: Yes or Maybe, subject to the GA rate of the month, because the energy cost, delivery cost and GA will decrease.
• Class A: No. Only the energy cost and delivery cost will decrease. The GA will stay the same until it is reset the following year (that is, if plant keeps the lights on through peak hours). If plant curtails lighting during peak annual hours, then the lighting retrofit will not affect the GA.

When the VFD on an air compressor reduces consumption by 100,000 kWh per month, will the electricity bill drop by $1,500?

Maybe, maybe not.

• Class B: If the compressor worked 100% during monthly demand peak while it was needed, then a $1500 drop should be expected. If the peak draw on the compressor was not during the plant’s peak demand time, then the energy cost and GA will decrease, while delivery cost will stay the same.
• Class A: same logic, except the GA will stay put until after next year’s peaks.

If a refrigeration plant has been optimized to reduce annual consumption by 500,000 kWh, how will this affect July’s bill?

Depends on how the reduction is expected to be achieved.

Refrigeration plants work at different settings in summer and winter (at least, the efficient ones do so). The annual energy consumption at refrigeration plant can be achieved during the winter with no reduction in summer. Alternatively, some of the reduction can accumulate through the year.

As you can see, figuring out how much is a kWh is worth at your plant is not a simple exercise, which is why it makes sense to seek out professionals, who can help put this question into context.



Anatoli Naoumov, MBA, MSc, CMVP, is a managing partner and “chief energy waste-buster” at GreenQ Partners. He has been certified as measurement and verification professional (CMVP) by the Association of Energy Engineers (AEE) and the Efficiency Valuation Organization (EVO). He can be reached at This e-mail address is being protected from spambots. You need JavaScript enabled to view it .

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