27 Jun Heads-up Ontario Commercial Energy Customers – Change is here
By Trevor Su
Originally, we intended this to be a very different article. The constantly evolving changes to energy regulation are highlighting the importance of working with partners who are able to help manage through these dynamic changes.
COVID-19 shifted energy demand in Ontario, the result of which will affect cost and budgeting for both Class A and B energy consumers – though billing equation dynamics mean not all consumers will be uniformly affected. In partnership with the team at Shift Energy, we had intended to share an analysis of how the calculation would affect commercial energy consumers.
Then, we heard the Government of Ontario was considering a mandatory Peak Demand Factor (PDF) holiday to stimulate the economy. While this situation is still unfolding, let’s run through the various scenarios.
The critical impact of a COVID-19 related demand shift
Over the past several weeks, I have been working with Marc Savoie from Shift. Their smart building software, EOS, is behind the energy optimization programs at some of Ontario’s largest buildings, many of whom are affected by the demand shift that has occurred as a result of COVID-19. Shift’s analytics engine communicates directly with building systems in order to achieve energy optimization while Powerconsumer’s predictive analytics support demand response, curtailment and behind-the-meter operational solutions. Together, we wanted to analyze and share the broad spectrum of possible repercussions for Ontario commercial real estate, including event venues, health facilities, malls or office towers.
The dynamics of Ontario’s energy calculations and usage patterns during and after the recent demand shift results in a very different energy budget depending on building type, each resulting in a different energy budget reality.
Breaking it down: The COVID-19 demand shift vs. Ontario’s Global Adjustment (GA)
By mid-April, the IESO was reporting energy consumption in Ontario had already dropped by over 12 percent. While consumption was lower in industrial and commercial sectors, the IESO reported a modest increase in total residential demand at that time.
Some interesting insights from the first few weeks, March 13 to May 26:
- It took a few weeks for commercial building consumption to wind down and stabilize (4 weeks)
- Demand pattern changed, with a slower ramp-up in the morning hours
- Industrial and commercial consumption both dropped, but as each sector resumes operations, demand normalizes
Lower demand doesn’t equate lower cost for Class A and B ratepayers – many of Ontario’s electricity system costs are fixed and the residential rate class is mostly insulated from this shift in the equation. Commercial and industrial consumers will bear this cost through their Global Adjustment payment.
Keep in mind that because the Monthly Global Adjustment = Contracted Electricity Contract cost – Proceed from HOEP, if HOEP goes up, Global Adjustment goes down, and vice versa.
The government already has moved to protect customers
In addition to fixing rates for residential and other small customers at off-peak prices, the Ontario government announced it would allow a deferral of Global Adjustment cost to protect almost 50,000 industrial and commercial consumers from a marked increase caused by the low demand during the COVID-19 outbreak, this amount would be repaid by these consumers over a 12-month period in 2021.
Heads-up commercial building managers
We fixed on three major factors for commercial building managers to consider. Keep in mind, these scenarios may change if the PDF holiday proceeds.
- Higher Peak Demand Factor
- Peak Demand Factor is a ratio between a facility’s 5CP electricity usage and the Ontario’s electricity system demand. When the system demand is lower, the ratio becomes higher.
- As an example, a Class A commercial customer who is paying 65% of their bill as Global Adjustment, would see their total bill increase by 11.4%.
- Higher Global Adjustment
- Commercial properties with low usage might be paying a lower energy cost, but the total bill might still be higher because the electricity bill is demand charge based, not energy based. Therefore, it is imperative to manage demand patterns, not only total energy consumption.
- If you look at Oct 2019 where the average HOEP is at $6.55/mwh and the GA at $1209M, vs those of Nov 2019 at $19.62 and $978M respectively, it means Class A customers paid $69.66/MWH in Oct 2019 vs $54.86/MWH – a 26.9% difference.
- How Deferred Global Adjustment Costs are Recovered in Future
- The total deferral in the Class A variance account will amount to $150M, to be repaid in 2021.
- It is projected that for Class A customers, the average cost of GA will jump from $76.96/MWH to $81.73/MWH for the 12-month period in 2021.
These factors are very relevant to commercial building managers. They also demonstrate the complexities of energy management and curtailment initiatives in this situation.
What about the Peak Demand Factor holiday?
Ministry of Energy, Northern Development and Mines has announced on June 26 “The Ontario government is helping large industrial and commercial companies return to full levels of operation without the fear of electricity costs spiking by providing more stable electricity pricing for two years. Effective immediately, companies that participate in the Industrial Conservation Initiative (ICI) will not be required to reduce their electricity usage during peak hours, as their proportion of Global Adjustment (GA) charges for these companies will be frozen.” The policy objective is to eliminate the need for Class A customers to predict and avoid operating during peak energy demand periods for one Base Period. The holiday would allow these customers to operate at full capacity without the need to curtail demand and manage peaks, at a time when the Government of Ontario is encouraging economic recovery.
The effects include:
- The mandatory Peak Demand Factor holiday would be for the current base period May 2020 to April 2021.
- Two adjustment Periods—July 2020 to June 2021 and July 2021 to June 2022—will use the Peak Demand Factor set in the Base Period from May 2019 to April 2020.
- New Class A customers will be exempted.
- The mandatory nature of the holiday has to do with fairness; the ratio is fixed for everyone at last year’s number, which sums to 100 percent of the five coincident peak demands during the Base Period. Allowing customers to opt for a lower Factor, could create a sum of Peak Demands less than 100 percent, necessitating further accruals and reconciliations.
- The holiday will put a chill on investors with qualified leads and battery projects in development. The holiday, in effect, postpones any financial benefits from peak reduction to the Adjustment Period which will take effect on July 1, 2022, a full two years from now.
What does this regulation change mean for commercial consumers?
Property managers will need to shift their energy management focus.
Instead of chasing five annual peaks, energy management should focus on curtailment for twelve monthly peaks. While a company might not need to manage their PDF and 5CP, they should still manage the monthly peak demand, as demand charge amounts to 17% of the electricity bill.
Another curtailment strategy would be to predict HOEP so that building automation can respond to pricing dynamics while maintaining building comfort.
The main takeaway here, the bottom line in this equation, is that energy management needs to be dynamic. It needs constant attention, and that’s where partners like Shift and Powerconsumer come in. We stay on top of the energy industry to keep our customers ahead of this curve.
Our advice is twofold: stay the course and stay tuned. In the meantime, we will run more analysis, prepare to react and keep you informed.