ELECTRICITY DEREGULATION IN ONTARIO

What You Need to Know About Buying Deregulated Electricity

Electricity charges in a regulated utility area are based on monopoly providers' costs, and are approved by a government appointed regulator. In Ontario, for example, electricity is generated by Ontario Power Generation, transmitted around the province by Hydro One, and distributed locally by a local distribution company or LDC (like Toronto Hydro), all of which are regulated by the Ontario Energy Board.

The Basics
There are four basic cost components (aside from taxes) that make up electricity charges: generation (actually producing electricity), transmission (moving it long distances at very high voltages), distribution (delivering it to users' premises at lower voltages) and system operation charges (system regulation overheads and debt retirement).

Only generation (i.e. the commodity itself) will be deregulated in Ontario. Transmission and distribution will remain regulated monopolies, and system operation charges will be set by the government. Only about 60 per cent of your electricity bill will be for the electricity itself, where market forces will eventually establish prices hourly.

It is important to note that what you see on regulated electricity bills is not comparable to what marketers offer, because marketers do not include transmission, distribution charges, or system operating charges.

What Makes Up Your Bill
Table 1 illustrates some typical charges on an electricity bill.

Your bill may also have a demand (kw) charge. This compensates the electricity distributor for the capacity they have to build into the system to handle your use at your peak demand time. We have used kWh approximations of this in the above chart.

Your Options for Buying Electricity

• Do nothing, and continue to be supplied by your LDC under default supply. This is a straight pass through of the monthly average spot market price. It's an option to everyone in Ontario, but Alberta only provides this option for customers who use less than 250,000 kWh per year.
• Purchase electricity from a retailer/ wholesaler/supplier. You will have a choice between many different prices, contract types, contract lengths and financial instruments to manage and reduce risk.
• Purchase directly from the wholesale market. Any customer with an average demand of over 50 kilowatts and who is equipped with an interval meter can theoretically register to become a wholesale market participant. However, in our experience it only really makes sense for users with a demand of at least 50 megawatts.

Full requirements contract
An electricity supplier agrees to provide all of a company's electricity needs at an agreed price. The supplier does not require that you buy a set amount or buy any electricity on the spot market. This type of contract is common for residential customers but rare for larger customers. Its also known as a "load following" contract.

Fixed volume contract
Here suppliers pass the volume risk and some spot market exposure to the customer. A customer estimates their monthly consumption based on past years and any expansion plans. The supplier then contracts for that amount on the customer's behalf. The customer is financially responsible for differences between estimated and actual use bought for them on the spot market by the supplier.

Electricity Purchase Blocks
These are agreements to buy fixed blocks of power at a predetermined price, for a specified term. For example:

• 7 (days) x 24 (hours) annual or monthly blocks,
• 5 x 16 (weekday, on-peak blocks),
• 5 x 8 (weekday, off-peak blocks),
• 2 x 24 (weekend, off-peak blocks)

Metering and Its Cost Implications
The electricity world will soon be divided into those with interval meters and those without. A standard utility meter measures kWh use each month, as well as the maximum kilowatt demand the facility puts on the system at a single point in time. It's like an odometer in a car that also measures the maximum speed hit during the month. The utility bills based on kilowatt hours used in the month, and on kilowatts of peak demand.

An interval meter measures electricity usage every hour of the year, 8760 hours, and creates a load profile of consumption. It’s like a trip odometer that re-sets every hour and records the kilometers traveled each hour.

For electricity users without interval meters, utilities make the assumption that their load profile is the same shape as the aggregate load shape of all electricity users in that utility who do not have interval meters, represented by the NSLS (Net System Load Shape). Their kWh consumption will be divided into hourly use based on that NSLS.

Facilities with interval meters will be charged based on their actual consumption each hour. It allows access to a much broader variety of pricing and suppliers and may save money.

However, not all facilities will benefit from an interval meter. It really depends on your load profile. For example, one of the best loads is a 3-shift, 7-day demand that is fairly constant all day and month to month. A poor load is 8-10 hour weekday use, with an air conditioning peak in the summer. If your load profile is better than the NSLS, you might benefit from an interval meter. If it is worse, you might not.

The OPG Rebate
In the deregulated market (especially for the first few years), Ontario Power Generation will have a lot of market power since it controls most of the Ontario generation. As a result, the government has instituted a rebate system designed to partially protect users from price spikes. It is a percentage of the difference between the average first year spot price, and the revenue cap of 3.8 cents placed on OPG. The percentage is based on the per cent of Ontario generation owned by OPG. This percentage will decline over the 4 year rebate period as OPG meets their government mandate to sell some of their generation stations.

Beware of marketer contracts containing a clause requiring you to sign over the OPG rebate to them. It could be a significant amount, between 1/2 and 1 cent per kWh.

Help in Deciding

• Is your electricity use consistent over the day, week and year?
• Will interval metering help or hurt your pricing options?
• How important is consistency of your electricity bills? Can you afford a large increase?
• Can you wait a few months until the current immature market settles down?
• What is your company's attitude towards risk? Are you comfortable not knowing exactly what the costs will be?
• Is your company comfortable signing long term contracts for commodities?

• Gather and evaluate your electricity data
• Work on a purchasing and energy management strategy
• Decide on metering options
• Do price comparisons using an objective information source.