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Commercial Ratepayers to Underwrite Industrial Electricity Incentive
September, 2012
By Barbara Carss
Given that 1,200 people might comfortably work in a commercial office tower with a 5,000 megawatt-hour (MWh) electricity load, the job creation parameters for Ontario’s proposed Industrial Electricity Incentive (IEI) program seem generous. Applicants would be eligible for what currently amounts to a more than 70% discount on electricity costs in return for creating one new fulltime position for each 5,000 MWh of increased consumption.
“This program will help create new jobs for Ontarians through incentives that attract significant new industrial investments and encourage existing companies to expand their operations,” the Minister of Energy, Chris Bentley, announced in June 2012. “This is not only great news for Ontario’s industrial sector, but will strengthen local economies across the province.”
Alternatively, others suggest the incentive could entice industrial employers to close down production in some communities then shift it elsewhere to take advantage of the incentive. The proposed rules, which were posted on Ontario’s environmental registry in late August for the mandated 45-day public review, simply require that existing businesses “expand operations, resulting in increased electricity consumption at a single facility by at least 7,000 megawatt-hours per year.”
“It’s not that difficult to make a megawatt appear to be new,” maintains energy policy analyst Tom Adams.
TARGETING SURPLUS BASELOAD GENERATION
Most observers of the electricity market agree that potential for economic development provides nominal motivation for the program. The greater inspiration is the dilemma of so-called surplus baseload generation when demand drops below the collective output from nuclear, hydroelectric, wind, solar and cogeneration stations. As a result, consumers outside Ontario’s borders are paid to take the power, pushing the hourly Ontario energy price (HOEP) into the negative range.
“Surplus baseload generation really is a waste. It’s like throwing out perfectly good food because no one is eating it,” asserts energy management specialist Mike McGee, Managing Director of Energy Profiles Limited. “The concept of the incentive program is noble, but fairness and equity are the real challenges. How do you implement it and not create new inequities both within the industrial sector, and between the industrial and commercial sectors?”
The proposed perks for qualifying expanding businesses are obvious. Successful proponents in the designated industries of manufacturing, mining, quarrying and oil/gas extraction would be exempt from several components of the electricity bill including: the global adjustment; the debt retirement charge; administrative service fees; and a portion of transmissions charges. These rate reductions would apply until 2020 on the added electricity consumption.
Details are less precise for businesses newly established in Ontario. They would be required to make a direct capital investment of at least $250 million and employ at least 275 fulltime workers, and would then be eligible for a fixed-price contract with price, term length and escalation rate to be negotiated with the Ontario Power Authority (OPA).
GLOBAL ADJUSTMENT EXEMPTION
Industrial enterprises that have achieved a level of production without benefit of incentives could now see their competitors subsidized to reach the same output. Ontario’s Independent Electricity System Operator (IESO) reports that the global adjustment added an average of 5.3 cents per kilowatt-hour ($53/MWh) to monthly electricity bills in the first seven months of 2012. That would translate into a $371,000 discount on 7,000 MWh of electricity consumption, which competing, non-qualifying industrial entities would continue to pay.
“Adding a megawatt [roughly equivalent to 7,000 MWh] is not a huge threshold. That would be within the grasp of a lot of small, medium and large industries,” McGee says.
In a sector-to-sector comparison, the formula for allocating the global adjustment – newly adopted in 2011 – has already burdened designated Class B customers, who are primarily commercial operators, with a disproportionate share of the costs. (See Canadian Property Management, July 2012.) That formula also sets Class B customers up to absorb the shortfall that would arise from the exemptions since Class B customers collectively cover the balance of what’s left after locked-in Class A rates are calculated.
“Commercial customers got turned into Class B customers and then things went downhill from there. Being turned into Class B was unwelcome, but this adds to the insult,” Adams says. “This essentially creates Class A+. They get protected from the global adjustment completely.”
IESO figures show that the global adjustment has accounted for nearly 70% of the commodity price of electricity throughout much of 2012, with the year-to-date HOEP average at 2.28 cents per kilowatt-hour ($22.80/MWh) at the end of July. Other proposed exemptions would reduce total billed charges even further. Notably, transmission costs could be cut in half.
“It’s a much bigger rebate than we expected when the program was announced in June,” McGee reports.
CAPACITY vs. CURTAILMENT
It’s widely assumed that industrial players have been singled out for the incentive because their electricity demand patterns are steadier than commercial operators’ peak and off-peak consumption, providing more effective mitigation of surplus baseload generation. However, McGee points to a noteworthy commercial venture – particularly in the communications and financial services sectors – with a similar demand profile.
“A new data centre is going to be about 5 MW or 35,000 MWh and I think there would be enough people working there to meet the job creation benchmark,” he says. “I’d say there is a case to be made for including that in the incentive program.”
Other observers note that the incentive’s structure will reward added demand in peak times, as well as off-peak, through its blanket exemptions on total usage.
“It would be helpful to the system if they were only using power in the off-peak, but that’s not what the Regulation stipulates,” says Mike Lithgow, Manager of Corporate Energy Services in York Region. “Recipients of the incentive would still be contributing to the peak like all the rest of us.”
Meanwhile, industrial customers are the predominant participants in the OPA’s demand response (DR) programs, which pay large-scale users to shut down – or simply be on standby to shut down – electricity load. Thus, it’s feasible that a business could receive a long-term discount to expand load and then be paid to curtail it.
Curtailment may become the more important activity with downtime for nuclear refurbishment and the shutdown of coal-fired generating plants looming in the near future.
“Although we have surplus baseload generation now, that’s not necessarily going to be the case within the next few years,” Adams predicts. “This applies a long-term contract to a temporary issue, and some lucky lottery winners are going to be locked in.”
The draft regulation can be found on the Ontario Environmental Registry at www.ebr.gov.on.ca under Registry # 011-7086, and is open for public comment until October 12, 2012.
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