What is the Global Adjustment fee on hydro bills?
Since the year 2006, most business owners have had no choice but to familiarize themselves with the policy that has seen electricity prices skyrocket in Ontario: the Global Adjustment (GA).
During the initial months of 2021, Ontario’s Global Adjustment cost electricity consumers in the province upwards of $2 billion. In essence, the fee was implemented in order to cover the cost of contracts administered by the Ontario Electricity Financial Corporation with generation facilities that supply our electricity, in addition to building new electricity infrastructure, maintaining current infrastructure and providing conservation programs in the province.
That being said, the cost of GA is inversely related to the Hourly Ontario Energy (HOEP), which is the wholesale price of electricity set by the Independent Electricity System Operator (IESO). As the HOEP goes down, GA fees rise to cover regulated and contracted power generation costs.
As stated by the IESO, the HOEP in January of 2020 was charged at a fair market value of 1.48 cents/ kW hour while wind producers were paid up to 13 cents/ kW hour – with the 11-cent difference charged to the consumer as part of Global Adjustment fees.
Why does Global Adjustment exist?
The Global Adjustment fee was initially introduced by The Independent Electricity System Operator (IESO) in Ontario in 2006 to cover the difference between the cost necessary to generate and deliver power and the revenue received in the market from that energy. Additionally, it was intended to cover the cost of maintaining our current electricity grid and creating new electricity infrastructure, ensuring there is an adequate power supply that will be available in Ontario in the future.
The ICI was introduced in 2010 as a method of providing relief to the province’s largest energy consumers in return for helping to stabilize the grid.
The Industrial Conservation Initiative (ICI) was introduced in 2010 as a method of providing relief to the province’s largest energy consumers in return for helping to stabilize the grid. Ontario’s ICI incentivizes consumers to reduce their grid load during peak demand hours through a method commonly referred to as ‘Peak Shaving’ or ‘GA Busting’.
What is the Industrial Conservation Initiative (ICI)?
The Industrial Conservation Initiative (ICI) is a program in Ontario that aims to reduce peak electricity demand by encouraging large energy consumers to shift their usage to off-peak periods. The program applies to large consumers, such as industrial and commercial businesses, that have an average monthly peak electricity demand of at least 1,000 kilowatts (kW), and in some cases as low as 500kW.
Participants in the ICI program are classified into two groups: Class A and Class B.
Under the ICI program, Class A participants pay a higher Global Adjustment (GA) fee proportionate to their electricity usage during peak hours only. This creates an incentive for Class A participants to reduce their peak electricity usage and shift more of their energy consumption to off-peak periods. Class B participants do not have the same degree of financial incentives to shift consumption to off-peak periods, but they still have access to the same data and tools to help them manage consumption.
The ICI program is designed to help Ontario Power Generation (OPG) and the Independent Electricity System Operator (IESO) to reduce peak energy demand system-wide, and thus avoiding building new power plants and transmission lines, which can be costly.
What do Class A and Class B mean?
Medium and large power consumers pay the Global Adjustment Fee in Ontario either as a Class A or Class B consumer. How your monthly Global Adjustment Fee is calculated is determined by which class you opt into.
Class A customers pay the GA through a monthly fee that is based on how their demand for electricity contributed to the peak demand of the province in the prior year. This is determined by something called the Peak Demand Factor (PDF). Every customer receives a letter from their local electrical utility company each Spring with a cost-benefit analysis regarding Class A participation for the coming year, and a reminder that you must opt-in by June 15th.
Class B customers consist of those who are either ineligible or have chosen not to opt-in to Class A. These facility operators pay a fee according to the amount of kilowatt hours (kWh) of electricity they consume monthly, regardless of when throughout the month that amount was consumed. The IESO determines the Global Adjustment rates on a monthly basis, providing three billing variations for Class B customers. Local distribution companies then use one of the variations to bill their customers.
Which class are you?
Businesses with an NAICS code starting with the digits "31", "32", "33" or “1114” and an average monthly peak demand of at least 500kW can opt-in to Class A and participate in the ICI. This includes most larger manufacturing, industrial and greenhouse facilities. Customers with other NAICS codes can participate provided their average monthly peak demand is greater than 1000kW. Any facility with an average monthly peak load greater than 5000kW is automatically entered into Class A, but may choose to opt-out.
What are the 5 GA Peaks?
The 5 GA peaks in Ontario refer to the top 5 hours of energy usage in the province over a 12-month period. Class A customers who participate in the ICI pay the GA fee based on their percentage contribution to the top 5 peak hours.
At the end of the 12-month base period (May 1 to April 30), the top five peak hours will be used to determine a customer’s consumption of power. That will then be used to calculate their respective GA allocation for the next 12-month adjustment period (July 1 to June 30).
The earlier a Class A customer can predict the 5 peaks, the more they will be able to reduce their electricity bill.
The earlier and more accurately that a Class A customer can predict the 5 peaks and reduce their consumption during Ontario’s peak hours, the more they will be able to reduce their overall electricity bill.
What does Peak Demand Factor (PDF) mean?
Class A customers are allocated their portion of GA fees based on the percentage that their consumption contributes to the top five coincident peak demand hours during a predetermined base period. This is done by using what is known as the Peak Demand Factor (PDF).
After the IESO establishes the final top five Ontario demand peaks, each Class A customer's consumption during those five hours is assessed to calculate their respective portion of peak demand and in turn, the amount they will need to pay to the IESO in Global Adjustment fees. The calculation for the peak demand factor is simple: the sum of a customer’s consumption during the top 5 demand peak hours in Ontario divided by the sum of top 5 system-wide consumption peaks.
Peak Demand Factor = Total Customer Demand / Total Ontario Demand = 8.01 / 109,816 = 0.00007294
Therefore, a Class A customer with a PDF of 0.00007294 (about 0.007 % of Ontario’s peak demand) will pay a Global Adjustment fee of 0.00007294 times the total provincial Global Adjustment fee for a given billing period. For example, in July of 2019 that would have been:
0.00007294 (PDF) x $1,261,600,000 (Total GA cost) = $92,021 (Customers GA fee for that month)
In other terms, this Class A customer’s PDF is equal to roughly 0.007% of the Ontario provincial coincident demand, so their July 2019 Global Adjustment fee of $92,021 is about 0.007% of the province’s total Global Adjustment bill for the month.
What does "Peak Shaving" refer to?
Now, let’s talk peak shaving. "Peak shaving", alternatively referred to as "GA busting", is the practice of strategically decreasing electrical usage in anticipation of a top 5 demand peak. Class A customers who can predict Ontario’s 5 peaks, sometimes through using the IESO peak tracker, and subsequently reduce their facility’s demand for electricity can reduce their Peak Demand Factor (PDF) along with their overall Global Adjustment fee. One method that facilities use to curtail electrical demand is to manually shut off as many electricity-consuming devices as possible. A Class A customer who executes a perfect peak shaving strategy can score a PDF of zero, and therefore pay zero dollars in GA fees for the following billing period!
To further understand the idea behind peak shaving, and how T&T Power Group designs and builds peak shaving systems you can watch our educational webinar in partnership with Siemens Energy.
How can you and your facility benefit from Peak Shaving?
A helpful method used to estimate the potential savings from peak shaving is to add up what you paid to the IESO in Global Adjustment fees over the last twelve months. That amount is likely on the table for savings next year.
Another way to calculate curtailment savings is to estimate based on a ‘rule of thumb’ in Ontario’s energy community, that every megawatt (MW) in electrical demand taken off-grid during the top five peaks is worth about $400k in annual savings. To put this idea into practice, simply multiply your facility’s typical electrical demand in MW by $400,000. The resulting amount is how much you could potentially save every year by implementing a peak shaving strategy, such as a prime power generator.
How do generators compare to batteries for Peak Shaving?
The two most popular peak shaving strategies are using batteries or a generator.
Batteries possess an advantage in terms of their limited maintenance but are quite expensive and come at an installed cost of more than $2,000/kW. Other than the high cost. The main drawback of batteries is their limited deployment window. Most batteries used for peak shaving have a 2-hour deployment window, leaving little room for error in the peak shaving process. Given the complexity involved with predicting peaks in today’s market, batteries are somewhat unreliable for peak shaving.
The changes in Ontario’s demand due to the COVID-19 pandemic have only added to the complexity. As such, if the curtailment efforts of other Class A customers cause a shift in peak demand hours, your battery may run out of power, and your facility may end up contributing to the peak demand, resulting in a hefty Global Adjustment fee. the following year.
Fortunately, Class A customers who participate in the ICI have a more reliable option when it comes to peak shaving. Generators for industrial use have the capacity to run continuously and provide the greatest adaptability as peak forecasting becomes even more complex. At around $1,000/kW, Generators powered by natural gas are also a lower cost option when compared to batteries. Further, the benefit of reliable emergency backup power and the option to capture heat through a Combined Heat and Power (CHP) System are two more reasons why generators remain the dominant solution to peak shaving in Ontario.
Case Study | Peak Shaving
Major Auto Manufacturer
18MW of natural gas fuelled power generation can be dispatched to reduce demand from the grid during peak times. This robust power plant saves millions in demand charges, and provides standby power as needed.
What was the Global Adjustment freeze (during COVID-19)?
On June 26th, 2020, the government of Ontario announced plans to freeze electricity rates for participants in Ontario’s ICI. In hopes of speeding up economic recovery, the government enacted this plan to allow Ontario’s industrial companies to freely increase production back to pre-COVID levels without worrying about contributing to top 5 peaks. This announcement follows the government of Ontario’s emergency order to defer a portion of Global Adjustment charges for industrial and commercial electricity consumers.
This new announcement, briefly explained in a video from Tilo McAlister, means that customers who opted-in to Class A up to the month of June will pay their Global Adjustment charge based on the last PDF they received. New PDFs will be denoted for eligible customers from May 2021-April 2022 and applied to the next cycle of hydro bills starting in July 2022, meaning peak shaving is back to business as usual starting in the Spring of 2021.
For customers who engaged in peak shaving in 2019 and secured a low PDF, savings will be realized due to the relatively lower Global Adjustment fees being carried for another year. They will also save on operating costs and by reduce reducing the usage hours of their peak-shaving equipment.
Customers that will not benefit fromto the freeze are those who only managed to partially shed load during the 2019-20 peaks or missed one or more of the peaks completely. Considering that each MW hour of electricity usage during a peak costs at least $100,000, these customers will have to suffer the impact of not peak shaving correctly for an additional year.
What is the IESO Demand Response Program? How does it relate to GA?
The Demand Response (DR) refers to a program in which the IESO contracts consumers to reduce their electricity demand in a response to system needs. Unlike ICI participants who must predict the occurrence of top 5 peaks proactively, DR participants are notified by the IESO when curtailment will be required.
With that said, while not nearly as lucrative for participants as the ICI, the DR has been playing an increasing role in Ontario's electricity system - already having a significant impact on energy demand while helping to reduce peaks - thus providing a valuable and cost-effective resource to the system.
Customers who participate in the Demand Response may also participate in Global Adjustment mitigation efforts such as peak shaving, provided that they can meet the short-notice activation requirements of DR.
How can a Shared Savings Agreement finance a Global Adjustment Mitigation project?
Whether you ultimately decide on using generators or batteries to keep your operations running during peak days, procuring and installing the equipment can be a costly endeavor. In an effort to mitigate this economic strain, the Shared Savings Agreements (SSA) has emerged as a popular choice to alleviate the financial burden (and the operational headache) associated with operating a peak shaving asset.
Furthermore, when a facility signs an SSA, a company like T&T Power Group will install, operate and maintain a peak shaving system at no cost, in return for a share of the savings generated. Agreement terms are typically in the 10-year range, with savings split anywhere from 50/50 to 75/25 in favour of the developer.
In more ways than one, SSAs are rather similar to Power Purchase Agreements (PPA) - but the key difference is that they’re optimized for peak shaving operations instead of continuously running generators and Combined Heat and Power systems (CHP).
What does the future of GA look like?
Global Adjustment has become a key determinant of how much you pay for electricity as a facility operator in Ontario. In fact, it is by far the largest single component of the average consumer’s total electricity bill, frequently accounting for upwards of 70% of the monthly total. Because the costs involved in the Global Adjustment fee are primarily fixed, successful peak shaving activities simply shifts the costs to other consumers. Whether it is taxpayers or ratepayers who end up paying more, the various cost that have historically contributed to the Global Adjustment rates will largely remain the same.
While forecasting Global Adjustment in Ontario can be quite difficult, what we do know is that these costs are here to stay. As such, consumers require a flexible strategy that will allow them to take advantage of the ICI regardless of underlying policy. It is for this reason that many Class A customers are adopting generators as a peak-shaving utility. Not only can they run ever-increasing curtailment periods in anticipation of a peak, but they also serve as a highly reliable source of backup power in times of trouble (which are becoming increasingly common). Additionally, if the savings created by peak shaving were to disappear completely due to policy changes, some generators can be run continuously to generate lower-cost power 24/7 – completely eliminating the policy risk.
And, while the policy may shift in future years, what we know for certain is that electricity in Ontario will be affected by Global Adjustment for the foreseeable future whether we like it or not.
Are Global Adjustment peaks becoming harder to predict?
In the past, Class A facility operators had the ability to curtail demand during all 5 peaks through the IESO peak tracker. However, through the nature of this resource being available to all, the peak tracker has in turn become less useful. Predicting and managing peaks has almost become an instance of Game Theory, where Class A customers are trying to predict what other facility operators will do in anticipation of a peak. But the peaks have become much more random and unpredictable, creating the need for a backup power source that can be run for longer curtailment periods, such as a generator.
Regardless of the chosen curtailment strategy, consumers need to keep in mind that Ontario’s energy and Global Adjustment will have a close relationship for many years to come.