Published in the Financial Post on July 24, 2015
Benjamin Dachis is a Senior Policy Analyst at the C.D. Howe Institute. Anindya Sen is the author of the C.D. Howe Institute study Peak Power Problems: How Ontario’s Industrial Electricity Pricing System Impacts Consumers.
The cost to an industrial business of consuming electricity during a single High-5 hour is $52,000 per MWh
A clumsy Ontario government program threatens Ontario’s industrial businesses with inordinately high electricity costs this month. The result is that businesses either shut down production or go off-the-grid to save money. But there is a better way.
July is historically the hottest month of the year in Ontario, giving July the highest peak electricity demand. Building the generation capacity necessary to meet that peak demand is costly.
In addition, the cost to business of electricity has been soaring for myriad reasons ranging from green energy subsidies to gas plants. High and rising electricity prices make Ontario an unattractive place for businesses.
In 2011, the government came up with a solution that seemed to solve both problems for businesses in a few government-selected industries. Under the program, a large share of the annual electricity cost for each eligible industrial business is based on its consumption during a few hours of the year. Those hours are the province’s highest five demand hours. Many call it the High-5 program but it is formally called the Industrial Conservation Initiative.
The High-5 program encourages eligible large businesses to reduce their consumption during those hours. Businesses save money on their bills for the rest of the year by cutting back on how much they draw from the electricity grid for only those five hours.
The program seems to meet two aims. It reduces the annual electricity costs for those chosen businesses. It also reduces the need for investment in new peak-period generation.
So, what’s not to like about the program?
Businesses can only make educated guesses of what will be the top five demand hours of the year. Will the peak be this week? Next week? Over the winter, as it was last year because of the record cold snap?
They do that because the effective cost of consuming electricity during a High-5 hour is eye-watering. We estimate that the cost to an industrial business of consuming electricity during a single High-5 hour is $52,000 per MWh. Building new electricity generation is nowhere near that cost. The highest possible cost to a residential consumer in Ontario is about 12 cents per kWh.
No wonder businesses are nervously eyeing how many people turn on the air conditioning during the summer. Businesses with flexible electricity use end up shutting down production or relying on off-the-grid diesel generators for many hours during the summer, not just the top five hours. Large industrial businesses without flexible electricity demand are left with high electricity bills like the rest of us.
The cost of paying for Ontario’s electricity system does not go away. Small businesses and residential consumers are left to pick up the bill for the electricity system costs. The savings for industrial businesses translate to a $34 increase per year in the average Ontario household’s electricity bill. That alone is about one-quarter of the province’s projected increase in household electricity costs.
There’s a better way to both reduce the cost of electricity for Ontario industrial consumers and create incentives for conservation.
There are new conservation technologies available, such as the internet-connected Nest thermostat, now owned by Google. In some parts of the United States, electrical utilities pay households with them to go a little easier on the air conditioning during peak periods. For electrical utilities, that is a cheaper option than having brownouts or building new generation capacity that only runs a few hours every year. That all happens automatically for homeowners who have signed up for the savings that come from being a degree or two warmer at peak hours.
Behind the changes in the air conditioning are buyers and sellers in an electricity market. The utility doesn’t need to build more generation capacity. The homeowner saves on electricity, and is paid for the inconvenience. And Google gets a cut for making this possible by presenting the utility with a group of flexible electricity users that can cut consumption at short notice. It’s a win-win-win.
The same thing could happen here in Ontario, for all businesses and residential consumers. But the province would first need to bury the outdated High-5 program and move to a market for conservation.
