In 2017, the Government of Ontario released its “Fair Hydro Plan”. While the main focus of the Fair Hydro Plan is the Government’s initiative to reduce electricity prices for residential and other small consumers by 25%, the Plan also expands opportunities for the development of behind-the-fence generation.
Industrial Conservation Initiative (ICI) overview
While most consumers pay global adjustment (GA) on a volumetric basis (i.e., based on the number of kilowatt-hours they consume), participants in ICI pay GA based on their percentage contribution to the five peak Ontario demand hours over a 12-month period. By reducing their demand or by self-generating using behind-the-fence generation during peak hours, ICI participants can significantly reduce their electricity bills. If they manage to avoid drawing any power from the grid during the peak hours, they are effectively exempt from paying GA for the next year. Given that GA makes up the majority component of many industrial users’ electricity bills, this presents a very significant opportunity to reduce electricity costs.
While it is impossible to know for certain when the peak hours will occur, it is possible to make an educated guess based on the time of year (typically summer, but occasionally winter), day of the week, and the time of day when demand has historically peaked (usually mid-to-late afternoon). By combining this information with weather forecasts, which are good indicators of expected heating or cooling electrical load, it is possible to forecast the peak days with reasonable accuracy. While many industrial consumers have a limited ability to conserve or shift demand during forecasted peaks without affecting their production, they can significantly reduce or eliminate their draw of electricity from the grid on peak days through the use of behind-the-fence generation. This creates a significant reduction or elimination of their GA expense for the following year.
Opportunities for new participants
When ICI was first introduced in 2010, it applied to consumers with a peak demand greater than 5 MW. It was then lowered to 3 MW, and before the Fair Hydro Plan was announced, the eligibility threshold was to be lowered to 1 MW. Now, under the Fair Hydro Plan, the threshold for eligibility has been lowered to 0.5 MW, which greatly expands the number of eligible participants, although participants in the 0.5 – 1 MW range are required to be in manufacturing, greenhouse, nursery and floriculture production industries, as determined by their North American Industry Classification System (NAICS) code.
Implications for existing participants
Existing participants in ICI who invested capital in behind-the-fence generation or other conservation initiatives and have multi-year payback periods have taken on the regulatory risk associated with the ICI program. Two of the key risks to existing participants is a change to ICI eligibility that makes them no longer eligible, and a fundamental change to the cost structure of electricity (such as GA) that either significantly reduces the value of the ICI program or renders it irrelevant. For months leading up to the Fair Hydro Plan announcement, political pressure was building on the government to take action on rising electricity bills. Given that the majority of the bill increases are being driven by the increased GA, there was a concern that a major policy change could significantly undermine the value of ICI. For those participants who had invested capital to participate in ICI, this created a risk of stranded assets. The government has now taken a clear policy direction on electricity pricing, and the good news for existing ICI participants is that it has not undermined the value of their investment. While there are never any guarantees of policy stability, least of all in the Ontario electricity sector, now that ICI has survived this policy shift, there may be some period of stability in electricity pricing that should facilitate further investments in reliance on the now expanded ICI program. Even though Ontario is scheduled for a general election in spring 2018, the policy direction taken by the current government will be difficult, although not impossible, for a successive government to unwind.
It is not all good news for existing participants. The expanded eligibility for ICI means there will be more industrial customers “chasing the peaks.” This means when a day looks like it might contain a peak hour, there will be an increased number of customers firing up their behind-the-fence generators and taking other conservation initiatives, which will flatten out the load on that day. In some cases, as a result of this conservation and behind-the-fence generation, the day will not turn out to have a peak hour. While this is one of the objectives of the ICI program, to shave peaks, as more and more participants react to potential peaks, the peaks will get harder to forecast. Participants in ICI will need to run their behind-the-fence generators more often and chase more potential peak days, in order to ensure they capture the five peak demand hours in the province.