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A closer look at the Fair Hydro Plan

April 2017

On March 2, 2017, the Government of Ontario announced elements of its Fair Hydro Plan (Plan).

The announcement stated that starting this summer, the Plan will lower electricity bills by 25% on average for all residential customers, inclusive of the 8% rebate introduced January 1, 2017 under Bill 13. Many small businesses and farms will also benefit from this initiative. Low-income households and those living in eligible rural communities will receive additional reductions. As part of the Plan, electricity rate increases for the next four years will be held to the rate of inflation for everyone.

Further, the Industrial Conservation Initiative (ICI) eligibility threshold will be reduced from 1 MW to 500 kW for certain manufacturing and industrial sectors.

‘Smoothing’ the Global Adjustment payments

The main contributing factor in reducing electricity bills will be a reduction in the Global Adjustment (GA) charged to consumers. The Ontario Government intends to take a portion of the GA, and finance it with an amortization over a longer term. This is expected to reduce high upfront costs by deferring GA payments over a longer period 

To recap, the GA consists of:

  • Ontario Electricity Financial Corporation (OEFC) long-term contracts with existing generation facilities
  • Regulated rates for Ontario Power Generation (OPG) nuclear and hydroelectric generating stations
  • Independent Electricity System Operator (IESO) long-term contracts with new and existing generators as well as procurement of conservation programs.

Aegent expects that it is the IESO contractual payment obligations to generators that will be refinanced to lower electricity costs. 

The IESO has financial contracts with a diverse mix of generators with contract execution dates dating back to as early as 2005. These generators get fixed payments over the term of the contracts ranging from 10 to 20 years, depending on the fuel type. For example, natural gas-fired facilities generally have 20-year term contracts, while biomass and energy-from-waste facilities have 10 to 15-year term contracts. The majority of generators have 20-year term contracts. The assets are assumed to have a longer useful life and can operate past their contract term, but they would not necessarily be contracted to the IESO, unless current contracts are extended or new contracts are negotiated.

The province uses the GA costs obtained from ratepayers to pay its contract obligations to the IESO-contracted generators (as well as to the OEFC and OPG). To reduce electricity costs in the near term as part of the Plan, the province will now take a portion of that GA payment obligation, refinance and amortize it over a longer term. The refinanced portion will be funded by the province and will consist of the difference between what is collected from ratepayers and what is paid to the IESO-contracted generators. This will lower the GA costs for ratepayers in the short to mid-term, but increase costs in the long-term as the financing costs will be recovered from consumers in later years.     

The Ontario Government will introduce legislation that will, if passed, enable the IESO and OPG to work together to refinance the GA. 

Changes to the Industrial Conservation Initiative program

The ICI program allows participants to be treated as Class A consumers for purposes of the GA charge. Class A consumers are charged GA on the basis of their share of the total system demand during the highest five peak hours of the year. The remaining GA dollars are paid by Class B consumers. Expanding the program provides the opportunity for some smaller consumers to opt-in and become a Class A customer allowing them to pay lower GA costs.

Effective July 1, 2017, Ontario will expand the ICI program by reducing the threshold from 1 MW to 500 kW and targeting more small manufacturing and industrial consumers. Changes to the ICI program that were implemented just January 1, 2017 reduce the eligibility threshold from 3 MW to 1 MW and remove sector-specific restrictions.  The recent announcement, however, potentially re-introduces certain restrictions and requires consumers between 500 kW and 1 MW to include electricity consumers and market participants in the manufacturing sector.

Although the changes are sector-specific thereby limiting eligibility, the recent changes to the ICI program may further expand the market for industrial-sized behind-the-meter generation and battery storage units. Class A customers that can’t reduce or shift their load during the high five peak hours can install a generator (such as diesel, or natural gas-fired combined heat and power generators) behind the meter to supply electricity during peak hours thereby avoiding some or all GA costs. Battery storage units can provide a similar service by taking electricity from the grid to charge during times when the Hourly Ontario Electricity Price is low and discharge during peak hours. 

Social programs

As part of the Fair Hydro Plan, a number of existing programs will be enhanced and new programs will be set in place. Specifically, the Plan will:

  • Enhance the Ontario Electricity Support Program (OESP) that provides rebates for the most vulnerable consumers (i.e. low-income households). The program will be expanded and the support will increase by 50%. Going forward, funding for the program will come from tax revenues rather than from a surcharge on electricity consumers.
  • Broadening the Rural or Remote Rate Protection (RRRP) program that provides rate subsidy to rural and remote residential customers who face higher distribution costs compared to urban areas. The province will expand the RRRP to provide distribution charge relief to additional customers served by distributors with the highest delivery rates. About 800,000 customers will benefit from the enhanced RRRP program. Funding will be shifted to the tax base.
  • Provide a new First Nations On-Reserve Delivery Credit giving First Nations households a 100% credit for the delivery charge on their monthly electricity bill. This will be funded from tax revenues.
  • Launch a new Affordability Fund to assist electricity customers who cannot qualify for low-income conservation programs allowing them to implement energy-efficiency improvements to reduce their electricity bills going forward. This will be funded from tax revenues.

These new measures will cost the government up to $2.5 billion over the next three years.

Questions and comments to consider

It’s not yet clear how the 25% on average reduction will be applied (excluding the existing 8% rebate). The key words are “on average”. Does this mean that the 25% reduction is a blended calculation consisting of the GA refinancing and transfers of key programs to the Ontario general account? Will the reduction in GA simply slice total dollars off of Class B customers and not directly affect Class A customers considering that they already have some level of control over their GA costs?

The Fair Hydro Plan suggests that ‘medium-volume’ consumers (e.g. consumers above 250,000 kWh/year, but below the 500 kW and 1 MW threshold) that are not manufacturers and industrial facilities will be left out and not benefit from the 25% on average reduction. This will impact institutional and commercial facilities.

It’s not yet certain how the reduction in costs will affect the Regulated Price Plan (RPP).  The Ontario Energy Board did not adjust the RPP rates on November 1, 2016, perhaps a premonition of the recent announcement. The question remains as to whether the RPP rates will be reduced going forward, whether the spread between the time of use rates and two-tiered rates will change (e.g. spread between off-peak and on-peak rates for time of use RPP), or whether the RPP will be changed altogether.