Electricity consumers who save energy should be rewarded with lower utility bills. But collectively we still need to pay enough to maintain our electricity infrastructure to ensure that the power is there when we need it. Ontario, like many other jurisdictions, has seen flat or falling electricity demand in recent years due to conservation, increased customer self-generation, industrial restructuring, and other factors. The problem faced by utilities is that declining electricity sales reduce their revenues that pay for needed infrastructure.
When I released my latest Annual Energy Conservation Progress Report in January, as the province’s environmental watchdog, I warned that I would be watching for signs that the government’s “Conservation First” vision was being realized in Ontario. Taking a look at one of the first major policy decisions to emerge in 2015 – distribution revenue decoupling – I am not so sure we’re living up to the Conservation First promise.
The Ontario Energy Board (OEB) has spent a long time studying how best to “decouple” utility distribution revenues from the amount of electricity sold in Ontario. To address the revenue problem faced by utilities, in April, the Board announced changes to the way residential electricity consumers will pay for the delivery of power to our homes.
Beginning in 2016, delivery costs will be recouped through a fixed monthly charge to consumers. The fixed charge will replace the current two-part delivery charge that is part-fixed and part-variable (tied to how much electricity you consume). At first glance, the approach seems attractive; utilities will not collect any net new revenue under the fixed approach. And according to the Board’s analysis, just over half of residential electricity bills will remain unchanged, or will see an increase or decrease of less than $5 per month. But those on either end of the electricity consumption spectrum will see a difference; in short, if you use a lot of electricity, your bill will come down, and if you use less than the average, your bill will go up.
As the Board notes, fixed pricing does have some advantages. In the short-term, a fully fixed charge is probably a more accurate way to recover current operating costs from customers. It will also continue to protect utility revenues and remove any disincentive for utilities to promote conservation to their customers. What concerns me is the long-term implication of a fixed charge because it means distribution charges will no longer be tied to the amount of electricity we consume. This is despite good evidence that over the long-term higher electricity consumption will lead to more infrastructure being built and thus higher distribution costs. A better option, one of three fixed charge designs that the Board considered and rejected, would be a fixed monthly charge based on a customer’s consumption during peak hours. Such a “demand charge” recognizes that the distribution system is sized to meet peak demand and discourages consumption during peak periods to avoid the need to build additional distribution infrastructure over the long term.
Why this isn’t Conservation First
A study prepared for the Board found that distribution system peak demand was the most significant predictor of long-term distribution system costs and there is a direct relationship between the two. I have argued for years that price signals should be used to help us avoid these future costs. Yet in its decision the Board implies that conservation cannot impact long-term distribution system costs. Such a position has implications beyond pricing and is inconsistent with “Conservation First” policy.
The new 100 per cent fixed charge also reduces the portion of the residential electricity bill that can be influenced through conservation. How does this impact our incentive to conserve? As a simple example, consider purchasing a new energy-efficient fridge that saves 500 kilowatt-hours of electricity a year. Under the current rules, you would save about $60 each year in lower electricity bills.[i] Under the new rules, a Toronto Hydro customer would see their savings drop to about $52 per year (the impact will vary by utility), or about $100 less over the 12-year life of the average fridge. Not a huge disincentive – but not nothing either.
Unfortunately, the Board’s choice of fixed distribution charge neglects to consider customer electricity consumption (especially peak demand) and will impose the greatest negative impact on residential customers who consume the least electricity. The policy will also weaken the ability of consumers to manage their bills through conservation and lacks long-term vision to mitigate future system costs related to growing peak demand.
Postscript – Reset of Time-of-Use rates
As I was about to post this blog, the OEB announced a second policy change linked to “Conservation First” principles. In late April, the Board set new time-of-use (TOU) prices that take effect May 1st. These rates affect the electricity charge on your bill and are reviewed every six months. I have long argued that the Board needs to increase the differential between on-peak and off-peak electricity prices to reduce peak demand and lessen the need for new infrastructure over the long term.
The Board slightly increased this difference; the spread between the two was widened from a ratio of 1.8:1 to 2:1. Hardly jaw dropping, and unfortunately continues to raise the off-peak price contrary to what I have previously advocated, but at least moving in the right direction compared to the past several years when the Board has narrowed the differential. Since the OEB has forfeited conservation savings derived from the delivery charge, it needs to double down on conservation obtained through the electricity charge.
As the year progresses, I will continue to keep a watchful eye on whether Ontario is truly favouring conservation as its first choice.
[i] calculations based on average 9 c/kWh RPP supply cost, 1.5 c/kWh distribution (Toronto Hydro), 1.4 c/kWh transmission