Are you ready for Energy Policy Changes in Ontario?
By: Ka-Ming Lin
The Industrial Conservation Initiative (ICI) is a program in which large industrial users of electricity could reduce their costs by lowering their load during Ontario’s peak demand hours. This benefits the electricity system by shaving the highest peaks. In 2018, the ICI was expanded by substantially reducing the size threshold for eligibility, allowing many more facilities the opportunity to participate. Some companies made capital decisions to provide their facilities with the flexibility to shave their peaks, with costs to be recouped in future electricity savings under this program.
The current government has launched a review of industrial electricity rates as stated in Ontario’s Plan for the People.
“The government understands the challenges to Ontario industry caused by the high cost of electricity. This is why the government, as part of its open for business policy, is launching a public review of current electricity pricing for industrial users. It will also review written submissions to assess what makes sense and what does not, to better align with the needs of industrial consumers.”
The Industrial Conservation Initiative
The benefit the ICI provides for participants is a change in how they are assessed Global Adjustment (GA). GA is part of the cost of electricity and is usually charged on an energy used basis. Under the ICI, participants were instead charged GA based on their share of load only during Ontario’s five highest demand hours. Thus if a facility could lower it’s demand to zero during these hours, it would be assessed zero in GA Charges. The GA does vary in amount from month to month, but in the past few years it has accounted for around 80% of the energy costs of electricity, so these savings could be very substantial.
One of the drawbacks of the ICI program is the delay in getting benefits. The GA charges under ICI are based on your peak demand factor from the previous year. Facilities which fully engaged with the ICI and made capital investments in order to reduce their utility costs had to do so for longer term benefits. Changes to the way industrial customers are charged for electricity therefore poses a real risk to these longer term savings.
One approach companies used for the ICI is installing battery energy storage systems. This application is well suited to batteries, as it requires only a few hours of storage – a type of application where lithium-ion batteries deliver their best bang for the buck. With the recent price decline for stationary battery systems and the opening of the ICI to a larger pool of eligible participants, battery systems for “GA busting” became financially viable for many facilities. Unfortunately, those business cases are now at risk due to the potential for changes to industrial rates.
Mitigating this degree of policy risk is very difficult as the specifics for future energy policies, or even the timeline for when those policies will take effect, is mostly unknown.
The IESO has been working to integrate storage into the grid with multiple procurement’s for energy storage facilities. Unfortunately, energy storage opportunities with the IESO have generally been for standalone “front of the meter” type facilities. The exception to this case is the demand response (DR) auction. However, DR suppliers need to be qualified and this will be difficult for most individual businesses, especially those who engaged in ICI due to the lowering of the size threshold. DR however does allow for aggregators, so there may be a solution provider who can enroll your asset into their DR fleet and provide you an avenue to get those revenues.
The ICI program has been providing the IESO with substantial peak shaving, which has benefits to the grid. Eliminating the ICI or changing industrial rates in a way to make the ICI irrelevant could result in significant increases in peak demand, which would be costly to address. The latest IESO Ontario Demand Forecast estimates the ICI as providing a reduction of 1,450 MW – 1.5 times the capacity that would have been provided by the cancelled Oakville gas plant.
Changes which threaten the ICI will have costs and impacts not only for participants, but for the grid as a whole. However, as information regarding the industrial rate review is limited, it’s not clear how these impacts will be considered. Perhaps changes to the industrial electricity rates provide enhanced value for peak shaving or possibly a temporary program may be implemented to transition current ICI participants over to the new rate regime. It is not clear at this time what direction the rate review is headed, but it is clear that ICI participants are providing value and losing that benefit will be costly to the ratepayer.
Behind the meter opportunities
“GA busters” are by necessity “behind the meter” facilities. The main value streams other than GA busting for behind the meter energy storage are demand charge reduction, energy arbitrage, and resilience. With the possible exception of resilience, these streams are much less valuable than what the ICI can provide. Even with the case of resilience, that benefit is currently being enjoyed by ICI participants, so this value cannot replace the loss of the ICI. Demand charge reduction and energy arbitrage are also existing benefits for ICI participants. Thus existing value streams have very limited ability to “step up” to mitigate any loss of savings should the ICI program go away, or be substantially changed.
There is potential for new value streams in providing resilience. The Made-in-Ontario Environment Plan targets resilience and climate change adaptation as priorities for the province. It requires municipalities to supplement disaster response action plans.
The ICI program provides Ontario’s electricity grid and participants with a great deal of benefit, but the future is uncertain. The Industrial Rate Review poses the potential to severely impact the business cases for “GA busting” projects. However, losing the benefits provided by the ICI can be quite costly to the system and the ratepayer; and any changes to industrial rates should bear those impacts in mind. In the longer term, changes to how resilience is valued, and how electricity distribution operates, should provide alternate sources of revenue for these types of facilities. However, those changes are uncertain at this time, and will take much longer to implement than changes to industrial rates. This leaves a potential gap, both in the value and the timing of these alternate sources of revenue.
As a result of this gap, facilities already invested in the ICI program should be reviewing their business models and considering how they can respond to various different Industrial Rate Review outcomes. Those engaged with third parties delivering GA busting as a service should have certainty of how their Service Agreements have allocated these policy risks. Parties who are considering getting in to the ICI program need to understand the context of potential changes to the system in order to make informed decisions. Regardless of your circumstance, a deep understanding of the implications of the Industrial Rate Review is important for any ICI-eligible facility.
Ortech is assisting customers in becoming better prepared for the changes that may come and will continue to monitor policy changes as well as seek to assist our customers with implementation opportunities.