Canada: Ontario's "Fair Hydro Plan" Changes Provincial Electricity Pricing And Expands Opportunities For Behind-The-Fence Generation

In this Update

  • On March 2, 2017, the Government of Ontario released highlights of its "Fair Hydro Plan" (the Plan), significantly reducing the price of electricity for many groups in Ontario and expanding opportunities for the development of behind-the-fence generation. 
  • The most significant element of the Plan is a 25% reduction in electricity bills for households, small businesses and farms, to be achieved through an effective refinancing of the Global Adjustment charge, as well as effectively removing the 8% provincial portion of the HST from electricity bills.
  • As part of the Plan, it has also been reported that the eligibility threshold for the Industrial Conservation Initiative (ICI), which allows certain non-residential users that conserve or self-generate during peak hours to significantly reduce their electricity costs, has been lowered from a minimum peak load requirement of 1 MW to 0.5 MW for many industries.
  • The Plan presents new opportunities for participation in ICI based on its expanded eligibility, both for newly eligible customers and third-party developers partnering with these customers.
  • The Plan is also mostly good news for existing ICI participants, as it preserves the value of capital investments made by participants in behind-the-fence generation and other conservation initiatives, although expanded participation in ICI may make it more difficult for participants to forecast peak hours.

On March 2, 2017, the Government of Ontario released highlights of its "Fair Hydro Plan" (the Plan), significantly reducing the price of electricity for many groups in Ontario and expanding opportunities for the development of behind-the-fence generation. The most significant element of the Plan is a 25% reduction in electricity bills for households, small businesses and farms. This reduction is essentially fixed for a period of four years, subject to inflation. As part of the Plan, it has also been reported that the eligibility threshold for certain non-residential electricity customers to participate in the Industrial Conservation Initiative (ICI) has been lowered from a minimum peak load requirement of 1 MW to 0.5 MW for many industries. The ICI program allows industrial customers that meet the eligibility requirements to substantially reduce their electricity bills if they are not consuming power from the grid during peak hours of the year by reducing their share of the Global Adjustment charge. The Plan is mostly good news for existing ICI participants, and presents new opportunities for participation in the program, either by newly eligible loads or third-party developers partnering with these customers.

The Plan contains a number of other elements, including enhancements to the Ontario Electricity Support Program, which discount electricity bills for low-income electricity consumers as well as Indigenous customers; removal of the delivery charge for on-reserve First Nations residential customers; a new tax credit for low-to-moderate income families and seniors; a northern Ontario energy credit; and increased funding for the saveONenergy Home Assistance Program.

As it relates to residential, small business and farm electricity consumers, the Plan also features an effective refinancing of the Independent Electricity System Operator's long-term contractual payment obligations resulting from electricity resource procurements, conservation initiatives and other electricity sector programs and costs. These "non-commodity" costs, known as the "Global Adjustment" (GA), make up an increasingly large portion of the ultimate consumer rate for electricity in Ontario. While intended to provide immediate relief to consumers affected by increases in electricity rates, this refinancing (by way of a debt or variance account funding mechanism supported by the government-owned Ontario Power Generation, the details of which are yet to be fully set out) will extend the duration and ultimate total cost of the long-term financial obligations that are determining electricity rates as of today.

The Plan will be further detailed in implementing legislation and regulation that the Government of Ontario has stated is to be in place for the summer of 2017.

Near-term rate reduction for regulated price plan participants

The Plan includes a series of new support measures directed at the reduction of residential electricity costs and which are to be funded directly by the provincial treasury, rather than by electricity ratepayers through rates. These measures include:

  • a new "Affordability Fund," which will provide certain customers who cannot qualify for other programs with financial assistance to undertake energy-efficiency improvements;
  • enhancements to the Ontario Electricity Support Program (which provides rebates for low-income electricity customers);
  • expansion of the Rural or Remote Rate Protection (RRRP) program (reducing the delivery charge for customers of specified local distribution companies with the highest delivery costs); and
  • a First Nations On-Reserve Delivery Credit (eliminating the delivery charge for all on-reserve First Nations households).

Importantly, programs such as these have until now been included in the GA and borne by electricity ratepayers. The Plan indicates that the costs of all of these initiatives, representing an estimated $2.5 billion over three years, are to be funded by the provincial treasury rather than by Ontario electricity users.

In addition to enhancing and provincially funding the support mechanisms described above, the Plan describes a "refinancing" of the portion of the GA borne by residential, small business and farm customers. This is to be accomplished by effectively shifting electricity ratepayer impact of power sector contractual obligations over a longer period of time, on the basis of an assumed longer useful life of the assets that are the subject of these obligations, relative to the remaining terms of their contracts. This will be implemented by financing a portion of these costs with funds being made available by the province. The financing costs for this "smoothing" or refinancing will ultimately be incorporated in the GA in the future. The Government of Ontario estimates this mechanism can result in a GA reduction of $2.5 billion per year on average over the first 10 years, with annual interest costs not exceeding $1.4 billion. In addition to this mechanism, effective January 1, 2017, the 8% provincial portion of the harmonized sales tax has been effectively removed from electricity bills for residential, small business and farm customers in Ontario, through the introduction of a new off-setting credit.

Expanded opportunities for behind-the-fence generation

ICI overview

While most consumers pay 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 March 2 announcement, the eligibility threshold was to be lowered to 1 MW. Now, the new lower eligibility of 0.5 MW greatly expands the number of eligible participants, although we understand that participants in the 0.5 – 1 MW range are required to be in certain industries identified by their North American Industry Classification System (NAICS) code. We expect the eligible industries to be refrigerated warehousing, mining, quarrying, oil and gas extraction, manufacturing, data processing, data hosting, greenhouses, nurseries and floriculture production.

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, political pressure has been 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.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.