The Ontario government’s newly announced electricity rate relief efforts will give large commercial customers access to a perk their peers in the industrial sector already enjoy. Proposed expanded eligibility for the now narrowly named Industrial Conservation Initiative (ICI) would allow any consumer with a monthly electricity load of at least 1 megawatt (MW) to potentially reduce the Global Adjustment that represents upwards of 70 per cent of the commodity cost of electricity.
“For large commercial consumers between 1 and 5 MW it could be a huge opportunity,” observes Neal Bach, president of the energy management consulting firm, Energy Profiles Limited. “The flipside is that smaller electricity accounts will pay even higher rates, but it will motivate a large and capable segment of the electricity market to significantly reduce demand exactly when the province needs it most.”
Meanwhile, as announced in Ontario’s Speech from the Throne last week, multi-residential landlords will qualify for a rebate on the provincial portion of the harmonized sales tax (HST) along with residential, small business and farm customers. The resulting 8 per cent discount on hydro bills beginning in January will moderate other anticipated added expenses over the next 12 to 14 months.
“The impact of an 8 per cent credit, which is obviously nice to have, is still going to be outweighed by other rising costs. We’re advising our clients to be prepared for an overall increase of 4 to 6 per cent,” says Peter Mills, co-chief executive officer of the utility sub-metering company, Wyse Meter Solutions Inc..
Shifting the allocation of Global Adjustment
Proposed broadened ICI eligibility is analogous to the exercise of property tax reassessment. The Ontario government won’t be losing any revenue, simply realigning how it is collected. More than 1,000 additional customers could join the existing exclusive group of about 300 primarily industrial operators now participating in the program.
Under rules first introduced in 2010, only customers with average monthly electricity demand of 5 MW qualified for the program, thus excluding most commercial buildings smaller than 1 million square feet. That threshold was subsequently dropped to 3 MW for a small number of light industrial and agricultural sectors, of which data centres were the only beneficiaries likely to occupy commercial real estate.
As with reassessment, shifts in the allocation of the Global Adjustment will benefit some customers and further burden others. However, proactive commercial real estate owners/managers are poised to be among the winners.
“Lowering the threshold to 1 MW would allow many of our members who have invested a great deal of money in conservation to reap some additional financial benefits,” says Bala Gnanam, director of sustainable building operations and strategic partnerships with the Building Owners and Managers Association (BOMA) of Greater Toronto. “So far, savings from conservation efforts have been consumed, for the most part, by the global adjustment mechanism.”
Ultimately, this mechanism, propagated via the ICI, is premised on inequitable distribution of the Global Adjustment. ICI participants, categorized as Class A, enjoy a different formula for calculating their share of the opaque envelope of costs — including contracted prices for nuclear and non-hydroelectric renewable generation and funds devoted to conservation and demand management (CDM) programs — that Ontario’s Independent Electricity System Operator (IESO) pegs at an average of 9.85 cents per kilowatt-hour (kWh) for the first seven months of 2016.
The Global Adjustment for Class A customers is calculated based on consumption during the five hours of the year — measured from May 1 to April 30 — with highest recorded electricity demand. Class A customers who can successfully predict those peaks and reduce power loads will lower the mathematical factor used to calculate their Global Adjustment for an entire year’s billing period. Non-eligible retail electricity customers, categorized as Class B, then pick up the remainder of the cost each month, paying it on a straightforward $/kWh basis.
“If done right, the ICI can offset a large portion of the customer’s Global Adjustment charges, but as the Global Adjustment is based mostly on fixed costs, the savings will need to be paid by those who don’t qualify for the ICI,” explains Andrew Pride, a consultant specializing in energy management and strategic conservation planning.
For example, a 2013 report to the IESO from Navigant notes that Class A customers paid an average of $27.70 per megawatt-hour (MWh) for the Global Adjustment in the period from October 2011 to September 2012, while Class B customers paid an average of $48.70/MWh.
Energy efficiency paybacks
The Ontario government is highlighting the potential beneficiaries, stating in a September 13 release that eligible customers “will be able to find cost savings of up to 34 per cent, depending on their ability to reduce peak electricity consumption.” The financial fallout for customers who do not qualify is not mentioned, but the pending cost redistribution makes an even stronger financial argument for energy efficiency.
“Class B customers will need to focus more on energy conservation to bring their overall consumption down, thus lowering their Global Adjustment cost,” Pride advises. Larger commercial customers are likewise urged to consider ways to capitalize on Class A status through conservation.
“Because the potential for cost reductions is so material, a lot of firms will rethink their entire energy cost management strategy,” Bach says. “At the very least, it will dramatically increase the focus on minimizing electricity use on peak days, but it will also make the case for on-site electricity storage and/or generation very compelling for businesses that can do it.”
Operationally, it will still be easier for industrial consumers to take advantage of the program since they have more flexibility to shut down production and associated electricity loads during times of peak demand. Commercial real estate’s electricity demand tends to be more in sync with the peaks as heating or cooling loads follow the outdoor temperature.
“The response capability may be an issue,” says Scott Rouse, managing partner of the consulting firm, Energy@Work. “There’s also the question of the true need for this when Ontario has demand capacity exceeding what is needed for most of the time.”
Barbara Carss is editor-in-chief of Canadian Property Management.