In Ontario, the future of Time of Use (TOU) rates on the Regulated Price Plan (RPP) are under scrutiny with a view from the current government to scrap them entirely. How would scrapping TOU impact ratepayers?
The short answer is that the average customer sees no change to their energy cost. Those who successfully shifted a significant portion of their use to off-peak hours will pay more and those who use energy primarily during peak hours will pay less. If the hourly energy demand pattern and total consumption stays the same, costs simply get redistributed among ratepayers in accordance with a new cost-recovery formula.
Note: the government has announced that a TOU opt-out plan will be made available to customers November 1, 2020. Customers can choose between TOU and tiered rates beginning November 1st. You should seek information from your Local Distribution Company.
Some of the content of this commentary has been revised to reflect the announcement.
The long answer is that TOU rates are just one of a series of initiatives in Ontario to reduce demand during peak load times. There are limited opportunities for many ratepayers to reduce their energy bills other than conservation and a TOU rate structure. It is also essential to engage ratepayers in the challenge of reducing peak loading on the grid. Without demand management initiatives there is a risk that all ratepayers will wind up paying more in the long-term as a result of consumption trends that increase peak load. That risk must be weighed against costs associated with administration of the plans. In the case of TOU rates, a cost is incurred by Local Distribution Companies (LDCs) and the Independent Electricity System Operator (IESO) for administration.
This commentary will look at
- the Regulated Rate Plan (RPP)
- the Covid-19 TOU rate reduction
- who sets rates
- what are TOU rates
- how rates are determined
- how two-tier rates compare with TOU
- grid fundamentals and load impacts
- what the TOU plan costs and who pays
- a view of the TOU rate plan as part of all demand management initiatives
- the impact rates have on consumption behaviour and energy bills
- the economic impact on specific ratepayer groups
- where we go from here
TOU rates have been successfully implemented in many jurisdictions including California, Connecticut, Maryland, Michigan and Italy
Acronyms
This article has quite a few acronyms. Here is what you will need to know
| Abbreviation | Term |
| CBDR | Capacity Based Demand Response |
| DR | Demand Response |
| ICI | Industrial Conservation Initiative |
| EV | Electric Vehicle |
| IESO | Independent Electricity System Operator |
| kWh | kilo Watt hour |
| MW | Mega Watt |
| OEB | Ontario Energy Board |
| RPP | Regulated Price Plan |
| TOU | Time of Use |
| TWh | Tera Watt Hour |
The Regulated Price Plan (RPP)
The Ontario Energy Board (OEB) has administered the RPP for the last 15 years under the direction of the Ontario government. It applies to almost 5 million residential consumers and small businesses, accounting for approximately 40% of annual provincial energy consumption. The RPP only pertains to the energy portion of a ratepayer’s bill. Over 96% of customers in the RPP are billed based on TOU rates. The TOU plan requires customers to have a smart meter. Customers enrolled in the RPP that do not pay TOU rates are billed on a two-tiered pricing structure. Customers may also be billed by a sub-meter entity or by a retailer under the terms of a contract. Sub-meter companies and retailers are not regulated under the RPP. Entering into a retail energy contract is a customer choice. Sub-metering is usually a consequence of your choice of residency, such as a condominium or apartment.
The Ontario Energy Board (OEB) sets electricity rates in Ontario, not Local Distribution Companies (LDCs).
The OEB takes direction from the Government of Ontario through legislation, orders in council or directives issued by the Ministry of Energy and Northern Development and Mines.
The Regulated Plans – Time of Use (TOU) and Two-Tier
The TOU plan has three pricing periods which are set twice a year based on summer and winter use patterns. The price periods are off-peak, mid-peak and peak. The two-tier plan has rates based on kWh thresholds that step up for greater energy consumption. The OEB has the mandate as determined by the Ontario Government to set prices and price structure to provide incentives and opportunities for consumers to reduce their electricity bills by shifting their time of use.
For a customer that uses 750kWh of energy in a month, paying November 2019 energy rates, the bill could range from a low of $76 if all use was off-peak, to a maximum of $156 if all use was on-peak. The average ratepayer’s consumption pattern would result in a $96 bill before rebates are applied.
As a result of the Covid-19 pandemic, the Ontario government announced that they would reduce the RPP TOU rates to off-peak for 45 days beginning March 24, 2020. For the average customer using 750kWh of energy per month it would reduce the bill by $20. The Ontario Electricity Rebate already reduces that amount by approximately 1/3 so the actual savings on a monthly bill will be closer to $13. Over the full 45 day discount period, it represents a $20 reduction in energy cost. Customers with retail contracts will not be eligible for the discount. Sub-metering customers must have rate savings passed through to them. The shortfall in revenue created by lowering rates will move to the debt fund created by the Ontario electricity rebates. Ratepayers will cover the cost sometime in the future.
Notes:
On Wednesday May 6, 2020 the Ontario Government announced an extension to the rate reduction until May 31.
On Monday June 1, 2020 the government announced an extension to the fixed rate for electricity until October 31, 2020. The new rate will be 12.8 cents per kWh, up from the previous off-peak value of 10.1 cents per kWh. The new rate corresponds to the average value paid by TOU customers as determined in the October 22, 2019 OEB Regulated Price Plan Report. Although it represents an increase over the previous rate, it will offer consumers’ savings on their air conditioning cost during peak times throughout the summer. Details are available on the OEB website.
In addition to the extended fixed rate, the government has announced it’s intention to allow customers to opt-out of TOU rates in favour of tiered rates beginning November 1, 2020. The OEB has begun the consultation process under File No: EB-2020-0152. Additional information is available on the OEB website.
The two-tier price plan is based on the customer’s monthly energy use. Up to a specific level (determined by season) one rate applies. Any use above that threshold a higher rate applies. The two-tier plan is seasonally adjusted by the OEB.
Consumers may opt out of the RPP by purchasing energy from an energy retailer. See my commentary on Electricity Retailers here.
TOU myth – rates are a cash grab by… someone
The perception that TOU rates are nothing but a cash grab by some non-descript entity is absolutely false. Energy costs are determined by contractual and regulatory terms with generators. Electricity rates are calculated and set in order to recover the cost of generation. No more, no less. That’s the law.
“RPP prices are set so that the “average consumer” would pay the same for their electricity (commodity only) regardless of whether they are charged tiered or TOU prices, if they do not change their consumption patterns.”
Ontario Energy Board, EB-2014-0319
The difference between the ‘two-tier’ pricing and TOU is not in the total revenue they collect, but how individual consumers share the cost. For the average customer there will be no difference between their energy bill regardless of whether they are on two-tier or TOU plans. The OEB reviews the regulated rates every 6 months to ensure costs are being recovered and revises them annually. Rate decisions are typically issued to cover a 12 month period with different summer and winter charges to reflect usage patterns.
With TOU rates, the consumer has an opportunity to lower their share of energy cost by shifting their use to off-peak times. Given the factors that impact the cost of grid infrastructure there is a strong case for charging a higher rate when energy demand contributes to higher costs. Rate structures have historically followed that philosophy.
Complexities of the grid: recognizing opportunities to save money and reduce costs
The grid is made up of thousands of segments that connect generators to loads enabling the delivery of energy to customers. Each segment has capacity limits that must be respected to avoid equipment failure and ensure system reliability. Capacity has a material cost associated with it. The greater the capacity, the higher the cost. It is the maximum anticipated peak loading that usually determines how much capacity will be provided on each segment of the grid. When load grows, new generation capacity is added or operational contingencies reach infrastructure limits, system upgrades are required. When upgrades are performed on infrastructure that isn’t at its end of service life, the utility incurs a financial penalty. An alternative to premature system upgrades is to manage the growth of peak load to extend the functional life of grid infrastructure. Effective strategies for managing peak load growth are to move consumption to off-peak periods and encourage conservation. Another strategy could include voluntary load shedding programs. The general term for actions that impact loads is Demand Response (DR). Each of these strategies have economic costs and performance implications associated with them. The programs for DR are managed by the IESO in Ontario.
Time-of Use (TOU) rates provide cost incentives for customers to shift their usage and reduce peak demand. The effectiveness of a TOU rate strategy depends on economic incentive (off-peak, mid-peak and peak rates) and the flexibility customers have with energy use. In economic terms, this is referred to as the price elasticity.
There are two consumer responses that are influenced by TOU rate structures. The first response is to conserve energy use outright due to the high cost during peak periods. The second is to shift energy use to off peak hours. The Ontario Energy Board (OEB) conducted pilot evaluation of TOU pricing (file EB-2006-0303) which ran from 2006 to 2008 with 4 Local Distribution Companies (LDCs). The studies showed that different groups responded very differently to time-based rates. Overall, the TOU plan showed promise for shifting energy use to off peak hours and consumer response was positive. A final study of the roll out was performed by the Brattle Group for the IESO and published in 2016. The final study validated the success of shifting energy usage, however the magnitude of the shift was less than expected.
Energy Cost and Recovery
The overall cost associated with generating electricity is not determined by the time it is used, but by the amount and compensation terms for generators. Long-term generating costs are influenced by the mix of generation. There are different costs associated with fuel-type, baseload generation, load-following (peaking), spinning reserve and intermittent resources. Constant, steady load is supplied by baseload generation which tends to be the lowest priced source. When the energy use has a significant peak it is likely that higher priced peaking generation is dispatched to meet demand. The energy pool cost is minimized when baseload generation can be maximized. Loads that are characterized by high daily peaks and low utilization do not provide good value for ratepayers due to high average energy costs. The daily pattern of energy use tends to follow the economic and social activity of our society unless there are incentives to minimize cost. If we want to lower the cost of generation we must make better use of available capacity by reducing peak demand and improving resource utilization. In Ontario we have significant idle generation capacity during off-peak hours which we pay for.
Energy and delivery costs are recovered from customers by formulas that vary by user classifications known as ‘Tariffs’.
Recovering energy costs involves multiple entities in the industry. The OEB performs the complex cost recovery calculation and sets the actual rates. The LDC measures customer usage and performs the billing service. The revenue associated with energy use is forwarded to and managed by the IESO who then settles the bill with generators in accordance with contractual and regulatory terms.
Implementation of TOU rates
The implementation cost for TOU billing in Ontario was tied to the roll out of smart meters which began in 2005. According to Ontario’s Auditor General, the cost benefit for TOU rates did not align with expectations as identified in the government’s original business case. It went over budget, took too long and never achieved the peak load reduction anticipated. The Auditor General’s 2014 report is available here. One of the problems with the implementation was the pain of using new technology – ‘the bleeding edge’. Presumably the industry is past that point in 2020 and the ongoing cost-benefit case has improved.
The implementation cost for smart meters and TOU billing falls upon Local Distribution Companies (LDCs) and is not reflected in the energy rates. It is recovered through the delivery charge.
The ongoing incremental cost associated with TOU rate administration is due to management of enterprise IT systems and personnel as required to retrieve, process and validate millions of customer’s data daily to ensure billing accuracy. This process requires resources within every LDC, The Independent Electricity System Operator (IESO) and several independently contracted service providers such as meter vendors. The cost will be embedded in the delivery charge of the bill if it is born by the LDC and part of the regulatory charge if it is associated with the IESO. Determining the cost of administration would be a substantial undertaking and is beyond the scope of this article, however it is likely being pursued as a part of a demand management efficiency review by the IESO.
The requirement of meter data management does not disappear if TOU rates are cancelled but rather must be transitioned to whatever plan replaces it. Customer meter data must be read, checked for errors, validated and billed regardless of the price plan. Any new process will have an up-front implementation cost and ongoing sustainment costs to consider. The reality is that any cost reduction at the LDC will be so small it will not translate to a measurable difference at the ratepayer level in a $20 billion dollar industry.
Time of Use (TOU) and Demand Response (DR) in Ontario
Reducing demand during peak load is accomplished by several programs which include TOU rates in the regulated price plan. Each program has a cost associated with it along with targets that are usually expressed in mega-watts (MW) of power avoided. For reference, the 2019 peak summer load in Ontario was 21,791MW. If the RPP accounted for 40% of that load, it would be 8,716MW.
According to the 2014 Auditor General’s report the target for TOU reduction was 1,350MW by 2007, 2,700MW by 2010 and an additional 3,600MW by 2025. In hindsight, those numbers are not realistic since it would amount to reducing the peak demand of RPP participants by more than 50%. A pilot TOU program conducted by the OEB in 2006/2007 showed a wide range of peak reductions, however the total reduction could have been extrapolated to much less than 10% of RPP demand (author’s interpretation). Fast forward to 2016 when the IESO published the results from a 4 year study on impact to peak load. The IESO used the Addilog Demand System model and different methodology than the OEB pilot however the results also showed an underwhelming achievement of the rate program when compared against targets.
To put the TOU impact in perspective, the IESO published targets for all demand response initiatives in 2016 as totaling 1,927MW. The TOU portion was 86MW.
The other demand response initiatives in Ontario include:
- Capacity Based Demand Response
- Demand Response (DR) Auction
- Demand Response (DR) pilot
- Dispatchable load
- Industrial Conservation Initiative (ICI)
- Peaksaver
Some of these programs are a part of the Ontario Electricity Market. All are described on the IESO website. The only programs that engage residential ratepayers are Peaksaver and TOU.
Who benefits if TOU rates are cancelled?
Unfortunately the debate over TOU rates pits different consumer groups against each other. Consumers that do not have the option of moving demand to off-hours consider peak rate charges to be punitive and discriminatory. Other groups want the opportunity to lower their bills through their pattern of energy use. The overall value assessment is speculative and has too many variables to definitively say whether cancelling TOU has a net benefit. There will be a different set of beneficiaries with and without TOU rates. What follows are some of the qualitative factors that need consideration for cancellation of the existing plan. .
Cancelling TOU – who comes out ahead?
The groups that benefit from cancelling TOU rates would include consumers that don’t have the flexibility to move consumption to off-peak hours and have exhausted their conservation efforts. Consultants who provide services to the IESO and LDCs to re-jig their customer billing process will benefit from transition services as the industry migrates to a different model. Meter vendors will be paid to modify meters and enterprise software to suit new requirements. Peak generators (natural gas) will see increased revenue from higher demand if peak loading increases. Short term the companies that have contracts with LDCs to administer TOU rates will be paid-out to terminate existing agreements. Engineering and construction companies will see an increase in demand for infrastructure upgrade services if peak load increases beyond limits on segments of the grid. LDCs will increase revenue if they make capital investments in grid infrastructure triggered by peak load growth. In today’s regulatory model, LDCs are allowed to make a profit on OEB approved capital investment.
Cancelling TOU – who is disadvantaged?
Consumer groups that have flexibility with their energy use patterns will no longer benefit from shifting to off-peak hours. The opportunity and incentive for reducing bills through time shifting demand will be gone. The IESO, LDCs and contractors will reduce staff assuming that the replacement rate plan is less labour intensive than TOU. Telecommunication companies will see reduced revenue due to a reduction in data transfer from meters to head-end data acquisition systems. LDCs that must invest in capacity upgrades where segment loading requires it will spend more money and pass the cost to ratepayers.
Electrification of transportation in Ontario
Ratepayers may face a significant impact from the loss of TOU rates if Electric Vehicle (EV) owners no longer have incentive to charge vehicles during off-peak times. According to Statistics Canada, the 2018 EV population in Ontario was 7.379. That accounts for only 3% of the passenger vehicles in the province. In Ontario’s 2017 Long Term Energy Plan, Ontario’s projected 2035 EV population is 2.4 million. I can do a quick back of the napkin calculation that suggests 2.4 million EVs each driving 15,000 km per year will require about 5.7 TWh of energy annually. That’s equivalent to over 4% of the total energy we consumed in Ontario in 2019. If that isn’t enough to make you sit up, consider that this consumption will be spread in a pattern of a few hours of the day, mostly during the work week throughout the year. It could result in a significant peak of daily demand that doesn’t exist today. In my estimation, that is enough to collapse our urban distribution infrastructure without massive capacity increases or smart load management. It is obvious that a rate plan must be in place to move EV battery charging loads to off-peak (overnight) unless we can afford the cost of capacity expansion (we cannot). If TOU rates are not the solution, we will need a better alternative soon.
It is a massive oversight to ignore the electrification of transportation when considering TOU rates. It may cause serious economic hardship due to grid infrastructure upgrades. Moving the EV battery charging load to off-peak times will avoid or defer some costly infrastructure upgrades until the end-of-life sustainment cycle requires it.
On average?
The average ratepayer as defined by the OEB will not see any impact if TOU rates reverted to the existing two-tier rate if usage patterns remain the same. Consequently, the average TOU ratepayer is probably not paying much attention to what is going on.
The reality is that TOU rates are just one element in an overall strategy to manage energy use in a way that minimizes cost. The overall success depends on the effectiveness of its implementation. One thing is for certain… if you don’t have a plan to manage the grid’s peak load growth it will result in higher bills for ratepayers.
Where do we go from here?
Updated June 21, 2020
The Ontario government is maintaining the fixed energy rates until October 31, 2020. On November 1st, 2020 customers are supposed to have a choice to opt-out of TOU rates and switch to tiered rates.
It remains to be seen what the new plans will look like, however energy costs have not changed. What will change is the formula for cost recovery from ratepayers in the optional plans.
We will still require Smart Meters, telecommunications for data access and IT systems for validation and customer billing. It is not likely to result in a significant change to the average customer’s bills.
If you have any concerns, or just want to keep informed, contact your Local Distribution Company or visit the Ontario Energy Board’s website.
Be prepared, be informed and make a choice this fall that aligns with your values.
Derek
Images are reproduced under the Creative Commons license
