XYLENE POWER LTD.

EXISTING ELECTRICITY RATE PROBLEMS

By C. Rhodes

OBJECTIVE:
The objective of this web page is to identify electricity rate problems in Ontario and their solutions.

PEAK kVA AND PEAK kW METERING:
Presently for customers with monthly peak demands > 50 kW electricity utilities in Ontario apportion transmission/distribution costs in proportion to measured monthly peak kW or monthly peak kVA where:
kVA = [root mean square (RMS) current in amps X RMS kilovolts]
The measurement interval is typically 15 minutes to 1 hour, depending on the Local Distribution Company (LDC) and the available metering technology.

There are several fundamental problems with this monthly peak KVA or peak kW measurement methodology.

1. Monthly peak kW or peak kVA measurements are often counter productive in terms of encouraging energy management, energy storage and behind the meter power generation. Monthly peak kW or peak kVA measurements do not recognize the reality that energy management systems, energy storage systems and behind the meter generators must be briefly shut down from time to time to allow electronic/electrical/mechanical/natural gas/plumbing/water service. With monthly peak kW or peak kVA metering the cost impact of such random maintenance shutdowns to the electricity cost savings stream that is required to finance the energy management, energy storage or generation equipment is frequently unacceptable to the building owner. This cost impact often leads to the equipment not being used at all.

2. Monthly peak kVA and peak kW measurements do not recognize the statistical independence of temporary maintenance shutdowns in energy management systems, energy storage systems and local energy generation systems. A Local Distribution Company (LDC) will have a large number of load customers. The maintenance related electricity demand peaks of the customers are statistically independent. However, on any one customer's metered connection to the LDC there is usually only a single energy management system, a single energy storage system or a single generator, that normally operates to minimize the connection kVA. Within a one month billing period this equipment may need to be briefly shut down for maintenance. During that maintenance period the building may experience an electricity demand peak. Hence, the practical effect of monthly peak KW or peak kVA metering is to unduely transfer costs to customers with behind the meter energy management systems, energy storage systems or generators when this equipment is shut down for maintenance. Thus, monthly peak kW and peak kVA metering is a significant obstacle to economic application of energy management, energy storage and distributed generation.

3. Major generators usually have multiple generation units at each generation site. At any instant in time, one of these units may be shut down for repair or maintenance. However, load customers usually do not have redundant equipment and should not be unduly penalized for short term statistically independent equipment shutdowns for maintenance. If transmission/distribution rates unduly penalize owners of small behind the meter generators, energy storage systems and energy management systems for occasional random equipment shutdowns, these small generators, energy storage systems and energy management systems simply will not exist.

4. Major electricity generators are presently not paying for transmission / distribution usage as are electricity consumers. Major generators presently have no financial incentive to use energy storage for more efficient use the transmission / distribution system. There is no price incentive for high generator power factor. This inequality in apportionment of transmission / distribution costs and the lack of generator responsibility causes electricity energy to be priced too low and consumer transmission / distribution charges to be priced too high. This improper pricing acts as an obstacle to energy conservation, consumer owned energy storage and distributed generation.

To remedy this problem the grid should be viewed as a medium for exchange of energy from any party to any other party. All parties connected to a distribution system should pay the same rate for its use, regardless of the direction of the instantaneous power flow. Since any party within a particular distribution system can alternately source and sink energy, the transmission / distribution rate should be the same for all parties within that distribution system.

Allocating part of the cost of transmission / distribution to major generators will increase the Hourly Ontario Electricity Price (HOEP) but should reduce load customers' transmission / distribution costs by the same amount. The increase in HOEP will encourage more energy conservation and behind the meter generation by load customers.

When generators pay half of the transmission/distribution cost for electricity that they export to the grid they are able to influence transmission/distribution planning and construction to ensure that transmission/distribution is built when and where it is needed.

5. Use of monthly peak kVA or monthly peak kW meters reduces the financial benefit to the load customer of saving a marginal kWh. Hence this type of meter acts as a disincentive for electrical energy conservation.

6. One of the reasons that electricity distribution utilities adopted monthly peak kVA and peak kW metering is historical. Prior to the availability of microprocessor based electronic meters, monthly peak kVA and peak kW metering was implemented using a simple mechanical ratchet advanced by the kVA or kW meter needle. The ratchet was manually reset monthly by the LDC meter reader.

GLOBAL WARMING:
Combating global warming substantially impacts electricity rates. The electricity system must be expanded to displace fossil fuels used in the transportation and heating sectors with non-fossil fuel electricity. Fossil fueled electricity generation for load following must be replaced by energy storage and non-fossil fuel electricity generation. Financially enabling energy storage requires electricity rates that have sufficient daily variation to provide an adequate return on investment for the owners of the energy storage systems.

GOVERNMENT INTERVENTION IN THE ELECTRICITY RATE SETTING PROCESS:
One of the main problems in Ontario has been government intervention in the electricity rate setting process dating back to about 1992. This intervention had the initial effect of shifting the rate burden from the rate payers to the taxpayers. This intervention has had the continuing effect of causing a rate revenue level which is insufficient to adequately fund the electricity system.

ENERGY RATE PROBLEMS:
The electricity energy rate determination system, as presently implemented in Ontario, has a number of serious problems. The rates are set by a process that has been and continues to be the subject of political abuse. The rate determination system does not include a coal prohibitive fossil carbon emissions tax, does not consider the costs of hidden government subsidies and financing guarantees, does not provide reduction of the stranded electricity debt principal and does not require major generators to pay for transmission/distribution. The rate structure does not communicate to either generators or load customers the need for better utilization of the transmission/distribution system. There is no adequate process for valuing new generation, manoeuvrable generation or energy storage. As a result, there is an insufficient supply of summer peak coincident generation, fossil fuel makes up over 30% of the total annual electricity generation and there is insufficient energy storage and behind the meter customer owned generation to reasonably limit electricity price swings. All these problems are a consequence of an electricity rate structure that does not reflect actual costs and an OPA IPSP that does not take into account the need to use electricity to displace fossil fuels for heating and transportation.

SPECIFIC ENERGY RATE PROBLEMS:
1. CARBON TAX: Absence of a fossil carbon emissions tax encourages consumption of fossil fuels. There should be a coal prohibitive fossil carbon emissions tax on electricity generation which is reasonably estimated to be $200 per emitted CO2 tonne. The revenue from this tax should be used to reduce the existing electricity debt.

2. STRANDED DEBT RETIREMENT: The charge for stranded debt retirement is not sufficient to pay down the stranded electricity debt principal, is a disincentive for new non-fossil fuel generators and does not properly allocate the cost of nuclear generation.

3. MAJOR GENERATORS ARE NOT PAYING FOR TRANSMISSION-DISTRIBUTION: The major generators are not paying their share of transmission/distribution charges which causes the Hourly Ontario Electricity Price (HOEP) to be too small and the transmission/distribution charges paid by load customers to be too large. This improper transmission-distribution cost allocation is a disincentive to both energy conservation and self generation. This improper cost allocation encourages wasteful use of the transmission system by wind generators. This improper cost allocation also makes it difficult for new generators to obtain the transmission that they require.As discussed at Electricity Rate Issues it is necessary to make all generators pay for grid access which will increase Cr and Ct but will decrease Cd.

4. MAJOR GENERATORS HAVE GOVERNMENT GUARANTEED CAPITAL FINANCING: The major generators that existed prior to the breakup of Ontario Hydro often have government guaranteed long term debt capital financing which reduces their overall costs as compared to a new generator without such debt guarantees.

5. LACK OF COMPETITION: Most of the load following hydraulic generation capacity is owned by one party, Ontario Power Generation (OPG). There will be no real price competition until load following generation is valued at:
(Price per kWh of load following generation) =
(cost per kWh of new nuclear base load generation) / (grid load factor)

6. EXPENSIVE RESERVE GENERATION: Since the capacity factor of reserve generation is very small its cost per kWh is extremely high. The supply of reserve generation is such a business gamble that it can only be financed via a standby charge built into the electricity rate. Otherwise there will not be enough reserve generation for electricity system reliability. Presently the electricity system reliability rests on major electricity supply contracts that permit service interruption and on purchases of peaking power from outside Ontario.

7. DISCRETIONARY LOADS AND DISCRETIONARY GENERATION: In order to limit the amplitude of price swings in the electricity market and increase system reliability it is necessary to develop a group of electricity customers that will consistently increase load or cease distributed generation as the price of electricity decreases, a group of electricity customers who will consistently decrease load or generate more electricity as the price of electricity increases, and a group of energy storage owners who will supply, install, operate and maintain behind the meter energy storage systems that input electricity at a low price and output electricity at a high price. The electricity rate structure must be financially viable for all of these different customer groups.

8. VALUATION OF NEW GENERATION: At this time there is no general agreement as to the value of different types of new generation. The Standard Offers made by the OPA have not been sufficient to trigger the required amounts of new non-fossil fuel generation. The Feed-In Tariff prices are related to the cost of implementing specific forms of renewable generation instead of the value of electricity to the load customer.

9. SHORT CIRCUIT FAULT CLEARANCE: One of the issues with distributed generation is that all the generation must be controlled to keep the generation within the short circuit fault clearance ratings of all the connected switchgear. This requirement triggers monitoring and control system cost and complexity that is higher than for a system with purely central generation.

10. ENERGY CONSERVATION RATE SIGNAL: The electricity rate should provide a strong incentive to all parties to save energy. The economic viability of energy cost saving retrofits such as high efficiency lighting, high efficiency fan and pump motors, etc. is determined by the marginal cost of a consumed kWh. Thus, to encourage energy efficiency, the marginal cost of operating electical equipment only at on-peak times should be high.

11. LOAD MANAGEMENT RATE SIGNAL: The electricity rate should provide a strong signal to load customers to manage load so as to minimize on-peak energy consumption.

12. ENERGY STORAGE RATE SIGNAL: In order to financially enable energy storage the electricity rate should allow a building owner to purchase electricity at a very low cost during the off-peak period. However, to protect the local distributon system there must be a large rate penalty if the building owner generates demand peaks during the off-peak period that are greater than the demand peaks during the on-peak period. Hence the electricity rate should incent high load factor, not high off-peak energy consumption.

13. RATE TOLERANCE FOR EQUIPMENT MAINTENANCE: Energy management and energy storage systems are inherently complex and must be shut down from time to time to allow maintenance or repair to that equipment or to other electrical/mechanical/plumbing/combustion equipment that may share the same electricity, water or natural gas services. Energy management and energy storage systems are also affected by utility outages. If normal service of the electrical/mechanical/plumbing/combustion equipment triggers undue costs via the electricity rate structure the building owner simply will not adopt the energy management or energy storage equipment that the rate signal is intended to encourage. In this respect monthly peak demand meters are often very counter-productive. Thus one of the key objectives in implementing a new electricity rate is minimizing the cost consequences of short term random equipment shutdowns and utility outages.

14. POWER QUALITY AND LOAD FACTOR:
Present electricity rates for small users are based on net energy absorbed and do not take into consideration harmonics, power factor or load factor. Any new electricity rate should address these problems by financially rewarding high power quality, high power factor and high load factor. High load factor is achieved via a daily load factor based electricity rate. This electricity rate should also reward high power factor.

REMEDIAL ACTION:
In order to financially enable non-fossil fuel Distributed Generation financed by the private sector it is necessary for the OPA and OEB to implement a non-fossil fuel generation incentive or a fossil fuel prohibitive fossil carbon emissions tax on electricity generation which values a kWh of nearly constant output from any non-fossil fuel generator at close to the full cost of a base load kWh from new nuclear generation using the same financing. In setting this incentive the OPA should recognize the full blended cost of capital in the private sector.

In order to implement Distributed Generation on a large scale it is desirable to implement energy storage at both generation sites and load sites. For this energy storage to be economically viable for its owners there must be suitable variable electricity rates guaranteed by credible long term contracts.

In order to permit reasonable maintenance of distributed electricity generation and distributed energy storage equipment existing monthly peak kVA meters and monthly peak kW meters must be replaced by suitable smart meters that enable calculation of daily peak demand.

In order to put all generation and energy storage on a level playing field all major generators that operate without IESO dispatch must be subject to the same metering and rate regime as are distributed generators, parties with energy storage systems and load customers. The rate factors Cd, Cr and Ct should be the same for all parties connected to a common distribution system.

DISTRIBUTED GENERATION METERING:
A problem that is particularly serious in many distributed generation systems is parasitic losses. Most distributed generation systems involve devices such as pumps, fans, transformers, etc. that cause continuous parasitic energy losses. The distributed generation system, when operating at 100% of its rated output capacity, may be 90% efficient at conversion of shaft mechanical energy into electrical energy. However at 33% of its rated output capacity, with the same parasitic losses, the same system is only 70% efficient. If the generator runs only 50% of the time at 33% of rated capacity but the parasitic losses continue 100% of the time, the system efficiency falls to 35%. Under many electricity rate structures the value per kWh of received energy is about twice the value per kWh of transmitted energy. Hence, a distributed generator operating at a low capacity factor can actually cause negative electricity cost savings. In these circumstances the issue of accurate directional electricity metering is of paramount importance.

This web page last updated June 12, 2010.