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MOTIVATION FOR RETAIL ELECTRICITY RATE RESTRUCTURING:
In order to economically transition from fossil fuels to clean energy it is essential to restructure retail electricity rates to financially enable displacement of fossil fuels by low marginal cost intermittently available surplus clean electricity. At present, in most existing electricity systems, surplus clean electricity is either exported at a very low price or is discarded.
"Dependable" electricity is electricity that 99.7% of the time is instantly available on user demand and is intended for applications where continuous electricity availability is more important than a low electricity cost per kWhe. In Ontario most retail electricity consumers presently receive only "dependable" electricity. The main sources of dependable clean electricity are hydroelectric and nuclear power plants.
"Discount" electricity is electricity that is reliably available except on a few days per year during extreme conditions when consumers contract to reduce their peak kWe demand in exchange for a discounted electricity rate for the balance of the year. In Ontario "discount" electricity is provided to electricity customers via demand response programs. The main sources of discount clean electricity are hydroelectric and nuclear power plants.
"Interruptible" electricity is low cost but unreliable clean electrical energy that is surplus to the instantaneous requirements of "dependable" and "discount" electricity loads. Interruptible electricity is useful for electrolytic hydrogen production, for charging electric vehicles, for charging thermal energy storage systems, for displacement of fossil fuels in hybrid heating systems and for operation of water pumping and water purification systems that have large amounts of purified water storage. In Ontario there is usually "interruptible" electricity available from midnight to 6:00 AM during which period fossil fueled electricity generation is usually shut down. At other times the amount of available interruptible electricity depends on numerous factors including season, wind, sunlight, temperature, equipment maintenance, etc. The main sources of interruptible clean electricity are wind generation, solar generation, surplus hydro generation and surplus nuclear generation.
DEPENDABLE AND INTERRUPTIBLE ELECTRICITY:
Modern civilization relies on the availability of dependable electricity. As shown in the video titled: Electrifying Our World the availability of dependable electricity distinguishes the developed world from the undeveloped world.
The fossil fuel industry has convinced some governmental regulatory bodies to price electricity based on delivered energy rather than on reliable capacity. That method of electricity pricing is not consistent with either recovery of dependable clean electricity system costs or with mitigation of climate change and has led to a lack of dependable reserve electricity generation capacity in several major jurisdictions.
Starting in 2020 and continuing in 2021 there have been and continue to be serious dependable electricity capacity shortages in both Texas and California, California citizens response. In Europe countries such as Denmark, Germany and Ireland rely on electricity imports from neighbours during low wind periods. Governments must face the reality that it is both impractical and uneconomic to make wind and solar generated electricity dependable. In order to prevent further climate change the main source of dependable electricity must be nuclear power. Wind and solar electricity sources both have common mode failures.
Dependable electricity is dependable in part because electricity utilities typically maintain at least 15% dependable reserve generation capacity that can be instantaneously drawn upon if there is a failure of one of the utility's power sources. Thus wind and solar generated electric power, as well as surplus nuclear and hydro power, may suddenly cease to be available with no notice. Hence, due to lack of dependability, electrical energy from these sources should be sold at a discount as "interruptible electricity".
ELECTRICITY RATE CONCEPTS:
Many existing retail electricity rate structures price all electrical kWhe the same. As an electricity system becomes less dependent upon fossil fuels this method of valuing electricity increasingly no longer reflects actual costs. In a dependable clean electricity system costs are strongly dependent on the fixed capital, operating and maintenance costs, all of which are nearly proportional to the annual peak load measured in kWe and are only weakly dependent on the annual energy consumption measured in kWhe.
The sun is powered by fusion of hydrogen so renewable energy is actually fusion energy. However, due to the rotation of planet Earth about its axis and the inclination of that axis with respect to Earth's orbital plane at any particular point on Earth's surface renewable energy sources are seasonal, intermittent and not statistically independent.
Renewable electricity generators require efficient daily and seasonal energy storage and long distance transmission to provide dependable electric power. Unless the local geography is very favorable, such as in British Columbia, Quebec and Norway, the energy storage and transmission costs required to make renewable energy dependable are prohibitive. In wholesale electricity markets a dependable kWhe typically has 5X the financial value of an interruptible kWhe.
Hence dependable and interruptible electricity should be priced differently so that applications that require dependable electric power pay the extra costs required to provide dependability and applications, such as partial fossil fuel displacement, that can be met with interruptible electrical energy, do not pay those extra costs.
The retail electricity rate structure and the electricity metering should allow "dependable" or "discount" and "interruptible" electricity usage by each electricity consumer.
Electricity generally must be priced so that the total revenue from sale of dependable, discount and interruptible electricity plus flat rate (constant monthly) charges is sufficient to meet the total costs of electricity generation, storage, transmission, distribution, metering, marketing and regulation.
In order for clean electricity to economically displace fossil fuels, the marginal cost to the consumer of the clean interruptible electrical energy used for fossil fuel displacement must be significantly less than the marginal cost to the consumer of the fossil fuel displaced. Hence the capital cost of the electricity system must be mostly financed via charges for dependable and discount electricity. In some electricity systems costs for distribution, metering, marketing and regulation are recovered via flat rate charges that are independent of measured monthly kWhe or peak kWe values.
An older induction type electricity meter registers the net cumulative amount of electricity in kWhe that has flowed through the meter.
More sophisticated directional electricity meters can separately register both incident and reflected kWhe and can calculate net kWhe absorbed by the load.
Electronic interval electricity meters (smart meters) have on-board electronic memory that usually stores the cumulative kWhe meter reading(s) every 15 minutes. These readings are transmitted to the billing department of the electricity distribution utility via various means. These readings permit easy calculation of power flows in kWe as a function of time as well as monthly energy usage in kWhe.
One way to measure a consumer's dependable electric power requirement is for the electricity utility to transmit signals to consumers indicating random time periods when interruptible electricity is available to a particular consumer. The consumer's peak monthly peak demand (kWe), which is measured only during time periods when interruptible electricity is not available to that consumer, indicates the consumer's dependable power requirement. The price of marginal energy ($ / kWhe) is the same for both dependable and interruptible electricity, but the dependable energy component has associated with it an additional monthly peak kWe demand charge. If a consumer does not exploit interruptible electricity and does not have a discount electricity contract, by default 100% of that consumer's electricity consumption is dependable.
The interval electricity metering and billing software should eventually be the same for all consumers, whether or not they choose to use discount and/or interruptible electricity. Consumers are not charged for their monthly power demand peaks that occur during time periods when they can access interruptible electricity.
INTERRUPTIBLE ELECTRICITY SIGNALLING:
During times when there is surplus clean electricity the electricity utility broadcasts signals to selected consumers which enable corresponding "interruptible" electricity loads. At other times the utility broadcasts signals which disable the same interruptible electricity loads. The number of selected consumers with interruptible loads enabled at any instant in time depends on the amount of available surplus clean electric power at that time. When there is no received supervisory signal the consumer's equipment quickly defaults to the interruptible load disabled state. Thus, in terms of power system reliability, "interruptible" loads can almost fully utilize available surplus clean generation.
To meet electricity system total revenue requirements the blended electricity price, including the demand charge, for "dependable" electricity must be much higher than the price for an equal amount of "interruptible" electricity. To prevent gaming of the electricity system the cost per marginal kWhe must be the same for both "dependable" and "interruptible" electricity. Hence practical implementation of the contemplated new retail electricity rate involves use of interval meter (smart meter) data to levy a charge per calculated monthly peak kWe or peak kVA as well as a charge per kWhe. Note that the customer's peak kWe or peak KVA is measured only during metering intervals when the consumer's interruptible electricity loads are disabled.
The price per marginal kWhe must be sufficiently low (~ $0.02 / kWhe) to financially enable use of available off-peak clean electricity for economic displacement of fossil fuels.
The price per measured monthly peak kWe or peak kVA must be sufficiently high, (~ $30.00 / kW to ~ $70.00 / kW depending on rate group demand diversity), to meet the electricity system revenue requirement for financing electricity system capacity.
The price per monthly peak kWe should initially be chosen so that for an average consumer the blended cost of dependable electricity is unaffected by the rate structure change.
It is recommended that the demand metering averaging time be two hours so that the cost impact on consumers of normal cooking with electric ovens and air conditioning system startup is minimal.
Implementation of this new electricity rate structure will incent installation of consumer owned energy storage (eg an electric DHW storage tank, electric vehicle, hybrid heating, thermal energy storage) and load control.
After spending over $2 billion on smart electricity meters the Ontario government has failed to offer an "interruptible" electricity rate which takes advantage of these smart electricity meters to encourage use of surplus low cost clean electrical energy for fossil fuel displacement. That failure is presently costing the Ontario electricity rate payers over one billion dollars per year in combined lost electricity revenue and excess fossil fuel costs and is causing major unnecessary emission of fossil CO2.
There is no rational explanation for the Ontario government's failure to provide a voluntary interruptible electricity rate, other than that the Ontario government is more responsive to the well funded fossil fuel lobby than to the climate change lobby. The fossil fuel lobby wants the global adjustment to remain applied to all electrical kWhe, in order to prevent use of surplus clean electricity for displacing fossil fuels. The Doug Ford Conservative government has further met the wishes of the fossil fuel lobby by opposing the federal fossil carbon tax, which tax has the objective of enabling displacement of fossil fuels by clean electricity.
To implement the contemplated new electricity rate there must be an Ontario legislative change which allows Global Adjustment (GA) recovery via a charge per measured monthly peak kWe or peak kVA instead of via a charge per measured kWhe consumed. To obtain this essential legislative change it is necessary to defeat the present Doug Ford Conservative government.
This rate concept is not new. During the 1970s to 1990s similar electricity rates were provided by Toronto Hydro, East York Hydro and Scarborough Hydro to owners of major buildings. During the late 1990s these rates were terminated by politicians who thought that they were smarter than power system engineers. As a result today Ontario discards large amounts of clean electricity and has very high average blended electricity costs.
The previous Ontario Liberal government squandered multiple tens of billions of dollars of Ontario electricity ratepayers money on wind and solar electricity generation which are incapable of meeting the dependable electricity needs of Ontario. Today, for lack of an interruptible electricity rate, about 70% of the clean electricity produced by the wind and solar generation is either discarded or is exported at an extremely low price.
More billions of dollars are currently being wasted by both federal and provincial governments through failure to authorize construction of additional nuclear reactor capacity for displacement of fossil fuels and through failure to adopt a much more fuel efficient and much less waste polluting nuclear fuel cycle.
A related issue is that efficient use of surplus clean electricity to displace natural gas will likely cause the blended price per unit of natural gas to increase because the fixed costs of natural gas pipeline network depreciation and maintenance must then be borne by decreasing amounts of natural gas consumed. In an attempt to retain market share the fossil fuel industry has lobbied governments to delay or prevent adoption of electricity rate structures that enable efficient use of surplus clean electricity for displacement of fossil fuels.
In this author's view it is essential for governments to prevent further expansion of the natural gas distribution network, except as a means for future distribution of electrolytic hydrogen. All new buildings, new vehicles and new energy infrastructure should be designed to eventually function without use of fossil fuels. Even so it will take many decades to fully amortize the existing fossil fuel infrastructure. In new high rise condominium buildings it is important to allow space for the pipe and electricity risers and basement level equipment necessary to connect the building's heating system to a future nuclear district heating system.
The fossil fuel industry rightly regards advanced nuclear energy production as an existential threat and, in spite of the CO2 emission consequences, continues to conduct a misinformation campaign aimed at preventing widespread use of nuclear energy for fossil fuel displacement.
RETAIL ELECTRICITY PLANS FOR A ZERO EMISSION ENERGY FUTURE
by Paul Acchione
Current retail electricity price plans have been developed primarily to recover the cost of providing electricity services to traditional electrically powered equipment like motors, lights and electronic devices. Electricity services involve three major categories of costs:
(1) Costs that are fixed regardless of the amount of power (kW) or energy (kWh) used
(2) Costs that are associated with the amount of peak power (peak kW) used
(3) Costs that are associated with the amount of electrical energy (kWh) used
An example in category (1) are the cost of distribution system equipment and labor serving each building. Once the electrical service connection size is installed, the resulting costs do not vary with the amount of peak power demand or electric energy demand within the capacity limit of that service connection.
An example in category (2) are the cost of transmission and generation equipment and labor required to supply the annual peak power demand of consumers.
An example in category (3) are the cost of fuel to produce the electricity. High emission generation typically has high fuel costs. Low emission generation typically has low fuel costs.
Unfortunately, various social and political goals have resulted in the electricity rates that are not precisely aligned with those 3 cost categories above. For small consumers like residential service, the electricity rates are often based on either an energy consumption rate only or a combination of a small monthly fixed charge and an energy consumption rate. Larger consumers have more complex rate structures but those structures do not align perfectly with the 3 cost categories listed above.
If consumers only used electricity for traditional electrically powered equipment then the electricity rate structure can be flexible. However, if we want to encourage electrification of the transportation and heating applications in various sectors of the economy, then the volumetric cost of electric energy must be competitive with the volumetric cost of the fossil fuels currently used to provide that energy. The transportation sector uses liquid fossil fuels. Heating is accomplished with a variety of gaseous, liquid and solid fuels and to a lesser extent electricity due to its current high volumetric (kWh) cost.
Because of the way energy is sold, most fossil fuel costs are combined into a volumetric rate ($/gallon, $/ton, $/cubic foot, etc.). Natural gas is an exception because it is supplied to buildings via dedicated pipelines so that fixed monthly and peak demand charges can also be included in the rate structure much like we see with electricity for larger business consumers.
However, from a consumer’s perspective, energy can come from any source that meets the consumer’s affordability limit. If zero emission electricity were available from time-to-time at rates lower than the cost of fossil fuels, that consumer could switch fuels to take advantage of the lower cost fuel when it is available. The only pre-requisite is for that consumer to have a dual fuel capability for their major energy consuming appliances. For a typical residential consumer that would be a dual fuel furnace for space heating in the winter and a dual fuel hot water tank for year-round use.
What most people do not appreciate is that as an electric power system approaches zero emissions, the installed generating capacity will be able to produce more zero emission electricity than the consumer is able to consume for their traditional electrically powered equipment. When this point is reached, the surplus is sold by the electricity system operator as zero emission energy to neighbouring jurisdictions that have a higher emission electrical system or the surplus is curtailed (turned off or effectively wasted).
Short duration surplus generation capacity is not dependable. It is sold as an interruptible source of energy at the marginal cost of production (effectively the fuel cost) by agreement among electricity wholesale markets. Selling zero emission surplus electricity on an interruptible basis is therefore not a profit-making operation. Curtailing the surplus is even worse because both the economic and environmental value of that zero emission energy is lost.
The surplus zero emission electricity can be used to displace fossil fuels in other sectors of the economy if its marginal cost of production is lower than the volumetric cost of the fossil fuel it is displacing. Fortunately, that is almost always true because zero emission electricity has a very low marginal cost of production (fuel cost).
So how do we reform our retail electricity rates to facilitate displacement of fossil fuels and accelerate our transition to a zero emission energy system across our entire economy?
One method is to reform our retail electricity price plans so they exactly match the cost of service in the 3 categories listed above. Unfortunately, that will undo many years of rate design intended to achieve a number of social and political goals. Also, it will create a number of losers who currently pay too little for their electricity services. These consumers will be very angry with the reform and lobby their elected officials to block the reform.
An alternative is to develop new electricity rate plans that have a marginal cost of energy that matches the wholesale market energy price whenever surplus zero emission energy is being sold to other jurisdictions or being curtailed. Consumers that are able to afford to install dual fuelled appliances in the building they own can voluntarily subscribe to these new price plans. They can then take advantage of the low prices for surplus zero emission electricity to reduce their fossil fuel use and emissions. There is no cost to the electricity system because the retail consumer is paying the same price that adjoining jurisdictions would pay for that same energy.
Small residential consumers with smart meters can have a very simple price plan with a very low time-of-use rate between midnight and 6 am. That is when most of the surplus zero emission electricity is available. The rate can be set to a fixed value equal to the average wholesale market price in the previous 6-month or 1-year period and periodically adjusted to recover any under or over charges.
Larger industrial consumers can have more sophisticated communication capability with the electricity market operator to take advantage of surplus periods at any hour of the day including daytime hours when we can have maximum production from wind and solar generation.
Zero emission electrical systems that are optimally designed will typically be capable of supplying over 15% of its total production as surplus to the needs of traditional electrically powered equipment. If the voluntary retail electricity rate plans are properly structured, that surplus can be used to charge electric vehicles at night, displace fossil fuels for space and water heating and make green hydrogen and ammonia to decarbonize more challenging industrial and transportation processes.
This web page last updated December 6, 2021.
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