Electricity Price: Deciphering Your Electricity Bill Part 3/4
Since suppliers offer their supply at their operating cost, the market clearing price can often not be high enough for them to cover all costs. From the last blog, we saw that the average HOEP in 2013 was 2.5 cents/kWh, which is not enough for suppliers to cover their costs.
To handle this issue, the government has signed long-term contracts with most suppliers to make sure they will invest in Ontario, build power plants, and be paid enough to cover their costs (plus a reasonable rate of return). In comes the Global Adjustment.
What is The Global Adjustment and How Does it Impact Electricity Price?
The Global Adjustment is the difference between the market price and electricity price contracted by the government. It is the “top-up” that most suppliers are paid when they generate electricity.
This means that as the market price goes up, the global adjustment goes down as suppliers are recovering more of their costs from the market and less from the global adjustment. As a consumer, you pay both.
For example, if the Hourly Energy Ontario Price is 2 cents/kWh, and an electricity generator has a contract with the government for 8 cents/kWh, the global adjustment is 6 cents/kWh. You, as a consumer of this electricity are charged a total of 8 cents/kWh.
Suppliers have individual contracts, so the amount of the global adjustment will change depending on which suppliers are meeting demand, one contract may be for 13 cents/kWh while another is for 5 cents/kWh. The actual payment to a supplier will be the amount of their contract multiplied by how much they generated:
13 cents/kWh * 300,000,000 kWh/month = $M 39/month
5 cents/kWh * 1,000,000,000 kWh/month = $M 50/month
Typically, the more expensive resources are run for less kWh as they are used at “peak” times, when Ontario consumption is at its highest.
The Role of The Independent Electricity System Operator (IESO)
Ontario’s grid operator, the Independent Electricity System Operator (the IESO) provides the monthly global adjustment which is then used to determine electricity price and billing.
They make two estimates and then provide a final actual amount:
1. The 1st estimate is provided on the last business day of the month for the next month (e.g., 1st estimate for October is published on Sept 30)
2. The 2nd estimate is provided on the last business day of the month for the current month (e.g. 2nd estimate for October is published on Oct 31)
3. The final rate is published at the middle of the following month (e.g., the final October rate is posted around November 15).
These preliminary estimates need to be made in advance of the final so that the LDCs can bill their customers on time by using the 1st or 2nd estimate and then truing up their customer in the following bill cycle.
If we look at the September 2013 1st estimate, the IESO had to:
1. Estimate the amount of supply and the “top-up” money that will be paid to suppliers (millions of dollars each month) = $M 666.7, and divide it by;
2. estimate of monthly of all Ontario consumption = 7,647,396 MWh, to arrive at $63.08/MWh (or 6.308 cents/kWh)
Note: 1 MWh = 1000 kWh.
This is no simple task and is why there is often a deviation between both estimates and the actual rate. You can find the IESO’s global adjustment information here.
There is also variation in the global adjustment month over month, as illustrated in the graph below.
It is difficult to predict the variation in global adjustment but it is clear that the global adjustment is on the rise. It will continue to rise as suppliers with government contracts build projects that require this “top-up” to the market price. The graph below shows the increase in yearly global adjustment since 2009:
So to recap, you pay the Global Adjustment based on how much you consume, this amount varies all the time as it is based on the “top-up” paid to suppliers of electricity and total amount of consumption in the province for a given month.
Both Global Adjustment and HOEP are energy consumption based charges. If you had a monthly January 2014 meter reading of 730,000 kWh you would get billed:
1. Electricity Price = 730,000 kWh * 5.7 cents/kWh (weighted average HOEP) = $41,61
2. Global Adjustment = 1,000,000 * 3.626 cents/kWh (GA 1st estimate) = $26,280
3. Total Electricity Charge = $67,890/month
What you can do to reduce energy consumption & cost:
Similar to the electricity price component on your bill, the Global Adjustment is charged on a weighted consumption (kWh) basis, so the less you consume during peak hours of the day, the lower this portion of your bill will be.
Stay tuned for the final post in this series that will feature an in-depth look at the impact of delivery, regulatory and debt retirement charges, and the Ontario Clean Energy Benefit.