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Why is Ontario electricity over 300% higher than normal right now?

 

If you are a large user of electricity, you are subject to the ‘spot market’, or the Hourly Ontario Electricity Price (HOEP). This is a dynamic price, which changes every 5 minutes. You see this reflected on your electricity bills as a monthly figure. This figure drives the total dollar amount you pay for electricity on your bill. In this post I am going to tackle some of the many factors which drive the HOEP, and have caused your electricity prices to spike so far in 2014.

In Ontario, the price of electricity or HOEP, is set by the lowest cost generator that can satisfy the demand for electricity at that time; the industry calls this generator the marginal supplier. The supply that sets the price for electricity could be coming from various forms of generation.  In Ontario, coal fired generators used to be the marginal supplier.  Now, Ontario’s electricity market relies upon natural gas generators to be the marginal supplier and they set the market price for electricity. Refer to the diagram below to see the characteristics of Ontario’s electricity supply mix, used in our recent blog series on deciphering your electricity bill.

OntarioSupplyMixCharacteristics_samira

The way the gas generators offer their electricity to the market, is a function of the generation plant’s efficiency and the price paid for the gas to fuel the plant. What many people often overlook; however, is that gas comes from a ‘local hub’. The majority of people discuss North America’s largest hub, ‘Henry Hub’ – located on the natural gas pipeline system in Erath, Louisiana. The important thing these people are missing, is that gas has a different price at every ‘hub’, and the price at that hub is based upon local supply (which includes stored gas) and demand.

That brings us to the discussion surrounding Ontario’s current electricity prices, and more specifically what is happening at the “Dawn Hub” located in the Windsor area.

It is becoming clear that there is a supply deficit at the Dawn Hub. Since late February and into early March, prices at the Dawn Hub went as high as $75/mmBtu, compared to the $4.75/mmBtu we saw at the Henry Hub. Historically, prices at Henry and Dawn are very close.

Since the removal of coal, gas generators usually set the electricity price in Ontario, making the HOEP a direct function of the current Dawn Hub natural gas price. With the supply shortage at Dawn, we saw prices throughout March sit between 10 and 32 c/kWh.

The biggest problem with this situation is the fact that there is no real end in sight. As the gas reserves continue to deplete, and the weather remains very cold, we will be relying on extremely high priced natural gas, and potentially even more expensive ‘peaking hydro’ to supply us with electricity.

As we look forward to Spring and Summer, the gas reserves will begin to refill. However, the price may remain expensive as historical reserves of natural gas – a key indicator for natural gas supply – are well below their 5 year averages.

 

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