By Don McLean & Yvan Masse

The Ontario Power Authority recently released amended program rules to both its existing DR1 program and it’s soon to be released DR3 program. This article reviews these programs in light of recent developments, and looks at the impact of the rules on the applicability of the programs to the retail/commercial sector. The concerns raised apply to a large portion of the industrial sector as well. (DR programs are also offered in Alberta and we shall be taking a closer look at these in next month’s newsletter.)

So, what exactly is Demand Response?

Demand Response (DR) is defined as “actions taken by electricity end-users that result in short-term reductions in peak energy demand.” In a competitive electricity market, DR typically occurs in response to a price signal from the electricity hourly market, or a trigger initiated by the electricity grid operator. DR is different from energy efficiency, which is performing the same services but using less power. Typically, DR actions would be in the range of 1 to 4 hours and include such actions as turning off or dimming banks of lighting, adjusting HVAC levels, or shutting down a portion of a manufacturing process. In order to provide an incentive for Ontario end-users to develop DR capability, the Ontario Power Authority (OPA) has established a suite of DR programs. Of interest to the retail/commercial sector are the OPA’s DR1 and DR3 program.

How does DR1 work?

DR1 can be referred to as a voluntary demand response program. Participants who have entered into a DR1 contract with the OPA have the opportunity to participate when the 3-hour ahead electricity price goes above a specified trigger price. A participant submits the Strike Price at which they are willing to curtail subject to Strike Price Floor levels set by the OPA. When the 3-hour ahead price goes above the participant’s Strike Price, the participant has the right but not the obligation to load shed. In this sense it is considered a voluntary program. The participant is paid by the OPA for the capacity shed multiplied by the strike price multiplied by the number of hours of load shed. The overall benefit is roughly twice the OPA payment in that the participant also achieves savings on the electricity not used.

To participate in DR1, an electricity user needs a load shed capability of 500 kW (or 0.5MW), which can be made up of any number of locations, anywhere in the Province.

How does DR3 work?

DR3 can be referred to as a “contractual” demand response program. DR3 participants are paid a standby fee to have a contractually obligated load-shed capacity on standby for roughly 1,600 hours during the year. From the standby period, a participant may be called to load-shed up to a maximum of 200 hours. The quid-pro-quo for receiving a standby payment is that the OPA requires 95% reliability when a load–shed is called. Failure to load-shed when asked will result in financial penalties being assessed to the participant.

DR3 is regional in nature, with there being 5 regions in Ontario. Incentive rates vary by region; being designated standard, premium, or discount regions. For example, the GTA is a premium region, while Niagara is a discount region.

To participate, as an individual participant requires a minimum load shed at each facility of 500 kW (or 0.5 MW) and a total load shed of 5.0 MW per region.

End-users may also participate through an Aggregator. Under an Aggregator contract, there is a minimum load shed requirement of 50 kW per location. The Aggregator as a whole must have a minimum over-all load shed capability of 25.0 MW.

For a given load, and 200 hour annual load-shed, DR3 is much more lucrative than DR1. The higher OPA incentive payment reflects the greater value of the higher reliability of DR3 load shed versus DR1 load shed.

Recent DR1 Rule Changes

The OPA influences the number of hours of DR1 opportunity by setting the Strike Price Floor. The higher the Strike Price Floor, the lower the number of hours available to participate. The table below provides a comparison of the current Strike Price Floor levels versus the new levels effective February 1, 2008. (Certain existing DR1 contracts have had the existing Strike Price Floor levels grand-fathered to December 31, 2008.)

The summer floor price is rising from $90/MWh to $100/MWh. The shoulder and winter season are being raised from $80/MWh to $105/MWh and $115/MWh respectively. The table below shows a comparison of DR1 opportunities for both the existing and new rules based upon 2007 hourly prices. With the new rules, opportunities are reduced dramatically from 1,364 hours to 209 hours.

*Table above based upon 2007 hourly pricing

With the reduction in opportunities, the economics of DR1 are directly impacted.

Recent DR3 Developments

With the DR3 minimum load-shed per facility requirement of 500kW, and minimum contract load-shed of 5.0 MW by region, participants from the retail/commercial sector will not be able to participate on a stand-alone basis, but will only be able to participate through an Aggregator. Aggregators have a 50kW minimum per location.

Under the DR3 program, Aggregators have until January 31, 2008 to advise the OPA of their intent to enter into a contract with the OPA. The number of Aggregators that intend to participate in the program will not be known until January 31. Aggregators will be able to offer their own terms and conditions within the DR3 rules umbrella. The pricing for Aggregator services will be dependent on the number of Aggregators and the level of competition for an end-user’s load shed capability.

Energy Advantage’s Concern Regarding the DR Market

The changes in the DR1 rules will lessen the economics of DR1 and encourage participants to move from DR1 to DR3. Because of bias in the rules towards Aggregators, participants that are otherwise able to manage and participate in DR3 on their own will only be able to participate after first negotiating and then entering into a contract with a DR3 Aggregator. This discourages competition for DR3 services, and ultimately gives an advantage to Aggregators to charge a premium for their services. This will be greatly exacerbated if there are not a large number of active Aggregators.

We believe the OPA should reconsider the revised DR1 Floor Price Levels. The level should be set to give a greater number of opportunities than what is proposed. An expected number of opportunities of 500 hours would seem much more reasonable. We feel the proposed level will discourage investment and participation in DR1 by the retail/commercial sector.

The DR3 rules should be modified to allow participants greater opportunity to contract directly with the OPA. This option is necessary in order to ensure competitive pricing for Aggregator services.

Energy Advantage’s Demand Response Service

Energy Advantage offers our expertise to assist customers in developing and implementing a Demand Response program. We understand the OPA programs and will work with clients to identify load-shed capability within their operation. Energy Advantage currently operates as a DR1 Aggregator. On behalf of our customers, we will also assist in first identifying potential DR3 Aggregators and then negotiating favourable terms and conditions.