This is a short video interview with Abbas Chagani, Manager of Electricity at Energy Advantage, discussing the volatile electricity market in Alberta, Canada.

The price of electricity in the province of Alberta has started 2011 with quite a boom. While electricity prices averaged about 4.4 ¢/kWh in 2010, they jumped to 8.3 ¢/kWh in January and over to 9.0 ¢/kWh to date in February.

As you can see from the graph displayed below the daily price of electricity has been significantly volatile.

So, fundamentally what has changed Alberta electricity market to cause the price of electricity to be so volatile? Well, there are a few reasons.

1. In Alberta, approximately 40% of electricity power is generated from coal fire plants. Due to an extremely cold winter this season and aging infrastructure, there have been multiple outages at coal fire plants across the province. Furthermore, at the beginning of February Trans Alta Corporation announced it was permanently shut down two coal fired units, which have been out of service since mid December 2010. These units, which were not due to be de-commissioned until 2017 had a capacity of 576 MW, or 9% of Alberta’s coal fire generation and 4% of Alberta’s total generation capacity.
2. Another reason, as mentioned earlier, is the extremely cold weather the province of Alberta is experiencing this winter season. The average mean temperature in February of 2010 was -4.6 Celsius compared to -17 forecasted for 2011. Cold weather increases the demand of electricity, which then puts pressure on the electricity supply to support this demand. This increase in demand forces the province to dispatch more expensive generation, which pushes up the price of electricity.
3. Thirdly, Alberta’s economy is back in growth mode, driven mainly by increased oil sand productivity. Alberta’s electricity demand is expected to grow by 3% + per year during the next few years. This increase in demand is and will cause the price of electricity to continually increase.

What does this mean to an energy end-user? Well, if I haven’t stated it enough, the cost of electricity is increasing. This volatility will make it tough to forecast prices and harder to budget commodity costs.

So what can you do to manage this risk so you don’t experience this volatility again? I recommend you do the following steps to evaluate your company’s energy options.

1. Evaluate your company’s energy consumption profile and risk tolerance. What is your company’s purchasing objectives? What are your budget requirements? What is your risk tolerance? High, low? These types of question have to be answered before you can decide how to manage your company’s electricity purchases.
2. Once you understand your profile and risk tolerance, there are three options electricity end-users in Alberta have:
   • You can pay the default utility price. This means that you pay the daily market price of electricity. If you chose this option you can expect prices to be extremely volatile. One month you could pay 5.4 ¢/kWh and the next month you could pay 30 ¢/kWh.
   • You can contract with an electricity supplier and transition to retail billing. Retail billing means that you pay the daily market price of electricity but you will save 0.5 to 1.0 ¢/kWh on administration costs from switching from default utility price to retail billing.
   • Or you can contract with an electricity supplier, be on retail billing and have a portion of your electricity based on the daily market price and a portion hedged at a fixed price.

Electricity Procurement Best Practice: I recommend companies create a customize strategy for purchasing electricity. A customized strategy is developed from understanding your company’s hourly, daily and monthly electricity consumption profile, risk tolerance, purchasing objectives and budget requirements and typically includes a blend of daily market price and fixed price. With the right expertise, a strategy can help your company mitigate risk and reduce overall electricity costs.

It is expected that the price of electricity in Alberta will continue to be volatile for the foreseeable future. To avoid experiencing this price volatility again, now is the time to manage your electricity purchasing profile for the future.

Watch a short video on this subject matter.

In 2009 and 2010, Alberta electricity customers were comfortable with prices in the low 5.0 ¢/kWh. Oil consumers were also feeling snug with prices trading at the $75 to $85 US/barrel level.

However, “black swan” events such as the permanent closure of two coal plants in Alberta, representing some 10% of the province low cost baseload supply, sent prices soaring to over 8.0 ¢/kWh in January and to over 13.0 ¢/kWh to date in February. As well, the recent spike in crude oil prices, due to the political turbulence in the Middle East and North Africa, remind us of the price risks inherent in the energy markets.

Natural gas prices, on the other hand, dropped to a 10 years low over the last 2 years, because of a quantum leap in drilling technology that typically occurs once a generation.

Who would have predicted that this could happen so fast?

Some end users are of the opinion that remaining on the spot market price yields the best value over the longer term. Fair enough…but don’t forget to fasten your seat belt to ride out the pockets of volatility along the way – which can last from a few weeks, to a few months, or even a few years.

However, if you, or that dreaded B word, your Boss, is budget focused and basically surprise averse, the recent occurrences in the energy markets are a good reminder that hedging the price on a portion of your future energy requirements is a prudent business practice that places you in a much better position to manage the unexpected.

Indeed, while no one can accurately predict future prices, history has taught us that unusually low or high prices are not sustainable. A prudent and disciplined hedging strategy based on ‘not too greedy at market bottoms and not panicking at market tops’ is the soundest strategy of all.

How smart are ‘smart meters’ anyways? Is it all about conservation? You can adjust your consumption habits, reduce demand intake and control your electricity cost. Seems easy, right? Well I beg to differ.

As the ‘smart grid’ continues to enter into the early stages of Ontario’s existing electrical distribution system many questions/concerns are being raised by industry experts. How will new ‘smart’ technologies benefit the end consumer? Are electricity costs going to increase? How can the end consumer save money on its electricity bill?

When smart meters were first conversed at the political level, politicians only reaped the benefits of the smart meter concept – a more conservative and efficient system, it helps end consumers manage their electricity costs and will reduce Ontario’s environmental footprint. But what politicians seemed to leave out is that in order to achieve the above benefits, it comes at a cost. And who’s going to pay for these benefits? Well who esle? The end consumer, you and I.

Smart Meters

Currently in Ontario most homes are equipped with a meter that only measures how much electricity was used by the customer in a billing period, typically one or two months. A smart meter will be able to record not only how much energy was used, but also when it was used daily, occurring in 15 minute intervals. This will allow for the introduction of different electricity rates based on what time(s) of the day consumption occurs, at on-peak, mid-peak or off-peak times. This introduces the time of use rate structure.

There are fundamentally two types of smart meters:

Time Of Use Meter (TOU) – measures how much energy was used in preset time blocks, such as on-peak and off-peak times. These meters provide readings to the Local Distribution Center and are typically read manually like today’s meters but may be equipped with additional technology for automated reading.

Interval Meter – measures how much electricity was used in various intervals (typically every 15 minutes). These meters produce many hundreds of sets of data and are usually read remotely due to the large amounts of data collected.

The Truth – How Smart Meters will Affect the End Consumer

Smart meters allow price setting agencies to introduce different prices for consumption based on the time of day and the season. This means that consumption during peak periods will be substantially more than off peak periods. This will place many end consumers who need reasonably priced electricity during peak periods in a costly situation.

Table 1 highlights the current TOU prices from the Ontario Energy Board

Table 1 – Current TOU Prices May 1 to October 31 2010

Source: http://www.ieso.ca/

As an average electricity end-user if you use more demand during the peak times, say 11am to 5 pm, you will be paying significantly higher prices. From table 1, today the price per kWh is 9.9 cents for peak times. If you want to conserve during this time period you will have to adjust your lifestyle to be more responsive to the electricity market. For example, instead of doing laundry during the day, you do it after 9 pm on the weekdays at the off peak rate.

Failure in the electricity system will also affect your electricity consumption. For example, if there is a spike in electricity demand, like a power outage, and all electric systems turn on at the same time, and this happens during peak times, you will be paying for that system failure.

The technology of smart meters is relatively new to the electricity industry. New system ‘bugs’ may occur and cause interruption on the grid. Smart meters also have a shorter lifetime than standard meters, and need to be inspected more often. If left unchanged, it could add significant costs to the end consumer.

Implementing smart meters also causes major privacy issues. Smart meters will be able to document the time you have a shower in the morning, the time you turn the T.V. off at night, when you’re making dinner and when you’re asleep and awake. This personal energy use would be a treasure trove for hackers, thieves or marketers. Personal privacy measures must be taken to ensure this data does not get in the wrong hands.

Conclusion

Most houses in Ontario are already set up with the smart meter and in some areas (like Milton and Newmarket) consumers are being billed for their time of use. With the price of electricity already rising (check out the article The Good, the Bad and the Ugly on why electricity prices are increasing), electricity consumers can expect a stocky increase in their monthly bills and a hefty change to their consumption behavior when smart meters are fully implemented across Ontario.

Introduction

The Ontario electricity market is not behaving rationally. Prices are rising sharply (~30% over a 24 month horizon) in a period of weak demand and strong supply.

Despite strong supply availability and modest demand growth, the cost of electricity is increasing at a frightening pace. The question everyone is asking is why. The answer is the rapid increase in the Provincial Benefit coinciding with the implementation of a harmonized sales tax. This article highlights key components of Ontario’s electricity market and what energy end-users should expect in the months ahead. It also suggests some remedial actions that might be taken to avoid the full impact of rising prices.

The Good

Currently, there is 35,485 MW of installed generation available in Ontario, with about 30,000 MW available at any one time. The majority of this capacity is nuclear, hydro, natural gas and coal. Further, nearly 2,600 MW of new and refurbished generation is scheduled to come into service over the next 18 months, contributing to a very positive outlook on the reliability of Ontario’s electricity system. Although 2000 MW of coal- fired generation is expected to be decommissioned in late 2010, this shut down is not expected to have any undue impact on the adequacy of Ontario’s electricity supply.

Figure 1 – Ontario Electricity Current Supply Mix

Electricity demand in Ontario has decreased by 12% since the summer of 2005, as can be observed in the graph below. Overall electricity demand in Ontario will continue to be impacted by 3 main factors:

• Economic conditions;
• Conservation efforts; and
• Embedded generation.

The 18-Month Outlook of the Independent Electricity System Operator (IESO) predicts that electricity demand will show very modest growth in 2010 and 2011, 0.2% and 0.9%, respectively. In addition, peak demand is expected to decline as a result of targeted conservation programs and increased use of smart metering and time-of-use meters.

Figure 2 – Ontario Electricity Consumption

The combination of strong supply availability and the modest demand growth expected over the next 2 years should result in a sufficient reserve over requirements for the Ontario market.

The Bad

The Evolution of the Provincial Benefit

The Provincial Benefit program was first introduced to Ontario consumers in January 2005. The Provincial Benefit accounts for the difference between the spot market price and the rates paid to regulated and contracted generators, and is applied to business customers who pay the spot market price and to customers who have signed a contract with an electricity supplier. The Provincial Benefit fluctuates in response to changes in the spot market price, and can be a credit or a charge.

The three components of Provincial Benefit contractual obligations include:

1. Guaranteed rates paid to the Ontario Power Generation (OPG) for nuclear and baseload hydroelectric generation.
2. Guaranteed rates paid to the Non-Utility Generators (NUGs).
3. Generation and load reduction projects awarded through Ontario Power Authority (OPA) contracts for new supply-and-demand management. These include new gas-fired facilities, renewable facilities (solar, wind, biomass, etc.), demand response and conservation programs.

If the spot market price is less than the contracted price, the Provincial Benefit is a charge to the end-users and the suppliers are paid the shortfall. On the other hand, if the spot market price is greater than the contracted price, the Provincial Benefit is a credit paid to the end-users.

The term “Provincial Benefit” has become an oxymoron. Since 2006 the Provincial Benefit has been a charge to Ontario customers as guaranteed prices have exceeded spot market prices. When the guaranteed price is greater than the spot market price, electricity prices are more expensive for the energy end-user.

Figure 3 shows the average monthly spot price (also referred to as HOEP) and the monthly Provincial Benefit since 2005. The green line illustrates the upward movement of total electricity prices (spot price + Provincial Benefit) that Ontario customers have been paying (excluding the regulated delivery charge of ~3.0 ¢/kWh). The red bars representing the Provincial Benefit charge hit an all-time high of $45.7/MWh (4.57 ¢/kWh) in April 2010.

Figure 3 – Ontario Electricity Prices

The IESO shows that the average monthly Provincial Benefit charge increased from just under $100 million per month in 2008 to $360 million per month for the first 3 months of 2010. Approximately 33% of monthly Provincial Benefit payments go to OPG assets, 22% to NUGs, which have an average contract price of 80 $/MWh (8.0 ¢/kWh), and more than 45% to contracts managed by the OPA.

The Ugly

With electricity demand growth projected to be minimal and supply increasing, one would expect the price of electricity to decrease. However, this is not the case. As long as the Provincial Benefit continues to increase, the price of electricity for energy end-users will most likely increase as well.

This is only the beginning.

With the introduction of the Ontario Green Energy Act, new and replacement resources in Ontario’s electricity system will come from higher cost renewable energy signed through the Feed-In Tariff (FIT) Program and other private power generation contracts with the OPA.
These include solar, wind, biomass, biogas, landfill gas and waterpower, as well as the new and refurbished nuclear projects and the new natural gas projects. Many of these generators have contract prices much higher than the spot electricity price with a typical contract term of 20 years. The price guarantee feature of these contracts will have a significant impact on the Provincial Benefit in the coming years. Provincial Benefit payments will increase with each new contract introduced into the supply mix, meaning energy end-users’ electricity costs will increase as well.

The introduction of the Harmonized Sales Tax (HST) will also have an effect on the price of electricity. While energy is not currently subject to PST, electricity will be subject to a HST charge, which will result in an 8% increase for energy end-users not able to claim HST as an input tax credit.

The end result is that the “all in” electricity price, which recently averaged 9.5 ¢/kWh to 10.0 ¢/kWh for the business energy end-user, will most likely increase to 10.0 ¢/kWh to 10.5 ¢/kWh by year end and by another cent in each of 2011 and 2012

What Can Energy End-Users Do?

Electricity end-users face price increases of 30% or more over the next two years. To counter such increases, the first line of defense is to rigorously evaluate all energy efficiency measures that can be undertaken to reduce consumption and all government and utility incentive incentives available to encourage such reductions.

Business energy end-users should also keep all their purchase options open by having Direct Purchase contracts in place with electricity suppliers and by keeping consumption load profiles up to date. Keeping options open in this manner does not necessitate a market transaction, but provides the ability to transact should market prices or the regulatory framework make this advantageous.

More price sensitive business energy end-users should consider fixing in the price of electricity to the extent they can to at least secure the variable price component, which represents 25% to 30% of the delivered price.

Conclusion

To summarize, the price of electricity for energy end-users will increase dramatically over the next two years due to a rapid increase in the Provincial Benefit and the implementation of a value-add tax.

Electricity end-users can take actions today to try to avoid the full impact of expected future price increases. In particular, they can implement energy efficiency measures to reduce their exposure to electricity price increases and keep their purchase options open by having direct purchase contracts in place under which future prices can be fixed quickly should an attractive opportunity become available.

“Make it so Number One”, the famous words of John Luc Picard should be an inspiration to Energy Managers. Once you’ve obtained senior level approval to precede with your energy management plans, it is time to make it happen.

There are many ways to do this. Many organizations have set rules and policies concerning the implementation of operational programs and capital budgets. Be sure to understand the approval process thoroughly (this should have been covered in the early stages of the strategic plan development). A good cross sectional energy management team will assist you in navigating the approval and implementation process. There are no substitutes for thorough planning and good communication at this stage. Regardless of whether you are implementing an awareness program or a major capital retrofit there are some basic steps to ensure success.

Project Development

Step 1
In most cases I recommend starting with a pilot project. The pilot project provides the best guarantee for success of a full scale project or roll-out. The first step is to select a small sample of facilities or sites that would be representative of the larger project. The selection can be based on scoping audits results and baseline analysis that would have been completed in the Opportunity Assessment phase (check out our article on Developing an Energy Management Program for more details on the Opportunity Assessment phase).

Step 2
The next step would be to collect detailed information from the selected sample sites. These details are important in preparing the scope of work for the pilot project. This may require hiring a qualified consultant to complete an audit and prepare the scope of work on your behalf. It is a good idea to involve contractors that you intend to invite to bid on the scope of work as they can provide valuable and knowledgeable input.

Step 3
With the scope of work prepared, the next step is to put the pilot project out for bids. It is important to follow corporate energy procurement policies when doing this. At the pilot stage, it may be worthwhile to select a couple of contractors so that you can evaluate their performance for possible inclusion in the program roll-out. Additional monitoring should be included in the pilot project so savings can be accurately measured. Make sure to allow adequate time before and after the work is done to collect enough monitoring data.

Step 4
Upon successful completion of the pilot project, the next step is to prepare the roll-out plan. The results of the pilot will be useful in selecting suitable sites, estimating costs, benefits and preparation of the roll-out schedule.

Analysis from the pilot program will goes into the preparation of the final business case. This business case is to be presented to senior management in order to get authorization to proceed with full a scale project. This business case should be brief and clearly present the key technical and financial parameters of the project. Be sure to identify and include any potential government and utility incentives in your analysis. Life cycle cost benefit analysis (LCCBA) is the best way to present the financial benefits. You should also include cash flow and P & L impact. If the project is good and the business case is thorough you should expect a speedy approval to proceed. At this point it should be noted that every day of delay means another day of lost savings.

Project Approved, on to Implementation

You should follow your corporate energy procurement policies once you have received approval to proceed. Be sure to allow enough lead time to submit and receive approvals for government and utility incentives.  Communications is key during the implementation phase. Facility managers and employees and in some cases customers need to be aware of what is going on. This will minimize disruptions and encourage full cooperation during the project. Awareness of the project and your energy management objectives will go a long way towards ensuring that savings are not compromised once the contractor have left the site.

You can expect a few visits from “Murphy” during the course of the project. It is not uncommon for contractors to suggest alternate equipment or configurations. In these cases it will be necessary to revisit the business case in order to assess the impact of the suggested changes on the financial goals of the project. This will need to be done during the project and again once the project is complete.

Proper commissioning and optimization are also important to success. The engineer and/or the contractor must ensure that the installed systems have been properly commissioned and the performance is specified in any bid documents. Following commissioning, there should be a period of optimization, where the performance of the system is continuously monitoring and fine tuned to maximize energy savings. This could take 3 months to a year to complete.

Once the system is working well, it is important to revisit the business case and update it with actual as-built information. This step proves to management that you have good accountability. This documentation is also a requirement for payment with most incentive programs and can be used in the creation of emission credits. Hopefully the results are as expected. If they are better or worse than expected you should be able to explain why and provide a clear picture of lessons learned. As Babe Ruth once said, “Never let the fear of striking out get in your way.” This type of presentation will strengthen your credibility with senior management and facilitate approval of future projects.

At this point don’t forget to celebrate your success. A good case study will go a long way towards promoting your program both internally and externally and provide momentum for your energy management program.

In the next article we make the jump to hyperspace and explore advance energy options such as distributed generation and renewable energy.

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We are really excited to launch a series of energy management articles by Peter Rowles. Peter is an engineer and energy expert with over 20 years of experience in the energy industry. The series will address how to successfully drive a sustainable energy management program within an organization. Articles will focus on program development, energy savings initiatives and making the program operational.  Topics include:

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• Emission credit creation.

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