If you’re a Class A customer, cheaper natural gas prices will increase your electricity bill.
TL;DR
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Lower natural gas prices will drive an increase in Global Adjustment (GA) costs.
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Companies that curtail effectively enjoy savings of $300,000 per megawatt each year.
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Doing nothing means your GA bill actually increases, as your relative share of total GA costs increases as other Class A businesses curtail.
‘Be careful what you wish for’ is sage advice for anyone, but especially large energy consumers in Ontario. Companies are anxious for natural gas prices to fall in the hope that their electricity bills will also shrink.
Unfortunately, for Class A customers these wishes will remain unfulfilled. These businesses won’t enjoy a reprieve from lower natural gas prices because of the relationship between Ontario’s energy market and contracted generation supply. Specifically, falling gas prices will lower Ontario market prices however will drive an increase in Global Adjustment (GA) costs.
The larger energy consumers in Ontario, known as Class A customers, pay a percentage of total GA costs based on their share of provincial energy demand during the five highest peak usage hours in a year.
In short, if a Class A customer uses one percent (for illustrative purposes only, it would never be this high) of Ontario’s demand on the five peaks then they would pay one percent of total GA costs the following year.
And with Global Adjustment likely to increase (more on why below), companies that don’t act will face sizable (and growing) bills. Participating in peak response programs and investing in energy-efficiency solutions can generate robust savings.
Yet rising inflation is already cutting into bottom lines, and fears of a recession are undermining business confidence.
All this leads companies to avoid starting new projects, focusing instead on protecting their capital, especially as higher interest rates make financing energy-efficiency projects more difficult.
Why do natural gas prices impact Global Adjustment?
To understand how natural gas prices impact electricity bills in Ontario, we need to look at two elements: the Hourly Ontario Energy Price (HOEP) and Global Adjustment (GA). HOEP consists of the 12 five-minute market-clearing prices (i.e. the prices paid to generators to supply the grid) that are set in the province’s electricity market every hour.
GA makes up a large part of electricity bills in Ontario, paying for grid maintenance, capacity expansion, green energy programs, and contract guarantees.
From 2019–2021, HOEP prices averaged around $20 per MWh, but reached $30–40 per MWh when natural gas generators were called upon. The more often natural gas generation is called upon, the more often the HOEP increases.
This is because natural gas generation has a higher marginal operating cost than many other generation types. Generators generally offer their resources into the market at their marginal cost. Usuallythese lower marginal cost resources are sufficient to meet Ontario demand.
However, when market demand is high (e.g. due to cold or hot weather) or there is reduced supply from some generators (e.g. nuclear unit refurbishments), it’s natural gas generators that take up the slack and set the market clearing price in Ontario.
Ontario sets HOEP based on the price of the last MW required to meet demand in the order of lowest to highest cost. Therefore, when natural gas generation is required it often sets a high HOEP.
At the same time, many generators in the province have contracts that provide them some form of guaranteed revenues. Since their revenues largely come from hourly energy market payments and GA payments, the lower HOEP the more of that guaranteed revenue needs to be made up via GA.
What does this mean for my electricity bill?
Large energy consumers in Ontario (Class A) are particularly impacted by GA increases. Companies with at least 500 kilowatts (kW) of hourly demand qualify for Class A. Since Class A customers pay a percentage of total GA costs, their bills will see increases as natural gas prices decline.
Natural gas prices averaged $6.50 per million British thermal units (MMBTU) in 2022. As such, total GA costs were lower than in previous years, at around $590 million per month. As we’ve said, GA costs are charged to large energy consumers based on their consumption during the five coincident peaks (5CP), or the five hours of highest demand in the province each year.
For example, let’s consider a company that uses 1 MWh over those five hours, for a total of 5MWh. During that period, total demand in Ontario was 110,578.32 MWh. Dividing the two numbers produces this company’s power demand factor (PDF), in this case 0.00004522. This is the percentage of total 5CP demand that this company is responsible for.
This number may look miniscule, but when multiplied by monthly GA costs ($590 million), you get a GA bill for $26,679.8. And that’s just for one month. This customer’s annual GA costs would amount to $320,158!
As high as these GA costs are, they’ll be even higher as natural gas prices fall. After all, 2022’s natural gas prices were triple what they were in 2020 (average $2.03 per MMBTU). That year, GA was costing Ontario $890 million each month.
Assuming the same 5CP demand and share of total demand, the aforementioned company faced monthly electricity costs of $44,315.6 just from GA (or $531,787 for the year) in 2020!
As such, minimizing energy usage during peak hours lets companies capture massive savings. The value of avoiding coincident peak demand is forecast to be $300,000 annually per avoided MW, assuming all 5 critical peaks are avoided.
When it comes to Global Adjustment, the cost of waiting is extremely high. Given how GA is calculated, doing nothing actually costs companies more.
If everyone else is minimizing their electricity use during coincident peaks but you aren’t, your share of total 5CP demand goes up. That leads to a higher PDF and a higher GA bill. In that case, PDF takes on a new connotation—pretty depressing finances.
It is also useful to remember that even for smaller businesses, or Class B customers, purchasing energy-efficiency assets like LED lighting or solar helps businesses further reduce their demand during peak hours and maximize their savings.
How EnPowered helps companies minimize GA costs
Responding to peaks helps companies reap big rewards, but navigating electricity markets to know when to respond is immensely complex. Tracking Ontario’s electricity demand is a full-time job (just ask some of our employees), and getting it wrong (increasing consumption during a peak) can lead to even higher costs.
EnPowered Programs helps companies minimize how often they curtail while maximizing their savings by avoiding peak hours. By leveraging our 5CP Programs notification services, whether through texts, emails, or an API, Programs empowers companies to take the sting out of GA costs.
Ready to learn more? Reach out today to see how EnPowered can help you fight rising GA costs.
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