Already beset by COVID-19, the electricity sector has also had to contend with political influence, as the latter’s well-intentioned, but poorly executed relief measures have spawned new problems illustrating the intended purpose of Demand Management.
TL;DR
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Ontario’s decision to suspend the ICI (and its attendant Global Adjustment costs) is designed to ease the financial pressure on companies during the COVID-19 pandemic, but in doing so the province also removed its main demand response buffer.
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The summer heatwave led to record energy use negating the effects of the GA hiatus and causing the IESO to issue emergency demand response calls.
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Extraordinary circumstances have exacerbated structural issues in Ontario’s grid, namely its inflexible generation mix, and its baseline nuclear capacity in particular.
“If it ain’t broke, don’t fix it” – that’s sage advice for the ages, so it is unfortunate that Ontario’s energy market hasn’t followed it.
This current state of affairs also brings another timeless adage to mind – “the road to hell is paved with good intentions” – and it certainly has been a hellish week for the province’s energy sector.
Already beset by COVID-19, the electricity sector has also had to contend with some friendly fire from the Ontario government, as the latter’s well-intentioned, but poorly executed COVID-19 relief measures have spawned new problems.
Perfect storm for grid instability
With COVID-19 kneecapping Ontario’s economy, the provincial government has sought to provide relief to companies by reducing electricity-related costs in order to encourage firms to return to production. To this end, the government has suspended its Industrial Conservation Initiative (ICI) – a program that helps regulate energy demand by tailoring usage, and which generates revenue in the form of Global Adjustment (GA) payments.
Normally, ICI participants contribute GA payments either based on usage (Class B) or based on their percentage share of the province’s total energy demand (Class A). For both groups GA charges represent a significant financial burden (roughly 70% of electricity costs), so the government is highlighting these payments as part of its COVID-19 business relief effort.
With COVID-19 reducing economic activity, it seemed inappropriate to expect cash strapped companies in these extraordinary times to pay for a program set up to operate in normal ones.
So far so good. With everyone working from home and businesses operating well below capacity, the Independent Electricity System Operator (IESO) was expecting lower overall demand and for the typical daily Peak profile to also flatten out, which would mean a reduce need for Peak generation.
Unfortunately, this was not the case. With no GA costs to worry about, businesses were indeed able to get back to production, however industrial energy usage was outside the normal bounds – normal being the load profile has been established since the ICI was introduced in 2007. As a result, significant Peak generation was indeed required. On top of that, the IESO could no longer rely on its main mechanism to encourage demand reduction, if needed.
Under normal operating circumstances, the IESO can rely on roughly 2,500 MW worth of energy demand via the ICI, allowing it to reduce stress on the grid during Peak hours. This is a significant amount (around 6% of the grid’s total nameplate generation capacity) compared to other Demand Management programs. Demand Response, for example, only has 800 MW worth of reduction available.
This kind of weather puts the grid under undue stress even in the best of times, but with its main Demand Side Management tool turned off, Ontario’s grid has become increasingly unstable.
The problem for the IESO has been faced with is that the COVID relief introduced – the GA hiatus – was negated by the heatwave in Ontario during which we saw the some of the highest usage levels since 2007. Only this time, the IESO could not rely on the ICI to help deal with this spike.
The majority of ICI participants were no longer controlling their usage, and moreover, with everybody at home, domestic energy use spiked as HVAC usage surged in response to the extreme heat. This kind of weather puts the grid under undue stress even in the best of times, but with its main Demand Side Management (DSM) tool turned off, Ontario’s grid has become increasingly unstable.
Grid demand has been see-sawing to an alarming degree, so much so that the IESO was forced to call emergency Demand Response (DR) events (July 9th & 10th), only to turn around and issue Minimum Generation Alerts and slash generation to keep the grid somewhat stable.
In some cases, participants were sent standby warnings with less than 24 hours notice: had they been called they would have constituted emergency events.
Even with these drastic measures there have still been outages and brownouts in places like Caledon and Port Perry. The IESO’s COO has explained that demand in excess of 24,700MW is considered extreme, yet July 9th usage was forecast at 25,300MW (usage hit 24,446MW after a DR response of 670MW): that’s on track to be the highest single day usage since 2007 (when such demand side response programs were launched).
To add insult to injury, many major energy users who participate in the ICI are also part of the IESO’s DR efforts, so ironically these companies have still been forced to curtail (and to a greater extent due to the ICI suspension) which leads to losses from production stoppages and slowdowns, the very problems the ICI suspension was supposed to mitigate.
So despite the government’s efforts to help businesses return to production, the knock-on effect of this decision has been to actually multiply the hurdles facing companies in Ontario.
Structural issues and weaknesses need to be addressed
While Ontario’s current state of affairs may be exceptional, this type of see-sawing is nonetheless indicative of an inflexible generation mix: more will need to be done in the coming years to improve grid flexibility and promote a varied generation mix in Ontario.
For example, Ontario’s nuclear baseline generation is very reliable, but it is not very flexible. On Peak days, the province can’t bring any more nuclear generation online, so more intermittent renewables have to make up the difference, but since sun and wind conditions are variable and inconsistent, you can’t rely solely on these sources to fill the gap.
As demand soars to very high levels, IESO is dispatching more and more costly [natural gas] generators.
Normally this is where the ICI would come into play, but with that on hiatus, the province has had to turn to gas-powered peaker plants. These plants are very expensive (in terms of upfront capital costs in relation to actual utilization) since they only activate 10-20 times a year, and when they are operating, there is a huge spike in emissions.
So not only are they considered the dirtiest generation sources having to be brought online, but the IESO is also having to use imports when available at lower prices to try and ensure adequate capacity.
As a result, the Hourly Ontario Energy Price (HOEP) – the average of the 12 market-clearing prices that are set each hour – has been going crazy. Our Lead Data Scientist, Abul Fahad, explains that emissions aren’t the only things spiking:
“As demand soars to very high levels, the IESO is dispatching more and more ‘costly’ [natural gas] generators. Generators are bidding high for their service now (GA money being short in their portfolios) and the IESO is also dispatching increased levels of ‘reserve’ as the ‘headroom’ between grid capacity and actual usage shortens. The high-price bids and dispatching of high-priced operating reserve generators are reflected as price spikes.”
Nevertheless, while the HOEP has fluctuated on Peak days and many industry players are expecting it to rise, they still remain historically low. Ultimately, it is the instability and uncertainty that is the biggest concern for Ontario businesses.
Changing deadlines and conditions only prevents companies from making long-term decisions. Stability is crucial for industry, which is left in an awkward position when the ministry tweaks the energy market and unleashes a bunch of unintended consequences. The first and last responsibility of Demand Side Management is simply this: keep the grid stable.
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