In Ontario, electricity consumers have a choice of how they pay for their energy. Exercising that choice is a gamble that may wind up costing you dearly.
By default most customers will pay for energy in accordance with the Regulated Price Plan (RPP) which is managed by the Ontario Energy Board (OEB). Alternatively, customers may elect to purchase their energy from a licensed Electricity Retailer by entering into a contractual agreement with one.
What portion of your bill will this impact?
I describe your electricity bill in my article ‘Looking at your bill’, however let’s break it out again here.
The cost of energy on the RPP is the wholesale electricity price (HOEP) added to the Global Adjustment and proportioned out into the 3 time of use rates. On top of this you have to consider the Ontario Fair Hydro Plan subsidy introduced by the former Liberal government that reduces the Global Adjustment – the Global Adjustment Modifier. I am going to simplify this math process to illustrate the bill proportions for a Toronto Hydro customer case from the OEB Bill Calculator.
The average 2018 wholesale electricity price up to August is 2.28 cents/kWh and the Global Adjustment is 9.25 cents/kWh. The Global Adjustment modifier for the government subsidy is 3.29 cents per kWh.
The result shows that an electricity retailer will displace about 10.5% of the average monthly bill of a Toronto Hydro customer.
Which alternative is best for consumers? RPP or Retail Contract?
Spoiler alert!
Since this is a relatively long post, I’ll give you the scoop up-front.
Most customers would wind up paying more for their electricity from a retailer than the RPP however with the alignment of a number of circumstances, the retailer may offer certain advantages. Read on to see if the planets align in your situation.
Buyer Beware
The ‘buyer beware’ label should be attached to the energy retail industry. Practices have been so shady that the provincial government had to pass the Energy Consumer Protection Act (EPCA) in 2010 to ensure consumers were protected from unfair business practices.
Auditor General Findings
In the 2011 Annual Report of the Office of the Auditor General of Ontario they determined that approximately 15% of residential customers had opted to sign up with electricity retailers. Those consumers could be paying 35% to 65% more for electricity than if they had stayed with the RPP.
In the previous 5 years the OEB had received more than 17,000 complaints from the public, mostly about electricity retailers.
Additional Review
In 2013 the Minister of Energy requested that the OEB conduct a review of the EPCA to determine if further action was required to safeguard consumers. The results of the review were published in May of 2015 and contained 14 recommendations to make necessary improvements to the Act.
Of the many findings it was noted that some consumers wished to have ‘choice’ but they were unaware of the cost associated with it. The primary goal of consumers was to save money although in reality they were spending more. Unfortunately many consumers were unaware that they were actually spending more than if they had stayed with their local utility.
A survey of customers determined that about 3 out of 10 contract holders were unaware that they had a contract!
Additional Protection Legislated in 2015
In 2015 the government passed additional legislation to defend against unscrupulous behaviours within the industry. An Act to amend the Energy Consumer Protection Act, 2010 and the Ontario Energy Board Act, 1998 (Bill 112) banned the practice of door to door sales and expanded the Ontario Energy Board’s oversight of the industry.
A reality check
Energy retailers have only one reason to exist. To be profitable. They earn their profit from their customers.
For most consumers, that’s all you need to know.
There has been so much bad behavior among retailers that multiple laws have been put in place to protect consumers from false claims and overpaying for electricity.
For those with a desire to gamble, read on so that you understand your odds of benefiting from retail services.
What Retailers Do
- They make commodity transactions in the wholesale electricity market.
- They purchase energy at wholesale pricing and enter into contractual agreements to sell that energy to consumers at a higher cost to make a profit.
- Retailers eliminate the Time of Use billing approach used by the regulated plans
Simply put retailers buy low and sell high. For some contracts they operate with a markup and others are fixed price per kWh of consumption.
What Retailers Don’t Do
- Retailers don’t need to generate or deliver electricity as a part of the ‘electricity retail’ business (they may or may not have other businesses that do).
- They don’t impact the reliability of your electricity supply or conditions of service.
- They don’t safeguard consumers from rising energy costs. This is an important consideration. No matter what retailers offer, the regulatory changes to the cost of electricity still make their way to consumers by way of the Global Adjustment. At this time the Global Adjustment is 4 to 5 times the portion of your bill covered by an electricity retailer. The Global Adjustment has increased by 16 times since 2008. None of the retail contracts would have protected consumers from those increases.
- They do not save the average consumers any money.
Why Bother?
For consumers to gravitate to retailers with the belief that they are somehow going to save money is much like heading into a casino. While you won’t lose your shirt with an energy retailer, your odds of coming out ahead are like gambling at a casino. As we know, everybody wins at the casino… right?
It’s a roll of the dice. Sometimes you win. Mostly you lose.
What circumstances improve your odds of coming out ahead?
If:
- Your pattern of energy use results in a higher than average consumption during peak hours when regulated pricing is highest.
- The wholesale price of electricity is trending up and/or the Global Adjustment is trending down.
- You correctly forecast the trend of the wholesale electricity price and the Global Adjustment and you enter into a contractual agreement that maximizes savings for that trend.
- You review and fully understand the terms of the contract being offered by the Retailer. Don’t sign contracts with exclusion clauses triggered by trends that maximize your savings when electricity costs are rising or your consumption is high during peak periods.
Small businesses may see some opportunities however the contractual terms of any retailer can easily negate any potential for savings.
Check out the playing field
A list of licensed retailers is posted on the OEB website.
A handy summary of current offerings can be found here. Availability, terms and conditions vary by region. Do your research.
You can compare bills under the RPP and retail contracts side by side using the OEB Bill Calculator.
If you plug-in the current fixed price electricity rates of 3.59 cents/kWh from one of the retailers to the OEB bill calculator you will notice that you would be paying slightly more with a retail contract than if you stay with the regulated plan.
Retail Terms
You will find that retail contracts are typically offered for 1, 3 or 5 year terms. It is like playing with the ‘futures market’. The contracts are either fixed rate or variable based on the wholesale (HOEP) price of electricity.
Historical Trend
In 2002 when electricity retailers set up shop about 1 million customers (roughly 20%) signed up. Electricity prices soared for a number of reasons and the government began a series of interventions that impacted the customers that signed contracts.
By 2011 approximately 15% of residential customers were on retail contracts and paying much more for electricity than their neighbors that simply stayed on the regulated plan.
After consumer protection legislation in 2011 and 2015 there wasn’t much room for retailers to lure customers into signing contracts. Market share of retail electricity sales had dropped from 16% in 2006 to 6.3% in 2013.
For the last 10 years the wholesale electricity price has been declining due to the gaming that goes on in the market. The actual cost of electricity has been rising over the same period so the Global Adjustment has risen dramatically to make up the difference between wholesale price and actual cost.
In a retail contract, the Global Adjustment is added to your electricity bill along with what the retailer charges.
Over the last 10 years any consumer that opted for a fixed price contract would have paid significantly more for their electricity than consumers on the regulated plan. Since the Global Adjustment has increased by 16 times in the last decade some consumers would have been hit hard by fixed price contracts. According to a report prepared for the OEB in 2014, customers who signed a fixed price 5 year contract in 2009 would have paid 72% more for their electricity than if they had remained on the RPP.
The decline in the wholesale electricity price that facilitated the profits of electricity retailers is an example of how the market is being manipulated by participants. The downward trend has nothing to do with market forces and looks suspiciously like gaming for profit.
Future Trend
Electricity price forecasting is available from the OEB and the Ontario Government 2017 Long-Term Energy Plan should you wish to investigate the subject further.
The future of retail electricity contracts will depend on how many customers want to assume the risk of gambling on future market trends.
The takeaway
If you take the time to look at the 2011 Ontario Auditor General report and the reviews prepared for the OEB you will see some very disturbing facts about the retail electricity business. The vast majority of electricity consumers will see no economic benefit from entering into a contract. In all likelihood it will cost customers more than remaining in the regulated price plan.
The retail electricity business is an example of one of the systemic problems with Ontario’s electricity sector. A case of adding cost without value
Somebody asked for choice.
Nobody realized what it was going to cost.
Everybody thinks it costs too much.
Retail electricity sale is an example of a service that adds cost without an offsetting benefit.
If, after all of this you decide to enter into a retail contract;
I suppose you will get what you deserve.
Derek
