Ontario’s wholesale electricity market connects generators offering to sell electricity to customers wanting to purchase it. It is operated by the Independent Electricity System Operator (IESO) in Ontario. Here is a whirlwind summary of the physical market – not just for dummies…
Why should you care?
With so much going on in our lives it is hard to find the time to drill into mundane topics such as this, however the wholesale market impacts what small business, farm and residential electricity costs are. The market is part of the reason why your rates are so high.
If you care about how much electricity costs you should tune in. The wholesale market is horribly complex so I will take some liberties and give readers an overview of the physical market in 5 minutes or less. If after 5 minutes you still don’t care, well… it was only 5 minutes of your life.
There is much more to the subject than just physical markets, but this is a good starting point.
The history
The change to electricity markets in Ontario was a part of the Harris government’s break-up of Ontario Hydro in 1998 in anticipation of privatization. This was a time when other jurisdictions including Alberta, the United Kingdom and California were implementing markets of their own.
Market design took several years and included grid infrastructure upgrades to better monitor power flows. It was heavily influenced by the California model. Unfortunately, that model was seriously flawed leading to an 800% increase in California’s wholesale prices and power shortages in 2000. Ontario delayed their implementation until 2002 amid assurances that we would not suffer the same crisis as California. You can read about the California electricity crisis on Wikipedia here.
Ontario has had a wholesale market for electricity administered by the IESO since 2002. Briefly there was a retail market as well, however it was suspended shortly after opening as prices escalated at an alarming rate. The PC government initiated a rate freeze and the retail market has never been revived. Instead it morphed into a regulated jurisdiction called the Regulated Price Plan (RPP) administered by the Ontario Energy Board.
Participation in the wholesale market is through registration with the IESO. Participants who qualify are subject to Market Rules. The rules are set out in an 11 chapter 1,100 page document and supported by a myriad of manuals that make the rules look like light reading.
Did I mention the market is complex?
It is currently in the midst of a ‘Renewal’ process as it has outlived its usefulness in its current form.
In summary, there are two primary ways to buy electricity in Ontario.
- Wholesale Market, IESO
- Regulated Price Plan (RPP), Ontario Energy Board
We are going to focus on Wholesale market, however the two are dependent on each other.
Market oversight
The behaviour of the wholesale electricity market is monitored by the IESO’s Market Assessment and Compliance Division (MACD) and the OEB via the Market Surveillance Panel. Participants in the market frequently behave badly and are subject to prosecution, fines and public flogging.
What the Market is supposed to do
In general, today’s electrical generation cannot be stored and must be managed through instantaneous adjustment to match the demand. When supply and demand do not match the grid becomes unstable and customers experience blackouts, voltage swings or partial interruptions called ‘Brown-outs’.
The System Operators must manage the supply and demand to ensure availability of supply and reliability of the grid. We have an interconnected grid across North America which makes coordination across provincial, national and international boundaries essential. In Ontario, the IESO forecasts load days and weeks ahead for use in outage management and generating capacity planning.
The wholesale market is supposed to enable the independent system operator (the IESO in Ontario) to schedule generation capacity a day ahead to meet forecasted demand. Generation is offered into the market at various prices and is matched to electricity buyer’s bids. The IESO then schedules the generation capacity based on pricing for the following day. Fluctuation of demand and grid constraints are managed through something called the ‘Spot Market’ and a constraint management process.
The Spot Market is a real-time trading mechanism to deal with unplanned differences between load and electricity supply.
The constraint management process pays compensation to generators that are curtailed due to grid constraints beyond their control.
Electricity pricing is updated by the IESO every 5 minutes and the average hourly value is called the Market Clearing Price (MCP). The average of 12 market clearing prices is set each hour and called the Hourly Ontario Energy Price (HOEP). This is the hourly price that is charged to Local Distribution Companies and other non-dispatchable loads. HOEP is also paid to self-scheduling generators. All other participants settle based on their market transactions which are not made publicly available.
The pricing of electricity is supposed to send signals to generators to increase or decrease output to maximize their profit. It is also intended to encourage the construction of additional capacity by market supply and demand forces.
Unfortunately the HOEP does not reflect the real cost of generation. In order to recover the true cost of generation the IESO imposes a ‘Global Adjustment” on Ontario ratepayers to make up for the shortfall. Large industrial customers pay a lower adjustment rate than medium, small or regulated customers. Exported power does not recover any adjustment.
After all that… what happens to the small customers that aren’t part of the market?
Generation in Ontario is a mixed bag of regulated and contracted pricing. After the market opened in 2002 demand rose sharply and there was no investor-owned generation being built. That part of the market design failed to deliver. New generation was attracted through government contracts that offered above market compensation with long-term guarantees. Most generation capacity in Ontario today is under some form of contract.
It doesn’t matter what the HOEP is or the rate of individual market transactions when it comes to financial settlement with generators. The generators are ultimately compensated based on either regulatory formulas or government contracts. Now we have a problem.
The IESO has to pay the generators in accordance with their regulatory or contractual commitments. The energy buyers pay the HOEP or transaction rates which aren’t sufficient to cover the cost of generation. Ratepayers cover the difference as a part of the ‘Global Adjustment’.
In the last 10 years the average Ontario Energy Price (based on the wholesale market) has declined significantly from 5.17 cents per kWh to 1.58 cents in 2017. The cost of generation over the same time period has risen considerably. How can that be?
Even the cheapest source of electricity in Ontario – OPG hydroelectric – is over 4 cents per kWh (2017) and rising. The most expensive energy is from the first wave of solar energy at 80 cents per kWh. That is a staggering difference from 1.58 cents.
Approximately 96% of the Global Adjustment goes to generators
All Ontario ratepayers pick up the tab for the difference through the Global Adjustment. It has gone from 0.61 cents per kWh in 2008 to 9.97 cents per kWh in 2017.
Within Ontario there are two different rates for the Global Adjustment. Large customers who meet specific criteria for the Industrial Conservation Initiative (ICI) pay approximately 30% less per kWh for their Global Adjustment than the balance of ratepayers.
According to the IESO:
“The Industrial Conservation Initiative (ICI) is a form of demand response that allows participating customers to manage their global adjustment (GA) costs by reducing demand during peak periods.”
Exported energy does not collect any adjustment and is sold at less than cost. Ontario is a net exporter of energy and there is a growing debate over what the true economic cost is for that distinction.
The price paid for electricity in the Regulated Price Plan is the Hourly Ontario Electricity Price (HOEP) plus the Global Adjustment
The TOU pricing has the Global Adjustment built into the rates
In 2017 the average energy price paid by the wholesale market participants was 1.58 cents per kWh. The average Global Adjustment was 9.97 cents. That makes the RPP price for regulated customers 11.55 cents (before the Fair Hydro Plan subsidy). Regulated customers pay significantly more for the Global Adjustment than some large wholesale market participants.
So how is that working for you?
It all comes down to how you distribute the actual costs among customers. At this time, the regulated ratepayers are heavily subsidizing the wholesale customers.
Gaming the Market
In Ontario we have excess generation capacity. It would be possible that some generators never run. An investor-owned generator will not maximize its profit without selling energy.
The IESO schedules generation based on the offer price from the generators. The lowest offers get scheduled until the demand is met. Generators that do not make the cut off will be idle. The solution for generators is to ‘game’ the market offer process by submitting low – or even negative – offers. At the end of the day, the generator will be paid in accordance with their regulatory or contractual agreement. Low bidding pulls down the Market Clearing Price and the HOEP creating an artificially low wholesale electricity price. Gaming the market allows more expensive generation to be dispatched and forces the Global Adjustment up along with the total energy price.
So what is the point of having a ‘Market’ where the posted price isn’t the actual price and the lowest cost generation isn’t dispatched?
It’s dysfunctional and needs to be fixed.
The takeaway
With all the complexities of the wholesale market, it seems to work for some aspects of the electrical system but it hasn’t managed to attract new generation capacity or serve the best interest of regulated ratepayers in Ontario for the last 16 years.
All Ontario ratepayers are hurt by generators that game the market and smaller customers pay the Global Adjustment at a higher rate than large customers in the Industrial Conservation Initiative.
Maybe it’s time to pull the plug
Derek
