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Global Adjustment

Global Adjustment

I apologize if this analysis seems overly complex. I am trying to explain a complex system in a common sense straightforward manner, however, I do have to do into some detail to fully explain it properly.
As I have pointed out on the main text on the home page of this website the total price of hydro in Ontario is determined as per the analysis below.

 Total Price of Hydro in Ontario

OHEP + GA (Class “B”) + Distribution+ Connection/Transmission Charges Demand Charges +HST
OHEP + GA (Class “A” )+ Distribution+ Connection/Transmission Charges Demand Charges +HST

All electricity customers in Ontario pay for Global Adjustment (GA) costs in a separate line item on their hydro bill. The monthly GA rate is set based on GA costs and the real demand and pricing for hydro. Thus, GA costs vary from month to month depending upon underlying trends in the real market, but the overall yearly rate will balance total GA costs between the estimated and actual costs. Because of this and other factors the IESO has admitted that it cannot forecast future monthly GA costs, only total costs with total demand. So there you have it.
The Global Adjustment (GA) is becoming a larger part of the total commodity costs and the IESO again cannot accurately forecast it. Thus, the chart here which is from the IESO web site clearly indicates this trend from 2008 and is there is no reason why this trend should not continue. (As the old Chinese philosopher Confucius said. “A picture worth a thousand words. Well this graph tells you all you need to know).
I believe, in fact that the GA will become a bigger and bigger portion of the total commodity cost given the soft demand for hydro and the cost of replacing the aging infrastructure which cannot be delayed any more. Moreover, I further believe that the spread between peak and non peak pricing will increase.
The enclosed pdf which is located here clearly point out the trends and components of the Global Adjustment in this one in graphic form.

Global Adjustment

What is the global adjustment? It is the difference in the actual (marginal) market price of hydro being produced/sold (Hourly Ontario Energy Price or HOEP) and the contracted rate for power paid to
1) OPFG-nuclear, water dam +
2) OPA-gas fired generators, wind, solar, biomass, demand response and conservations programs +

the Ontario Electricity Financial Corporation (OEFC) has long term contracts with existing facilities. For example , many gas plants have twenty (20) year contracts signed in the mid 2000’s.
Regulated rates for Ontario Power Generation (OPG) and hydroelectric generating stations that are paid by all end consumers of hydro. OPG for example is being paid 6.9 cents per Kwh (approx. 3,500 megawatts for Darlington, 3,100 for Pickering). Bruce Power is being paid 6.638 cents per Kwh with a total capacity of approx. 6,800 megawatts.

The contracts vary in length with the fuel type. Natural gas contractors generally have 20 year contracts, while biomass and energy from natural waste 10-15 years. Under the Ontario Fair Hydro Plan the Province has chosen to amortize these over a long term to lower GA. I believe this is questionable and will of course only lead to higher interest costs etc. This re-financed or extended amortization will cost the ratepayer/taxpayer at least 10 billion more in costs.

Now, due to surplus electricity production (and capacity) the average 2016 HOEP (or Hourly Ontario Electricity Price) price is/was 1.695 cents per kwh. Thus, the GA paid due to OPG regulated rate is (6.9-1.695) or 5.205 cents per kwh hour produced and for Bruce it would be (6.638-1.695) or 4.943 cents per kwh. Moreover, OPG has applied for a 180% increase through 2026 and this is based on the assumption that the projected 12.8 Billion re-build on Darlington is done on time and budget, which is not a good assumption. (If you recall the Initial projected cost of Darlington was 3.9 billion with the final finished cost 14.4 billion. Consider the Niagara Tunnel project (Big Becky). It was delivered three (3) years late and 500M + over budget (985 M to 1.6 B +). To be fair, it was a difficult and complex task. It was a 12 kilometer tunnel build under downtown NF to take water from the top of the falls to the generating station below it. Thus, you are going to run into unforeseen events etc.

In essence, the GA is simply the total costs of providing hydro spread across all of the users. The cost overruns from these projects are simply classified as GA costs instead of in a higher actual kwh cost of your bill. If Darlington and the other projects actually came in at or below projected costs we would have much lower rates. However, since these cost overruns have to be paid the end user is going to pay for it as these costs have to be recovered/paid.
You combine this along with the fact that the demand for hydro in Ontario has gone down 12% in the last decade with higher costs to maintain an ailing infrastructure and you get the picture. Given that most of these projects have been financed with bond issues etc. part of the GA costs include the amortization of Bond Interest etc. As previously mentioned under the recent Ontario Fair Hydro Plan in order to cut residential rates by 25% the Province extended the amortization of the GA to show lower GA expenses and put the difference (816 Million) into a new variance account which of course will eventually have to be repaid with interest. The Province is essentially extending the amortization period the whole GA pricing pool which under GAAP no public/private company could do for either reporting or tax purposes.

Many natural gas peaker plants lay idle but are still being paid and the Province just announced that they were buying hydro from Quebec when we already have excess capacity and lose money on exports of Hydro to the USA.
Class “B” users essentially pay for the savings of Class “A” group who are in the ICI Conservation program. The GA has gone up 27% a year since 2011. (Peak hours based in Actual Quantity of Energy Withdrawn (AQEW). Other parts of the ICI include production curtailment, conservation and demand management costs.
Also, due to the rapid increase in the price of residential hydro the Province announced (under the Ontario Fair Hydro Act) a 25% reduction in residential hydro rates (in June 2017) and shifted these GA costs to Class “A and Class “B” users. Under NAFTA since the Province legally can’t subside any user(s) and since they cut residential rates by 25% , the Industrial sector has to pay the difference and in particular Class “B” users. Now due to the 5CP program Class “A” customers try to shift their GA costs (in the GA Class “A” pricing pool) to other end users by trying to anticipate what these hours will be. That’s why many large users will stop production if they think they are hitting a peak hour etc. Since it is a capacity auction users try to predict when these peak hours are and try to avoid these times.

In the end it doesn’t matter what you call it (i.e. Global Adjustment or whatever), all users are essentially paying for the total cost of providing hydro. It is simply due to Government policy and mismanagement as to why hydro prices in Ontario are the highest in continental north America.

Explanation of the Two (2) GA Pools

 In Ontario, within the Industrial portion there are two (2) Classes , Class “A” and Class “B”. Class “A” consists of the approx 300 largest end users and the balance to Class “B”. At one time each paid their proportionate share of total system costs. The difference was that in the Class “A” pricing pool each large user paid their proportionate share of total GA Class “A” pooled costs based on their peak demand over the five (5) highest hourly peaks over the year under the 5CP Program. (Five Coincident Peak Program). It was/is in effect a capacity allocation model. If you are a Class “A” user you will see a peak demand load factor on your bill and your monthly GA cost is based on that peak load factor X the total GA Class “A” pooled costs for that month. (Based on the previous year’ peak load factor). Class “B” users simply pay the monthly GA costs based on total kwh used during the month X of course total GA pooled costs for Class “B”. The threshold for Class “A” was 5 MW (monthly peak load) and has been revised down to 3MW then 1MW and now 500K with certain opt in provisions for certain Industry Classifications.

The total GA Class “A” pool costs are expected to be 1.5 Billion dollars (approx 20Twh) and 10 Billion and (110 Twh) for Class “B” users with an additional 816 Million dollars in the Ontario Fair Hydro Plan variance account. (Residential hydro prices were lowered in June 2016).