June 4, 2012

Current and Future Components of Global Adjustment

Centre for Urban Energy Ryerson University – Discussion Panel Series 2012Amir Shalaby

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Outline

• Generation and conservation contracts drive global adjustment

• What is included in Global Adjustment Mechanism (GAM)?

• How is GAM collected from customers

• Outlook for the cost of generation and conservation and GAM

• Some ideas for consideration

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Conservation and generation contracts drive Global Adjustment

i. Electricity Generation (i.e. electricity production)ii. Electricity Conservationiii. Transmission Delivery Systemiv. Distribution Delivery Systemv. Wholesale Market Servicesvi. Debt Retirement Charges

Total Cost of Electricity Services

Debt Retirement

Charge

Transmission Delivery

Costs

Wholesale Market

Services

Distribution Delivery

Costs

Electricity Generation

CostsElectricity

Conservation Costs

Generation, $9.4 , 60%

Conservation , $0.4 , 3%

Transmission, $1.3 , 9%

Distribution, $3.1 , 20%

Wholesale Market Services,

$0.7 , 4%

Debt Retirement,

$0.7 , 4% 2010 Actuals

GAM + market revenues pay the contracted or regulated amounts

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OPA Generation Contracts (i.e., Bruce, FIT, RES, CES)

OEFC Generation Contracts (i.e., NUGs and OPG Coal Contingency Contract)

OPG Regulated Rates(i.e., OPG Nuclear and base load Hydro)

Market Generation(i.e., not contracted and non-regulated)

Conservation Costs- OPA

Conservation- OEB approved

LDC conservation

Market Revenues @HOEP

GAM

Cost Recovery Mechanisms:

• Market revenues are earned in the IESO-administered markets (e.g. spot market/Hourly Ontario Energy Price)

• The Global Adjustment Mechanism (“GAM”) is used to recover costs not recovered through Market Revenues

GAM tops up market revenues for contracted or regulated generation and conservation

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OPA Generation Contracts (i.e., Bruce, FIT, RES, CES)

OEFC Generation Contracts (i.e., NUGs and OPG Coal Contingency Contract)

OPG Regulated Rates(i.e., OPG Nuclear and base load Hydro)

Market Generation(i.e., not contracted and non-regulated)

Conservation Costs- OPA

Conservation - OEB approved

LDC conservation

Market Revenues @HOEP GAM

• The Global Adjustment Mechanism (“GAM”) is the settlement difference (+ or -) of the OPA and OEFC contracts and OPG regulated rates + conservation costs.

• Market generation is completely paid for by market revenues

Market revenues will cover cost of market generation; therefore this isn’t part of GAM

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About 84% of total supply is supported by GAM: here is the List

• OPA Contracts (generation is base load, intermediate and peaking supply)– Bruce Power A and B - RES contracts

– HESA (Hydro Energy Supply Agreement) - HCI (Hydro Contract Incentive)

– CES and CHP contracts • (deemed dispatch and natural gas related)

– Standard Offer - Lennox• RESOP• CESOP• FIT/Micro-FIT

• OEFC contracts – NUG contracts– OPG Coal Contingency Support Payments

• OPG Regulated Rates (generation is base load)– Nuclear (Prescribed Assets)

• Pickering and Darlington– OPG Base load Hydro (Prescribed Assets)

• De Cew I, De Cew II, Sir Adam Beck I, Sir Adam Beck II, Sir Adam Beck pumped generating station and R.H. Saunders

Share of Market Revenues is declining over time. Share of Global Adjustment is increasing

• As the Market Price (i.e., HOEP) declines, the share of costs recovered through GAM increases

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Source: IESO

$78.93

$47.80$50.51 $51.67

$31.61

$37.85

$31.47

$-

$10

$20

$30

$40

$50

$60

$70

$80

$90

-$2

$0

$2

$4

$6

$8

$10

$12

2005 2006 2007 2008 2009 2010 2011

$/M

Wh

Billi

ons

GAM for Generation GAM for Conservation Market Revenues Hourly Ontario Electricity Price (HOEP) $/MWh

Components of Monthly GAM: OEFC, OPG and OPA

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Source: IESO

353

302

451

371

273 282

99

157

314

444

389412

469

394428 440

498

423392

426391

457 451

541512

550

667

-100

0

100

200

300

400

500

600

700

800

$ M

illio

ns

GA-OEFC-NUG/Coal GA-OPG GA-OPA

Components of Monthly GAM by Energy Source

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Source: Market Surveillance Report

353

302

451

371

273 282

99

157

314

444

389412

469

394428 440

498

423392

426392

457

-100

0

100

200

300

400

500

600

700

800

Mill

ions

Nuclear (Bruce and OPG) Natural Gas and Coal phase out Wind/Solar Conservation and Hydro

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

GAM Costs in 2011 ($ M) Energy Production in 2011 (TWh)

$ Bi

llion

s

Nuclear Natural Gas Wind Solar Bio and Hydro Conservation

0

10

20

30

40

50

60

70TWh

GAM Unit Cost

Bio and Hydro $62/MWhSolar $466/MWhWind $74/MWh

Natural Gas $54/MWh

Nuclear $26/MWh

GAM and production by fuel type for facilities contracted by OPA (2011)

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Nuclear

Natural Gas

WindSolar

Bio & Hydro

Conservation

Source: OPA

How GAM is collected from customers

• Prior to January 1, 2011 – GAM was a uniform volumetric rate (total monthly cost divided by domestic demand)– Applicable to all customers (no difference in customer Class)

• After January 1, 2011 – GAM cost divided between Class A and Class B customers– Class A (demand greater than 5 MW) pay GAM based on their use during five highest peak

demand hours in “base period”– Class B (=< 5MW) pay the remaining GAM cost on a volumetric rate basis

Schedule of when the GAM High 5 is determined for Class A customers (i.e., Base Period) and Adjustment Period, is when the determined shares are applied to GAM costs.

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1

Base Period Adjustment Period

May 1, 2010 to October 31, 2010 January 1, 2011 to June 30, 2011May 1, 2010 to April 30, 2011 July 1, 2011 to June 30, 2012May 1, 2011 to April 30, 2012 July 1, 2012 to June 30, 2013May 1, (Year X) to April 30, (Year X+1) July 1, (Year X+1) to June 30, (Year X+2)

Appendix: Cost Recovery

353302

451

371

273 282

99

157

314

444

389412

469

394428 440

498

423392

426391

457 451

541512

550

667

0

100

200

300

400

500

600

700

800

$ M

illio

ns

Class A Total (M$) Class B Total (M$) All Customers GA Costs (M$)

GAM Monthly Cost Share by Customer Class (A or B)

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• Pre – 2011 all customers shared the GAM costs on a volumetric basis • Post – 2011, Class A cost share of GAM has been about 11% and 10% with about 16% of energy usage.• Class B share of GAM is the remainder not recovered from Class A, which is about 91% to 90% of costs from 84% of

the energy • The cost share will be re-established on July 1, 2012, associated with the May 1, 2011 to April 30, 2012 base period

Source: IESO

Class A Share 11% Class A Share 10%

0

10

20

30

40

50

60

70Ja

n-10

Feb-1

0

Mar-

10

Apr-1

0

May

-10

Jun-1

0

Jul-1

0

Aug-1

0

Sep-1

0

Oct-

10

Nov-1

0

Dec-1

0

Jan-1

1

Feb-1

1

Mar-

11

Apr-1

1

May

-11

Jun-1

1

Jul-1

1

Aug-1

1

Sep-1

1

Oct-

11

Nov-1

1

Dec-1

1

Jan-1

2

Feb-1

2

Mar-

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$/M

Wh

Class A Avg. GAM ($/MWh) Class B GAM ($/MWh) All Customers($/MWh)

Same GAM Rate for all Customers

Class B GAM Rate

Class A GAM Rate

Average Unit Cost of GAM for Class A is less than Class B customer

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Post January 1, 2011

• Post Jan 1, 2011, Class A on average pay a lower GAM rate then Class B• Class A pay GAM based on individual’s usage of highest 5 hours; therefore, Class A rate is an

average unit rate not applicable to any one customer.

Source: IESO and Market Surveillance Report

GAM and Market Revenue Share – depends on HOEP• HOEP will result in GAM.

Conversely, HOEP will result in GAM

• HOEP projected trajectory to 2015 is likely to be downward from 2011.

• HOEP is impacted by:– demand levels– fuel costs (i.e., natural gas)– changing supply mix– regional trade (i.e., exports)

• 2015 Outlook is produced for two HOEP scenarios: 1) $15/MWh, and2) $25/MWh

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Outlook for generation and conservation costs by 2015

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11.29.6

2.54.1

13.7 13.7

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

HOEP @ $15/MWh HOEP @ $25/MWh

$201

0 Bi

llion

s

GAM ($B) Market Revenue ($B)

Source: OPA

Outlook of GAM Components by Fuel Type

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Source: OPA

2.54.1

13.7 13.7

$0

$2

$4

$6

$8

$10

$12

$14

$16

HOEP @ $15/MWh HOEP @ $25/MWh

$201

0 Bi

llion

NUCLEAR NATURAL GAS HYDRO WIND BIO SOLAR Conservation and Funds Market Revenue

GAM Costs 2015 ($2010 B) Energy Production in 2015 (TWh)NUCLEAR NATURAL GAS HYDRO WIND SOLAR BIO Conservation and Funds

0 0

20

16

12

8

4

$201

0 B

illion

s

40

80

120

160

200

TWh

Hydro $33/MWh

Natural Gas $164/MWh

Nuclear $46/MWh

Bio $101/MWh

Wind $143/MWhSolar $459/MWh

GAM Unit Cost HOEP @ $15/MWh

2015 Outlook of GAM Component and Production Levels by Fuel Type @ $15/MWh

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Solar

Wind

Bio

Hydro

Nuclear

Natural Gas

Conservation

Source: OPA

GAM Costs 2015 ($2010 B) Energy Production in 2015 (TWh)

NUCLEAR NATURAL GAS HYDRO WIND SOLAR BIO Conservation and Funds

0 0

20

16

12

8

4

$201

0 B

illion

s

40

80

120

160

200

TWh

Hydro $24/MWh

Natural Gas $155/MWh

Nuclear $36/MWh

Bio $93/MWh

Wind $133/MWh

Solar $450/MWh

GAM Unit Cost HOEP @ $25/MWh

2015 Outlook of GAM Component and Production Levels by Fuel Type @ $25/MWh

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SolarWind

Bio

Hydro

Nuclear

Natural Gas

Conservation

Source: OPA

2015 Outlook of Average Unit Cost of GAM for Customer Class (A or B)

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• Outlook for Class A and Class B GAM costs, are based on the historical cost shares of 10% and 90% and volume shares of 17% and 83%, respectively

• Unit GAM rate for Class B is about two times greater then the Class A GAM rate

Source: OPA

$45.18 $38.72

$83.29

$71.37

$-

$10

$20

$30

$40

$50

$60

$70

$80

$90

HOEP @ $15/MWh HOEP @ $25/MWh

$201

0/M

Wh

Class A Class B

What is working and what can be improved about GAM?

What is working? What can be improved?• Enables investments to proceed,

which can’t be fully funded by market revenues

• Better forecast scenarios

• Full cost recovery of electricity and conservation cost

• Retailers treatment of GAM

• Communication

• Relevance of real-time price signal

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Some ideas

• Recognize GAM allocation as rate design exercise: apply rate design principles

• Communicate that price of generation is real time market plus GAM

• Inform/protect retail customers

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Q & A

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