Conservation and Demand Management Code and Targets for Electricity Distributors
| In June, 2011, the ECO released volume 1 of its 2010 Annual Report on the progress of activities in Ontario to reduce or make more efficient use of electricity, natural gas, propane, oil and transportation fuels. Click here for more information on this report, including videos and communications materials. | |||||
Contents |
The Changing Roles and Responsibilities in Conservation and Demand Management
The state of flux in Ontario’s electricity sector over the past 20 years has directly affected electricity conservation policy and the role LDCs play in CDM. The first serious efforts at province-wide CDM initiatives started in the mid-1980s. In an effort to delay the need for new generation, Ontario Hydro embarked on a large-scale CDM program. However, in the early 1990s, a recession hit and electricity demand dropped. As a result, Ontario Hydro’s conservation programs were abandoned as priorities shifted towards constraining costs, especially for new resources.
In the late 1990s, the province was preparing for a competitive electricity market. With the Energy Competition Act, 1998, electric utilities became “wires only” companies. LDCs were restricted to distributing electricity, leaving CDM to the market as a response to market price. It was not until the passage of the Electricity Restructuring Act, 2004 that LDCs were permitted to re-engage in CDM activities. Over the last several years, conservation has resurfaced as a key part of the province’s electricity plan, positioning LDCs to play a central role in CDM.
Over the last several years, conservation has resurfaced as a key part of the province’s electricity plan, positioning LDCs to play a central role in CDM.
2005-2007: The Ontario Energy Board Framework
From 2005 to 2007, 85 LDCs designed and delivered CDM programs referred to as “third tranche” conservation programs. Distributors were granted increases in their 2005 rates if an equivalent amount was spent on CDM by the end of September 2007. Some distributors were granted extensions to continue programs into 2008. Under this framework, distributors prepared and submitted CDM plans and budgets for approval and provided regular reports on the progress of CDM programs to the OEB.
2007-2010: The Ontario Power Authority Framework
In 2007, the framework for CDM programs changed. The June 2006 Supply Mix Directive to the OPA required that conservation be a key component of the province’s electricity plan. A month later, the Minister of Energy directed the OPA to co-ordinate and fund conservation programs for LDCs by establishing a three-year fund of up to $400 million. The directive was silent on the role of LDCs in CDM and their source of funding beyond 2010.
From 2007 to 2010, electricity distributors could either: contract with the OPA to deliver standard CDM programs; apply to the OPA for funding of custom programs; or apply to the OEB for CDM initiatives targeted at consumers within the distributor’s service area. The process for OEB-approved programs remained the same, that is, CDM was funded through distribution rates and a performance incentive called the Shared Savings Mechanism continued to apply. This financial incentive allowed distributors to share 5 per cent of the net savings resulting from CDM programs they initiated. An additional source of funding was created for OPA programs and this operated independently of the OEB framework’s funding. Funding was provided through the Global Adjustment, and the performance incentive was paid either per participant or per kW of savings achieved, depending on the program.
During this period, it was expected that LDCs would act primarily as delivery agents for the OPA’s standard CDM programs. Only a few OEB-approved and OPA-funded LDC custom programs were offered.
2011-2014: Mandated LDC Delivery Framework
The GEGEA once again shifted the CDM framework in significant ways. The GEGEA allowed for LDCs to be given mandatory conservation targets as part of their licence condition. In the March 31, 2010 CDM Directive, the Minister of Energy specified the total province-wide reductions for both electricity consumption and peak demand that LDCs must achieve by 2014. The directive also required the OEB to allocate the province-wide targets among LDCs and to issue a Code with rules to govern how LDC targets are met. Unlike previous directives, the CDM Directive was prescriptive. The Minister laid out a list of specific rules the OEB must consider in developing the Code.
On April 23, 2010, the Minister directed the OPA to provide advice to the OEB on LDC CDM activities and targets, and also to design, deliver and fund OPA-Contracted Province-Wide programs.
Distributors must meet their CDM targets by delivering either: unique CDM programs approved by the OEB (referred to as Board-Approved Programs); province-wide CDM programs designed by the OPA (referred to as OPA-Contracted Province- Wide Programs); or a combination of the two. The CDM framework allows for Board-Approved Programs to be designed by individual LDCs or co-operatively between multiple LDCs. In keeping with the Minister’s directive, all CDM programs must start on January 1, 2011 and end on December 31, 2014.
The 2011 to 2014 framework adopts elements from previous frameworks. Oversight of some CDM activities has been shifted back to the OEB, as was the case in the 2005 to 2007 period. A significant difference from the previous framework is that there is now a single funding approach. In the 2007 to 2010 framework, funding and performance incentives differed according to the approving agency (i.e., the OPA or OEB). Under the mandated LDC delivery framework, all CDM programs are now funded through the Global Adjustment, and the performance incentive is based on the amount of kWh and kilowatt (kW) savings achieved within a distributor’s service territory, regardless of whether those savings result from province-wide programs or custom programs. In this sense, given that it is a licence condition, responsibility for conservation success lies with each individual LDC.
The New Conservation and Demand Management Framework
The OEB released the final CDM Code on September 16, 2010 and issued its Decision and Order for CDM targets on November 12, 2010. LDCs have been ordered, as a condition of their licences, to meet their CDM targets and comply with the CDM Code.
Conservation and Demand Management Targets
For the first time, CDM is a mandatory function for electric utilities. In accordance with the Minister’s directive, the OEB allocated CDM targets for each LDC to achieve a total provincial savings of 1,330 MW of peak demand in 2014 and 6,000 gigawatt-hours (6 TWh) of electricity consumption over the four-year period. Savings from CDM initiatives implemented prior to 2011 or persisting after 2014 will not count toward the utilities’ target. Currently, it is unclear what type of action will be taken by the OEB if an LDC does not meet its CDM targets.
With advice from the OPA, the OEB assigned individual LDC targets based on 2008 and 2009 data. Energy savings targets were allocated according to each distributor’s share of total energy consumption by customer account type. Peak demand savings targets were based on each distributor’s average contribution to the top ten system peak hours.
The intention of the peak demand targets was to reduce province-wide peak demand. Beginning 11 years ago, Ontario’s system peak demand has occurred in the summer. This is mainly due to air conditioning load in the Greater Golden Horseshoe region. As a result, distributors’ peak reduction targets and the OPA’s demand response programs were developed primarily to address summer system peak. Peak demand on many LDCs’ distribution systems, however, occurs in winter. Accordingly these LDCs may wish to design programs that address winter peak demand. LDCs are not prohibited from designing programs that address winter peaks. When assessing demand savings from a specific conservation program, LDCs can choose to apply either winter peak savings or summer peak savings from a given conservation program towards their peak demand savings target.
Conservation and Demand Management Code
The CDM Code sets out the obligations and requirements which distributors must comply with in order to achieve their CDM targets, including: rules related to reporting requirements; Board-Approved Programs; and, performance incentives. Each of these requirements is discussed below.
Reporting Requirements
All electricity distributors were required to submit a CDM strategy by November 1, 2010. Each distributor’s strategy outlined its four-year plan to meet its CDM targets, including annual milestones for meeting its targets, descriptions of all the CDM programs to be offered, confirmation that CDM programs will be offered to all customer types, and details as to how administrative efficiencies and co-ordination with other agencies will be pursued.
Distributors must also file an annual report to the OEB by September 30 of each year, and provide an overall review of the activities undertaken to achieve their CDM targets in the previous calendar year. Annual reports must include program descriptions, participation levels, funds spent, evaluation results based on the OPA’s Evaluation, Measurement and Verification (EM&V) Protocols and progress towards CDM targets.
Board-Approved CDM Programs
The CDM Code sets out the specific requirements that the distributor must include in its application for Board-Approved Programs (BAPs), including program details, expected results and the projected annual budget. The CDM Code also sets out specific requirements regarding cost-benefit analysis and program evaluations.
BAPs must be cost effective as determined using the OPA’s cost-effectiveness tests, and must use the OPA’s Measures and Assumptions Lists or provide justification if varying from these lists. There are three exemptions from the cost-effectiveness requirement: pilot CDM programs; educational CDM programs; and, low-income CDM programs.
Unlike the natural gas conservation framework, which has a maximum conservation budget (see section 6), there are no spending restrictions for electricity CDM programs aside from ensuring programs are cost-effective. LDCs are not restricted to a spending limit for conservation programs or in the number of BAPs permitted. However, when approving CDM programs, the OEB will assess the reasonableness of the budgets requested and take into consideration the number of pilot and educational CDM programs an LDC already has or plans to undertake. If an LDC wishes to redirect funds once BAPs have been approved, the LDC must apply to the OEB to re-allocate funds that exceed 30 per cent of an approved budget for an individual CDM program.
With the CDM Code, the EM&V process is stricter than in the past. For each BAP application, distributors must file a program evaluation report that is based on the OPA’s EM&V Protocols. Results from the BAPs must also be evaluated using the same protocol by an independent third-party evaluator selected from the OPA’s vendor of records list. The LDC must file the thirdparty reviewer’s report with each annual report. The report will also be used, along with the LDC’s report, in verifying results for performance incentives. The OPA will remain responsible for the EM&V of OPA programs, and the results will be shared with the LDCs for inclusion in their annual reports.
The CDM Code also specifies what will not qualify as a BAP. These include programs that duplicate an OPA program, are related to infrastructure (new or existing), or are programs associated with the OPA’s FIT or microFIT Program.
Performance Incentives
The CDM Code provides for a single performance incentive mechanism for both OPA programs and BAPs. In accordance with the Minister’s directive, the Code sets out a mechanism for a tiered performance incentive for distributors meeting 80 per cent of each CDM target, up to 150 per cent of each CDM target. A distributor can begin receiving incentives once it has reached 80 per cent of both its peak demand reduction and electricity savings targets.
The new incentive structure provides a specific dollar amount per kW and kWh of savings achieved, with the dollar value increasing in tiers relative to the distributor’s results against its targets. A total of $72 million over the four-year period will be available for performance incentives, accounting for approximately 5 per cent of the total net income for all distributors.
For programs where several entities participate in the delivery of a program, a distributor can only claim the performance incentive relative to its contribution to the CDM program. For BAPs, an LDC must demonstrate it was central to the CDM program to receive full attribution of those savings. Centrality is established if an LDC’s budgetary contribution is greater than 50 per cent of the total program cost or if the distributor can prove that it initiated the partnership, program or implementation of the program. If a distributor does not meet the test for centrality, it can submit a proposal for attribution and the OEB will decide whether the proposal is acceptable.
OPA-Contracted Province-Wide Programs
(commercial and institutional) and industrial customers to be offered from 2011 to 2014. With the exception of a few new initiatives, the majority of OPA programs are enhancements of programs offered in the past. On July 5, 2010, the Minister also directed the OPA to develop province-wide CDM programs targeted specifically at low-income consumers as part of its suite of province-wide CDM programs (see section 5.2.3.1).
OPA-Contracted Province-Wide programs have been slow to roll out in the market. LDCs must contract with the OPA to be delivery agents for provincewide programs in their distribution areas. The contract, known as the Master Agreement, was not available for LDCs to review until late January 2011.[1] The specific details of CDM programs are laid out in Program Schedules as attachments to the agreement. At the end of January 2011, only the residential and business programs were available for LDCs to review. The OPA began delivery of the residential CDM programs on behalf of LDCs to ensure programs were launched by January 1, 2011, but the business programs did not launch until early March.[2] The program schedule for the industrial program was released in March 2011 and the schedule for the low-income program was released on May 9, 2011. As a result, those programs are unlikely to launch until almost halfway through the year.
Although some LDCs may choose to rely entirely on province-wide programs to meet their individual targets, some BAPs will still be necessary to achieve the provincial targets. The OPA forecasts its province-wide programs will achieve approximately 80 per cent of the LDCs’ aggregate CDM targets.[3] Almost half of the savings are expected to come from the business sector (commercial and institutional), approximately one-third from the residential CDM programs (including low-income), and the industrial programs are expected to provide the remainder.
A Province-Wide Low-Income Program |
 Offering CDM programs targeted at low-income consumers can also help to redistribute the burden and benefits of CDM initiatives. Ratepayer funded conservation programs can result in low-income consumers paying their share of the costs (through their utility bills) but not receiving their share of the benefits. Although low-income consumers are eligible for conservation programs offered, they often face significant barriers that do not allow them to participate. Most CDM programs require that the household pay a portion of the costs, which lowincome households typically cannot afford. Furthermore, for low-income renters the cost savings incentive is split between landlords and tenants. As a result, the landlord has limited incentive to carry out energy efficiency upgrades to the building, heating and cooling system or appliances. Previous efforts for providing province-wide low-income CDM programs have failed to sustain momentum. In 2007, the
Ontario Power Authority (OPA) offered three province-wide low-income conservation initiatives following an October
2005 ministerial directive. These programs lasted only a year. From 2008 to 2010, no province-wide low-income programs
were offered, although Local Distribution Companies (LDCs) could apply for OPA funding to create a custom low-income
program. In July 2010, the Minister directed the OPA to design, implement and fund an electricity CDM program for lowincome
residential consumers as part of its suite of province-wide CDM programs. |
| The OPA’s low-income residential CDM program, to be co-ordinated with conservation programs offered by natural gas utilities, was expected to launch in May 2011, but has been delayed. The program will offer a free home energy audit, free direct installation of energy efficiency measures, and in-home conservation education on issues such as time-of-use prices and conservation behaviour[4]. Low-income households living in multi-family buildings, including social housing, are eligible for incentives under the OPA’s Business Retrofit Program. LDCs can also apply to the Ontario Energy Board to deliver a custom low-income CDM program, however rules relating to OPA program duplication still apply. |
| The ECO commends the province for developing a province-wide low-income CDM program and encouraging a coordinated approach with natural gas utilities on program delivery. Lessons learned from this collaborative model should be extended into other conservation programs. |
| It remains to be seen, however, the results that will be delivered or whether the commitment to low-income CDM can be sustained. If previous experience is any indication, mandating low-income programs will not necessarily produce significant results. A 2005 directive to the OPA set a target of 100 megawatts (MW) in electricity savings from low-income and social housing consumers. However, as noted in the ECO’s Annual Energy Conservation Progress Report – 2009 (Volume One), only three MW of savings was achieved[5]. Furthermore, given limited resources and the desire to achieve performance incentives, LDCs may keep their participation in low-income programs at a minimum level, as these programs may deliver lower energy savings than other types of conservation programs. |
ECO Comment
The ECO is encouraged that CDM programs will be available for all customer types, including a targeted low-income program. However, despite positive developments, the ECO also notes several areas of concern.
Encouraging or Discouraging Co-operation?
Although the OEB was specifically mandated to encourage opportunities for co-ordinating CDM programs between distributors and other relevant entities, the ECO is concerned that the centrality principle may have the opposite effect. During the Code consultations, stakeholders commented that having to prove centrality is onerous and could act as a disincentive for co-operation with other electric and natural gas utilities or organizations.
The Code does not differentiate how (or if) the centrality principle would apply to different types of collaborating entities (i.e., another electric utility, natural gas utility or other entity). For example, in the OEB’s review of the conservation framework for natural gas utilities, OEB staff recommended that joint programs between natural gas and electric utilities attribute energy savings based on the energy source delivered (i.e., all electricity savings would go to the electric utility and all gas savings to the natural gas utility). It is unclear if the Code would allow for such an arrangement or if, as the Code currently stipulates, the electric utility would first have to prove centrality (e.g., that it contributed at least 50 per cent to the program before it could claim all the electricity savings).
Furthermore, the centrality principle may entice LDCs to duplicate, rather than leverage existing or develop new programs. For example, if two LDCs wish to deliver a similar program in their respective distribution areas, instead of collaborating on program design, the two utilities may choose to independently develop the same program. Although this would result in unnecessary duplication of resources, by avoiding collaboration both utilities can claim the full amount of savings from their distribution area without having to prove centrality.
All the Responsibility with None of the Freedom
The ECO is concerned that LDCs may unfairly be held responsible for OPA programs, in the event these programs do not perform as expected. While LDCs did participate in the design phase of OPA programs, they have little flexibility to improve or enhance them. Contracts between the OPA and LDCs do not allow LDCs to customize OPA programs to fit their particular distribution area. Furthermore, by ministerial direction, LDCs cannot apply for BAPs that duplicate an OPA CDM program. The CDM Code defined duplication to include differences in incentive levels, qualification requirements, technology specifications, marketing approaches or budgets from an OPA program.
The OEB’s definition of duplication caused concern for many stakeholders. Though most agreed in principle that duplication of OPA programs should not be allowed, LDCs believed the definition was too restrictive, rendering much, if not all, LDC program innovation as duplicative. For example, utilities that were early adopters of peaksaver® argued that they needed to take a more creative approach, such as innovative marketing or greater incentives, to encourage higher participation rates. However, under the Code, such efforts could be interpreted as duplicative.
The ECO strongly disagrees with the OEB’s definition of duplication. If an OPA program is not successful in uptake, LDCs have little opportunity to adjust programs as necessary, regardless of the potential increase in program results. Furthermore, the list of ineligible features in the definition of duplicative programs is so restrictive it may limit LDC innovation in BAPs, effectively centralizing control of most CDM programs with the OPA.[6] The ECO believes the OEB’s overly prescriptive interpretation of duplication goes against the spirit of the GEGEA. LDCs are in the best position to tailor CDM programs to be more effective and suitable for their customers. With mandated targets, it is also in the LDCs’ best interest to deliver the most effective and efficient programs.
Sustaining Momentum
The CDM Code mandates that only initiatives starting January 1, 2011 and ending December 31, 2014 will count towards LDC targets. As a result, LDCs will likely ramp down their programs before 2014 to ensure all savings achieved are credited towards their targets. This, in addition to the late start of OPA programs, will effectively shorten the timeframe for delivering CDM programs, from four to three years.
To create a sustainable conservation culture, LDCs require long-term commitment. The current framework with short-term program funding hampers the ability of LDCs to engage in long-term CDM planning. Furthermore, a long-term commitment would allow LDCs to develop CDM programs with a longer payback that can deliver significantly greater savings.
There are currently no timelines in place to review and prepare for the next CDM framework. An important lesson learned from this process is the need to have a clear framework ahead of time to ensure momentum is sustained.
The ECO recommends that the Ministry of Energy initiate the next Conservation and Demand Management Framework, which would include guaranteed funding, by January 1, 2014.
References
- ↑ Ontario Power Authority, information provided to the ECO in response to ECO inquiry, March 14, 2011.
- ↑ Guy Raffaele, Ontario Power Authority, e-mail message to ECO staff, March 3, 2011.
- ↑ Ontario Power Authority, information provided to the ECO in response to ECO inquiry, March 14, 2011.
- ↑ Ontario Power Authority, information provided to the ECO in response to ECO inquiry, March 14, 2011.
- ↑ Environmental Commissioner of Ontario, Annual Energy Conservation Progress Report – 2009 (Volume One): Rethinking Energy Conservation in Ontario (Toronto, Ontario: 2010), 24-25.
- ↑ For example, one stakeholder noted LDCs could be restricted from designing any load control program as it could be considered duplicative to the peaksaver® program under the CDM Code’s definition of duplication
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