Editing Managing a complex energy system: Executive Summary
| 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. | |||||
Under the Environmental Bill of Rights, 1993, the Environmental Commissioner of Ontario (ECO) reports annually to the Legislative Assembly of Ontario on the province’s progress in energy conservation.
This report is the first volume of the 2010 energy conservation report and reviews policy developments. The report concentrates on electricity policy because most activity has been centred on the continuing reform of electricity regulation. Four electricity topics that dominated the policy agenda are covered. An analysis of an Ontario Energy Board (OEB or the “Board”) decision to not increase the conservation budgets of natural gas distributors is also included. One barrier topic was selected for in-depth discussion: the report reviews barriers to alternative heating and cooling systems that use renewable energy sources.
Contents |
The Long-Term Energy Plan
In 2010, the government restarted the development of the Integrated Power System Plan (IPSP). This was long overdue as the regulatory framework has entered its fifth year without an IPSP, formally approved as required in law. An approved IPSP is needed by organizations whose actions help meet conservation targets and objectives set by government. The IPSP is also necessary to provide the detailed assumptions and data that were not contained in the Long-Term Energy Plan (LTEP) so that the veracity and feasibility of the LTEP can be scrutinized.
It is commendable that the government sought public comment through the Environmental Registry before issuing the LTEP. The Ministry of Energy, however, has not posted a decision notice on the Registry. Therefore, it is not known how the wideranging comments were considered.
It is a positive step that the government acted on a 2009 ECO recommendation by establishing electricity consumption (kilowatthour) targets, in addition to peak reduction targets, to support its policy to build a conserver culture. The ECO believes, however, that the Ministry of Energy should clarify the specific technical details of how peak demand and consumption targets, established for the 2011 to 2014 period and the LTEP’s planning horizon, are measured because their interpretation is ambiguous.
Previously, the regulatory framework included only demand (kilowatt or kW) targets. These have a more narrow focus and concentrate conservation activity on the dozen or so hours in a year when demand on the electricity system peaks (reaches the highest amounts consumed during the year). With the LTEP now including two types of targets, the approach to conservation is more comprehensive. This will reduce the amount of new generating stations and transmission and distribution lines that must be built, and provides more environmental benefits. Consumption targets also better reflect the design of many of the conservation programs available in Ontario (e.g., home and business retrofits, standards and rebates for high efficiency appliances), and this helps ensure the programs will continue to be offered.
The ECO agrees with the vision – low-carbon generators connected to a smart grid that will facilitate conservation – contained in the LTEP. This vision, however, was poorly communicated. The LTEP did not adequately explain the difficult trade-offs that are necessary when choosing among types of generation. In particular, an opportunity was missed to educate the public on the expected costs of renewable and conventional generation, possibly leaving the public vulnerable to misinformation and not supportive of the vision. Finally, the LTEP is an energy plan in name but is an electricity plan in reality. Ontario needs an energy plan and, as the ECO recommended in 2009, the province needs a multi-fuel conservation strategy that addresses all energy sources.
Pricing Policy
The LTEP estimates that electricity prices will rise by 30 per cent in real terms between 2010 and 2014. Several changes to pricing policy were made, through the introduction of tax credits and an electricity bill rebate, to shelter eligible consumers from higher energy costs. Contained in the 2010 Ontario Budget were: the Ontario Energy and Property Tax Credit and the Northern Ontario Energy Credit. In the 2010 Fall Economic Statement (and LTEP), a 10 per cent price rebate on electricity bills called the Ontario Clean Energy Benefit (OCEB) was introduced.
These financial measures have different effects on conservation. The ECO supports the tax credits because they maintain a price signal that reflects the true cost of energy, while protecting vulnerable consumers, and thus do not undermine conservation. Conversely, the ECO disagrees with implementation of the OCEB. It is a perverse incentive that undermines conservation efforts.
One estimate of its effect is to increase overall electricity consumption by more than one per cent. This would negate about onethird of the savings that conservation programs are expected to provide between 2011 and 2014.
In 2010, a regulation was made that changed the method by which certain consumers (e.g., larger industrial plants, universities) paid for the electricity they consumed. These consumers are billed through a charge known as the Global Adjustment but the method of billing was changed from a straight volumetric payment to one based on electricity consumed during the five highest system peak hours of the year. This effectively introduced a form of critical peak pricing that applies very high prices during a few hours of very high demand when the delivery system is under stress. The Independent Electricity System Operator estimates that this might reduce peak system demand by 500 megawatts and avoid nearly one-half billion dollars of new investment while reducing prices for all consumers by about one-half cent per kilowatt-hour.
The ECO supports this incentive to reduce peak demand, with some qualifications. The ECO urges the government to expand critical peak pricing to other smaller volume consumers to encourage conservation on their part and adjust some inequities in the allocation of costs in the Global Adjustment.
The government also passed legislation to clarify rules around individual metering of multi-unit residential buildings, known as suite metering, in buildings that would otherwise be served by a single bulk meter making it difficult for individual occupants to measure their own electricity use and take actions to conserve. The ECO approves of these changes, which ensure that more Ontario consumers will receive price signals that reflect their consumption and provide incentives for energy conservation.
The Conservation and Demand Management Code for Electricity Distributors
Two program delivery frameworks governed conservation in the last half of the previous decade. A third, which mandates electricity distributors to deliver programs to meet assigned conservation targets as a licence condition, will be in effect over the next four years.
From 2005 to 2010, the role of distributors has varied from innovator and leader in Conservation and Demand Management (CDM) to program delivery agents for the Ontario Power Authority (OPA). A new CDM framework has been implemented for the next four years. For the first time, electricity distributors are mandated, as a license condition, to deliver CDM programs to meet their conservation targets.
A new CDM Code governs distributors’ conservation activities. Most distributors will meet their targets by delivering both selfdesigned programs and contracting to deliver the OPA’s province-wide programs. All electricity savings will be verified by a thirdparty and distributors will be eligible to receive financial incentives for meeting or exceeding their targets. The ECO notes three concerns about the Code. Under the Code, a distributor must prove centrality (e.g., it contributed at least 50 per cent of the budget, initiated the program) before it can claim all the electricity savings. The ECO is concerned the centrality principle may be unnecessarily onerous and act as a disincentive to co-operation with other electric and natural gas distributors or organizations.
Secondly, the ECO is concerned contracts between distributors and the OPA do not allow distributors the flexibility to customize province-wide programs, if needed. The ECO also believes that the Code’s definition of duplication is overly restrictive, may be contrary to the spirit of the Green Energy and Green Economy Act, 2009, and could inhibit distributors from developing innovative conservation programs.
Finally, there are no LDC targets or stated commitment to their role in CDM beyond the time period of the current framework. To ensure momentum is sustained, a process to review and prepare for the next CDM framework should be established well before the end of 2014.
Natural Gas DSM Budgets
The OEB recently announced its determination that the demand-side management (i.e., conservation) budgets of Ontario’s natural gas distributors would be limited to their current levels for the next three years. In its 2009 report, the ECO stated support for increasing these budgets to bring them into line with budget levels in neighbouring jurisdictions, and thus disagrees with the Board’s recent decision. The Board presented four arguments for its determination and the ECO offers alternative rebuttal arguments.
Briefly, the ECO’s position is the following: conservation provides system benefits that help all gas consumers and environmental benefits for all Ontarians from reduced emissions. Limiting conservation funding means these benefits are lost. Conservation remains a very cost-effective strategy and offers between 7 and 10 dollars, depending on the program, for every dollar that natural gas distributors spend on conservation. The rules of how conservation is funded limit the amount of cross-subsidies of program participants by non-participants, and reduce any inequities. The end of some government programs is not a signal by government that utility funded programs should also be limited. Indeed, communication issued by the Minister of Energy indicates that the government believes gas distributors should expand conservation activities.
The combined effect of budget decisions on conservation by the government and the OEB is to reduce spending on natural gas conservation to very low levels, which is unfortunate given the large contribution of natural gas to both Ontario’s total energy consumption and its greenhouse gas (GHG) emissions.
Ontario’s Activities to Build the Smart Grid
The smart grid is a recently-developed term that refers to the next generation of electricity delivery infrastructure where new technologies (e.g., storage, distributed generation, smart meters and two-way information flow) will work together. One of the benefits is the potential to enhance the amount of conservation, renewable generation and distributed energy, which makes the system more efficient.
Ontario recently passed enabling legislation and provided ministerial direction to facilitate this modernization of the grid but there are planning, operational and financial challenges to be met that are faced by all organizations (e.g., transmitters, distributors, the system operator, the regulator, government). In addition, working groups, forums, research funds and centres have been established and pilot projects are planned.
At this early stage, the ECO’s principle concern is that a single entity with the perspective of the electricity system as a whole is needed to lead this implementation. The government should produce a discussion paper and consult with the public regarding who should lead implementation of the smart grid and how this can best be accomplished.
There is a regulatory issue that should be immediately resolved: the OEB should address distribution utility concerns that the current regulatory environment does not facilitate their ability to fund smart grid investments to reduce line losses (electricity that is lost in the delivery of power to the end user).
Barriers to Alternative Heating and Cooling
The ECO is mandated to identify and review barriers that prevent the reduction or more efficient use of energy. This report focuses on barriers to the uptake of alternative heating and cooling technologies, such as solar and geothermal. The report makes several suggestions for addressing barriers.
The Ontario Building Code, which currently does not include provisions for alternative energy systems, should be updated to facilitate builders’ use of alternative energy systems. The ECO suggests that simple methods could be developed for builders of houses with alternative energy systems to demonstrate compliance with the Building Code.
In current policy that governs the development of programs to promote alternative heating and cooling technologies by electricity distributors, there is a hurdle related to the cost-benefit test that distributors must pass to receive OEB approval of programs. The government, with the OPA and Board’s advice, should act to address this barrier.
Land use planning affects energy use, but alternative energy is currently poorly integrated into planning processes at the neighbourhood level. The ECO believes that integrated community energy planning should be pursued.
Finally, the report urges the government to correct the imbalance between incentives offered for solar heating compared to financial assistance provided for solar electricity generation (photovoltaic or PV systems). Since PV incentives are currently more attractive than those for solar thermal, homeowners are more likely to use their limited property space to install PV systems. While this does assist in meeting government targets for renewable generation, solar thermal energy offers environmental benefits that can help Ontario meet its GHG reduction targets.
Recommendations
To address our findings, this report makes the following recommendations:
- The ECO recommends that the Ministry of Energy clarify how the peak demand and consumption targets contained in the Long-Term Energy Plan and Conservation and Demand Management Directive are measured.
- The ECO recommends that the Ministry of Energy build upon the work completed in the Long-Term Energy Plan and produce a comprehensive multi-fuel energy plan.
- The ECO recommends that the Ministries of Energy, Revenue, and Finance improve the design of the Ontario Clean Energy Benefit so that any transitional assistance on electricity bills does not act as a disincentive to conservation.
- 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.
- The ECO recommends that the Ministry of Energy clarify the appropriate roles of the government and gas utilities in funding natural gas conservation, with the goal of increasing overall funding.
- The ECO recommends that the Ontario Energy Board encourage and facilitate smart grid investments that reduce line losses, putting these investments on an equal footing with conservation investments.
- The ECO recommends that the Ministry of Energy adjust the relative financial incentives available for solar thermal and solar photovoltaic in residential buildings to appropriately reflect the economic and environmental benefits of each technology.
Citing This Article:
Environmental Commissioner of Ontario. 2010. Annual Energy Conservation Progress Report, 2010 (Volume One): Managing a Complex Energy System. Toronto, ON : Environmental Commissioner of Ontario. pp. 1-5
