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January 2014

January 2014. Cost of Electricity Service 2013 LTEP: Module 4. Overview.

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January 2014

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  1. January 2014 Cost of Electricity Service 2013 LTEP: Module 4

  2. Overview This module will walk you through the steps used to develop the cost for electricity service associated with the 2013 LTEP. It also provides the details to building the typical residential bill forecast and industrial prices. Cost for Electricity Service Sources of Revenue for Suppliers of Electricity Services Customer Bill & Rates Components of Cost • Generation • Conservation • Transmission • Distribution • Wholesale • Debt Retirement • Hourly Markets • Global Adjustment • Residential • Large Industrial Customers - Methodology - Categories Note: Tabulation of data for figures shown in this module is contained in the Appendix

  3. The basis for cost projections • The cost projections made in this analysis are based on many assumptions. As will become evident throughout this analysis, there are many considerations affecting costs/bills that will change over time • We present annual averages in this analysis. More detailed, more current estimates for each of the components are developed for settlement/rate setting purposes • The journey from cost to customer bills is complex because of the number of service providers, the different ways they get paid, the factors that affect costs, and the process of allocation of costs to customers

  4. Electricity Service is comprised of the following categories i. Electricity Generation: All payments to generators for the production of the electricity commodity. This includes payments pursuant to contracts, regulated rates or market clearing prices as established/negotiated by the generating facility. ii. Electricity Conservation: This includes energy efficiency and demand response costs that are recovered by electricity ratepayers (i.e. excludes the equipment investments made by the customer implementing the conservation initiative). iii. Transmission Delivery System: The regulated revenue requirements for the high-voltage transmission required to transport electricity from the generators to the low-voltage distribution delivery system iv. Distribution Delivery System: The regulated revenue requirements for the low-voltage distribution delivery system required to transport electricity to retail customers embedded in an LDC v. Wholesale Market Services: These costs include: payments for constraints and losses, provisions for reserves, black starts, IESO administration fee, OPA administration fee, rural and remote electricity rate protection. These costs reflect the operation and administration cost for the electricity system. vi. Debt Retirement Charge: The Electricity Act, 1998, O. Reg. 493/01 imposes a charge which is payable on electricity consumed in Ontario. This is applied to the $20.9 billion debt of the former Ontario Hydro and is collected on behalf of the Ontario Electricity Financial Corporation.

  5. Electricity Service Cost in 2014 Market Services

  6. Electricity Service Cost Projection • The above graph provides information consistent with Figure 6: Total Cost of Electricity Services, in the 2013 LTEP.

  7. Electricity Service Cost - Generation Cost for Electricity Service Sources of Revenue for Suppliers of Electricity Services Customer Bill & Rates Components of Cost • Generation • Conservation • Transmission • Distribution • Wholesale • Debt Retirement • Hourly Markets • Global Adjustment • Residential • Large Industrial Customers - Methodology - Categories

  8. Electricity Generation Cost Methodology • The cost of electricity generation is the payment to generators for electricity. The majority of generation is under contract or regulated rates • The capacity and production levels from each generator are estimated. • The cost is then calculated based on the general contract terms or regulated rates. • Costs are in real $2012 dollars. For analysis provided in nominal dollars, an inflation rate of 2% is assumed. • No cost for carbon emission is assumed. • For costing modeling purposed, planned flexibility is priced as generic SCGT. • The natural gas price forecast for this analysis is March 2013 - Sproule Forecast: http://www.sproule.com/forecasts/archives

  9. Generation Cost Projection by Resource

  10. Generation Unit Cost by Resource

  11. Costs are added to the summary developed in module 3 40,500 MW Capacity Factor (%) 600 MW $ 87/MWh $ 13.1 B 151 TWh Summer Capacity Contribution (%) 11 TWh 13 % $ 1.8 B $163/MWh 10,100 MW 29,400 MW 20 TWh 24 % 500 MW 84 % $177/MWh $ 3.5 B 41 TWh 51 % 9,000 MW 89 % 9,400 MW $50/MWh $ 2.0 B 23 % 2,200 MW 9,100 MW 6,400 MW 71 % 100 % $73/MWh $ 5.8 B 80 TWh 81 % 11,300 MW 11,300 MW 11

  12. Electricity Service Cost - Conservation Cost for Electricity Service Sources of Revenue for Suppliers of Electricity Services Customer Bill & Rates Components of Cost • Generation • Conservation • Transmission • Distribution • Wholesale • Debt Retirement • Hourly Markets • Global Adjustment • Residential • Large Industrial Customers - Methodology - Categories

  13. Conservation Delivery Cost Assumptions • This conservation cost includes energy efficiency and demand response costs that are recovered from electricity ratepayers (i.e. excludes the equipment investments made by the customer implementing the conservation initiative). • Conservation assumptions for cost analysis • Cumulative program savings assumptions • As this component will develop further (eg: conservation details post framework definition), the budget and estimates will need to be flexible to accommodate the evolution of refining the program.

  14. Conservation Cost Projection • Conservation delivery costs includes program and funds administration plus incentives. They exclude participants’ costs • While participants of a conservation program may incur additional capital/equipment costs, these costs are not included in the total cost of electricity service estimate as they are not passed on to all Ontario electricity consumers.

  15. Electricity Service Cost - Transmission Cost for Electricity Service Sources of Revenue for Suppliers of Electricity Services Customer Bill & Rates Components of Cost • Generation • Conservation • Transmission • Distribution • Wholesale • Debt Retirement • Hourly Markets • Global Adjustment • Residential • Large Industrial Customers - Methodology - Categories

  16. Transmission Delivery Cost Methodology • Transmission cost is estimated with a base cost of transmission for the planning period plus an incremental revenue requirement for the additional capital investments that occur during the planning period. • Base transmission revenue requirement is based on the November 2, 2012, EB-2012-0031, Settlement Proposal filed by Hydro One Networks Inc. for 2013 and 2014 Transmission Rates. • Incremental Revenue Requirement is based on the assumption of about $3 billion ($2012) in new capital investments occur during the 20 year planning period, for regional and system planning purposes.

  17. Transmission Delivery Cost Projection

  18. Electricity Service Cost - Distribution Cost for Electricity Service Sources of Revenue for Supplier of Electricity Services Customer Bill & Rates Components of Cost • Generation • Conservation • Transmission • Distribution • Wholesale • Debt Retirement • Hourly Markets • Global Adjustment • Residential • Large Industrial Customers - Methodology - Categories

  19. Distribution Delivery Cost Methodology • There are over 70 local distribution utilities (LDCs) in Ontario. • Revenue requirements for a distributor is primarily related to the distribution system infrastructure, meters and meter reading services, and customer care services (such as billing and customer information services). • The distribution cost for this analysis is comprised of four components • Base distribution cost – OEB 2012 Yearbook Data • Incremental distribution cost related to growth in households • Smart meter and grid costs • Incremental Low-Income Energy Assistance Program costs • Given the large number of LDCs in the province, a proxy (not detailed assessments) is used to estimate the projection of costs. The proxy is the increase in number of households .

  20. Distribution Delivery Cost Projection

  21. Electricity Service Cost – Wholesale Market Services Cost for Electricity Service Sources of Revenue for Supplier of Electricity Services Customer Bill & Rates Components of Cost • Generation • Conservation • Transmission • Distribution • Wholesale • Debt Retirement • Hourly Markets • Global Adjustment • Residential • Large Industrial Customers - Methodology - Categories

  22. Wholesale Market Services Methodology The Wholesale Market Services were grouped into the following categories. Further description is provided on the next slide. • Congestion Management Settlement Uplift Costs • Energy Reliability (or ancillary ) Services • Intertie Offer Guarantee • IESO and OPA Administration Fee • Rural and Remote Electricity Rate Protection The cost methodology for this analysis is as follows: • The first three items listed above are assumed to grow in proportion to the generation cost. This of course is an approximation of a complex set of services. • IESO and OPA administration fees are held constant in real terms over time. • The rural and remote rate is held constant in nominal dollars over the planning period.

  23. Wholesale Market Services A comprehensive list of wholesale market services is outlined in the following IESO document: http://www.ieso.ca/imoweb/pubs/settlements/IMO_Charge_Types_and_Equations.pdf For cost modeling purposes these services are grouped under five categories: • Congestion Management Settlement Uplift:represents the cost of dispatching the power system out of economic merit order in light of transmission or other physical constraints • Energy Reliability: services related to maintaining a balance between generation and demand during unanticipated events, such as equipment failure or a surge in consumption. The IESO purchases spare capability that is available on short notice. The cost of these types of services can vary by the hour. (i.e., black starts and provisions for reserves) • Intertie Offer Guarantee: a payment to reduce the risk for imports. Imports are settled on real-time prices but are scheduled on pre-dispatch prices, which may be different. The Intertie Offer Guarantee ensures that, over the course of an hour, an importer would receive at least the average price of their offer. • IESO and OPA Administration Fee: an OEB-approved administration fee to allow the IESO and OPA to recover their net revenue requirement needed to operate. • Rural and Remote Electricity Rate Protection: A rate used to partially offset the higher costs of providing electricity in rural/remote areas. This rate is embellished by regulation.

  24. Projection of the Cost of Wholesale Market Services

  25. Cost for Electricity Service – Debt Retirement Cost for Electricity Service Sources of Revenue for Suppliers of Electricity Services Customer Bill & Rates Components of Cost • Generation • Conservation • Transmission • Distribution • Wholesale • Debt Retirement • Hourly Markets • Global Adjustment • Residential • Large Industrial Customers - Methodology - Categories

  26. Debt Retirement Charge Methodology • The Electricity Act, 1998, O. Reg. 493/01 provides for thedebt retirement charge to be paid by electricity consumers until the residual stranded debt is retired. • The rate is established at $0.007per kWh (or 0.7 ¢/KWh) for electricity consumed for most Ontario communities. • For modeling purposes, the DRC is assumed to be the legislated rate of 0.7 cents per kWh, in nominal dollars as this rate has not changed since its inception into the Ontario electricity market. • For 2013 LTEP cost analysis, the DRC is assumed to be retired after 2018, which is consistent with OEFC Annual Report 2011, which notes the debt repayment plan estimates will likely be defeased between 2015 and 2018 (pg. 5).

  27. Debt Retirement Charge Projection and Data

  28. Sources of Revenue for Suppliers of Electricity Services Cost for Electricity Service Sources of Revenue for Suppliers of Electricity Services Customer Bill & Rates Components of Cost • Generation • Conservation • Transmission • Distribution • Wholesale • Debt Retirement • Hourly Markets • Global Adjustment • Residential • Large Industrial Customers - Methodology - Categories

  29. Generation and conservation costs are paid to service providers from two sources • The two sources of revenue are: • Hourly market revenues and • Global adjustment • All generators participate in the IESO administered markets. Therefore all generators will obtain revenues based primarily on the hourly prices • The majority of generators are either: • Rate regulated by the OEB or • Contracted with OPA or OEFC. The global adjustment is the payment mechanism that provides the settlement difference between market revenues and the regulated rates or contract prices. As a result, generators make up the difference between their collected market revenues and their regulated or contract rate by obtaining debits or credits from the global adjustment. • Conservation delivery costs and funds such as the Aboriginal, Municipal and Community Fund are paid for from the global adjustment.

  30. HOEP Annual Average Projection • Marginal cost of generation is used as a proxy for HOEP,

  31. Global Adjustment and Hourly Market Revenues: Illustrative Projection

  32. Costs developed in module 3 extended to illustrate the share of GA and Market Revenues 40,500 MW Share of GA & Market Revenue Capacity Factor (%) 600 MW $ 87/MWh $ 13.1 B 151 TWh Summer Capacity Contribution (%) 11 TWh 71% 13 % $ 1.8 B $163/MWh 10,100 MW 29% 29,400 MW 20 TWh 24 % 82% 500 MW 84 % $177/MWh $ 3.5 B 41 TWh 51 % 9,000 MW 89 % 18% 9,400 MW 32% $50/MWh $ 2.0 B 68% 23 % 2,200 MW 54% 9,100 MW 6,400 MW 71 % 100 % $73/MWh $ 5.8 B 46% 80 TWh 81 % 11,300 MW 11,300 MW 2018GA & Market Revenue Components (%) Global Adjustment Market Revenue 32

  33. Residential Bills and Industrial Rates Cost for Electricity Service Sources of Revenue for Suppliers of Electricity Services Customer Bills & Rates Components of Cost • Generation • Conservation • Transmission • Distribution • Wholesale • Debt Retirement • Hourly Markets • Global Adjustment • Residential • Large Industrial Customers - Methodology - Categories

  34. The allocation of the global adjustment is a factor in calculating bills/large industrial rates. • To make a projection of residential bills and industrial rates, assumptions (detailed later in this presentation) are made about the share of the global adjustment allocated between the two broad categories called: • Class A (>5MW) and • Class B • Effective January 1, 2011 – GAM costs are divided between Class A and Class B customers as follows: • Class A (demand greater than 5 MW) pay the global adjustment based on their use during five highest peak demand hours in the prior year known as a “base period” • Class B (=< 5MW) pay the remaining global adjustment cost on a volumetric rate basis • For purposes of this analysis, the cost share of global adjustment between Class A and Class B is 10% and 90%, and the volume share is assumed to be 17% and 83%, respectively. These ratios are held constant for the planning period. These cost and volumes shares are based on the current actual shares, and are held constant as a simplifying assumption.

  35. The Basis for Calculating a Typical Residential Electricity Bill Forecast • The proxy of a current residential bill is a Toronto Hydro’s residential customer that consumes 800 KWh on average during a month. Factors that make every customer bill unique are listed on the next slide • The residential bill is comprised of the following components: • Electricity (generation + conservation costs) • Transmission Delivery • Distribution Delivery • Regulatory (wholesale market services) • DRC (debt retirement charge) • HST (13% for harmonized sales tax) • To get an indication of the bill over time, the 2012 actual proxy bill is increased by the year over year percentage changes in each of the 6 components of the bill. • Actual residential bills based on OEB approved rates are available on OEB website: http://www.ontarioenergyboard.ca/OEB/Consumers/Electricity/Your+Electricity+Utility/All+Electricity+Utility+Bills

  36. Bills vary from customer to customer depending on use, and on tax credit eligibility • The assumption of 800 kwh/month use on average is maintained for consistency with historical comparisons • As consumers reduce or increase their demand, the bills will be lower or higher. Residential customer bills are also impacted by their usage patterns (on-peak, off-peak and mid-peak) • Northern Ontario Energy Credit available to low to middle income families and individuals in the north based on an individual’s/family’s net income • Ontario Energy and Property Tax Credit is available to low to moderate income individuals and families, including seniors based on individual’s/family’s net income

  37. Bills also vary depending on location and the distribution service provider • There are over 70 separate LDCs in Ontario. Each LDC has its own rate and cost structures. • Transmission rates are developed on a postage stamp basis; thus the transmission rates are the same for each LDC. However, the LDC’s unique system usage profile and service requirements impact the overall cost charged to it for transmission and connection costs. • Rural/Remote Protection Plan credit is given to customers in some LDCs with low customer density.

  38. Typical Residential Electricity Bill Forecast – Before OCEB* (Nominal $/Month – assuming 800KWh/Month) • The above graph provides information consistent with Figure 7: Typical Residential Electricity Bill Forecast, in the 2013 LTEP. • OCEB – Ontario Clean Energy Benefit • Based on Toronto Hydro’s 2012 annual average residential bill, assuming 800kWh/month • Inflation rate of 2% assumed to convert real $2012 dollars to nominal dollars

  39. Typical Residential Electricity Bill Forecast – After OCEB (Nominal $/Month – assuming 800KWh/Month) • The above graph provides information consistent with Figure 7: Typical Residential Electricity Bill Forecast, in the 2013 LTEP. • Ontario Clean Energy Benefit (OCEB) is a 10% credit to residential customer bills, which is in effect from 2011 to 2015. A 3,000 kWh per month cap was implemented in September 2012. • Beyond 2015, the OECB program’s future would require legislative changes and would need to be take into account a number of factors including the province’s fiscal position. • Based on Toronto Hydro’s 2012 annual average residential bill, assuming 800kWh/month • Inflation rate of 2% assumed to convert real $2012 dollars to nominal dollars

  40. An illustrative example of how improvements in efficiency will lower average customer bills • Average residential household energy use is decreasing as customers adopt energy efficient measures and behaviour supported by conservation programs. • The above graph provides information consistent with Figure 7: Typical Residential Electricity Bill Forecast, in the 2013 LTEP.

  41. Methodology for Large Industrial Electricity Price Forecast • The large industrial rate is applicable to a customer (>5MW) that is directly connected to the transmission system • The industrial rate does not include HST, as this would be an allowed corporate tax credit. • The large industrial rate is composed of four components: • electricity (HOEP + Class A GA rate), transmission, wholesale market charge, and DRC • This price forecast is an illustrative aggregate. Each large user Class A customer will pay a global adjustment rate based on their unique usage during the 5 highest hours of the prior year (during base period).

  42. Large Industrial Electricity Price Forecast (Nominal $/MWh) • The above graph provides information consistent with Figure 8: Industrial Electricity Price Forecast, in the 2013 LTEP. • Inflation rate of 2% assumed to convert real $2012 dollars to nominal dollars

  43. More detailed projections of global adjustment allocation used for rate setting purposes • For purposes of this forecast, the cost share of global adjustment (GA) between Class A and Class B is 10% and 90%, and the volume share is assumed to be 17% and 83%, respectively. These ratios are held constant for the planning period • As actual Class A and B share values change, the rate and bill outlooks will change correspondingly. An estimate of the monthly GA is prepared by the IESO, for LDC billing purposes: http://www.ieso.ca/imoweb/b100/b100_ga.asp • Historical monthly data on GA is available at the following links: http://www.ieso.ca/imoweb/b100/b100_ga.asphttp://www.ieso.ca/imoweb/b100/ga_archive.asp • The Ontario Energy Board establishes the electricity commodity rates for households and small businesses via the regulated price plan, using higher resolution data that reflect current assumptions and circumstances. http://www.ontarioenergyboard.ca/OEB/Industry/Regulatory%20Proceedings/Policy%20Initiatives%20and%20Consultations/Regulated%20Price%20Plan

  44. Class A and Class B GA Unit Rates: Illustrative Projection • The Class A GA Rate is illustrative of the average rate for Class A, individual Class A customer will pay a GA rate based on their specific usage of the 5 highest hours in the prior year (base period)

  45. All-in Electricity Rates: Class A and Class B(GA Rates + HOEP) The Class A all-in rate is illustrative of the average rate for Class A, individual Class A customer will pay a GA rate based on their specific usage of the 5 highest hours in the prior year (base period)

  46. APPENDIX This section contains tabulation of data for figures shown in this module.

  47. Appendix: Data for Slide 6 – Cost of Electricity Service

  48. Appendix: Data for Slide 9 – Generation Cost by Resource Note: Planned Flexibility include generic SCGT facilities and a Notional Import Tie. Both Planned Flexibility options are priced as a SCGT facility for cost modeling purposes.

  49. Appendix: Data for Slide 10 – Generation Unit Cost by Resource

  50. Appendix: Data for Slide 14 – Conservation Costs

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