Should global adjustment (GA) exist or should it not? This is billion-dollar question.
Leaving methods of calculation aside, I think GA is the best option Ontario ratepayers can have given our market realities.
Here are the conditions that form Ontario electricity market:
- Demand varies through the day, week and year.
- Power generation technologies have different fixed, variable and life-cycle costs, as well as reliability, availability and risks.
- Add pollution, effects of cross-border electricity trade, centuries-long “love” between English and French, political pedalling.
Altogether, these factors (and many more) maker reliably meeting demand every day a difficult task.
Possible solutions – grossly simplified:
- Build constant generation capacity to meet the highest demand – high fixed cost, low variable cost.
- Build dispatch-able generation capacity – low fixed, high variable cost
- Balance a mix generation sources, including demand reduction, to achieve the lowest possible resulting cost to rate payers, while meeting environmental standards and political pressure – this is what IESO is doing.
The last option has an inherent risk of not working perfectly at every moment.
The situation is not alike to solving problem of making milk available at the supermarket shelf every hour of every day: over order creates waste, under order – shortage. Unlike “no-milk” situation, blackouts are not acceptable.
Who should to pay for mitigation of electricity shortage risk and for resulting costs of stand-by generation capacity and demand management programs?
If IESO were a private company, it would set fixed tariff to cover all these variable costs at their possible highest level to have profit every day. Since IESO is not a private corp, unpredictable variable costs are allocated to rate payers, hence we have the GA, which changes month-to-month.
IMHO, leaving GA calculation mechanism aside, GA is the best solution practically possible to make Ontario electricity market situation work. It’s not perfect, granted, but if you you can come up with a better mechanism, I am sure IESO will love to hear from you.
I wrote about ways to curb GA at company level here