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By Charles Rhodes, P. Eng., Ph.D.

The following description of Ontario and California electricity market problems includes contributions from Paul Acchione, P. Eng., FCAE in an April 2017 email to the Future of Energy Initiative (incorporated with permission from the author).

Be careful what utilities you invest in!

California has just discovered that when you add clean generation (it is adding solar generation aggressively) the design of the current wholesale energy market will drive wholesale prices negative as producers compete to stay on line.  Some producers have very high shutdown costs and will bid negative prices to stay on-line to avoid a temporary shutdown during low demand or high renewable production periods.

This problem is not new for Ontario because we were one of the first mixed generation power systems to transition to an almost non-fossil power system.  In a mixed power system the number of hours when prices go negative increases as the CO2 emissions decrease.  To keep producers whole financially, there must be mechanism to pass the fixed capacity costs through to the retail rates. Otherwise the producers will go bankrupt as the power system emissions decrease.

Ontario added a capacity cost pass-through mechanism to retail rates with its Global Adjustment.  Ontario also introduced minimum wholesale market bid prices on dispatchable non-fossil generation to avoid excessively large negative market prices. PJM in the USA is using a separate capacity market.

Unfortunately Ontario made two fundamental errors in designing its retail rate structure.  The first error was recovering it's global adjustment via energy use rather than via capacity use at the retail level.  The second error was moving to a flat charge at the retail level for distribution costs rather than a capacity based charge.  Both of those decisions created incentives to use electricity in sub-optimal ways from a power system cost perspective.  Those two errors will drive electricity rates higher over time as asset utilization deteriorates.  For example Ontario is currently exporting large amounts of surplus non-fossil electricity at very low prices and is curtailing (wasting) what it cannot export.  That non-fossil electricity should instead be used in Ontario to displace fossil fuels. However, the present Ontario retail electricity price plans do not allow economic use of surplus non-fossil electricity for displacement of fossil fuels.

Clean power systems (under 50 grams carbon dioxide per kWh) require a different design for retail electricity rates.  Clean power systems like Ontario's incur more than 90% of their costs based on capacity (peak kW) and less than 10% of their costs based on energy production (kWh). High CO2 emission power systems in most other jurisdictions incur more than 50% of their costs based on energy production.  Most wholesale and retail markets in deregulated power system jurisdictions were designed for a high CO2 emission power system.

California is transitioning, like Ontario, from a high CO2 emission power system to a low CO2 emission power system.  As it does so its wholesale energy rates will collapse like Ontario's did.  Ontario's weighted average wholesale energy price in 2016 was 1.6 cents/kWh.  That's not enough money to pay for any known electric power production technology.  So unless a capacity mechanism is added to the wholesale market like Ontario and PJM have done, producers in other markets will likely go bankrupt as the electricity system is forced to become cleaner by well intentioned politicians and their green energy mandates.  Europe has also identified this wholesale electricity energy price as an existential crisis for its electricity producers and is now looking for solutions.

Here is the link to the California news article:


The fundamental concept that politicians and electricity system regulatory bodies must grasp is that in a non-fossil electricity system the retail electricity price must be primarily based on consumer peak power (kW) demand at any time when interruptible power is not enabled. Similarly non-dispatched generator compensation must be primarily based on minimum power supplied at any time when interruptible power is not enabled. That methodology fairly compensates parties for their fixed costs, which in a non-fossil electricity system are typically 90% of total costs.

Energy (kWh) metering should be used for allocation of variable costs, which in a non-fossil energy system are typically only 10% of total costs.

Energy metering can be used for total cost allocation in major buildings where the building management uses shared central equipment to do energy storage and peak demand control for the benefit of all of the building occupants.

In Ontario the electricity market is further skewed by faulty Ontario government policies that encourage reduction of electrical energy consumption (kWh) instead of encouraging reduction of electrical peak demand (kW) and encouraging use of surplus non-fossil electricity for displacement of fossil fuels in other sectors using fuel switching equipment and automation.

This web page last updated April 16, 2017.

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