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By C. Rhodes

The objective of this web page is to identify major issues relating to variable electricity rates.

The purpose of variable electricity rates is to encourage load customers to change their net electricity usage pattern in a manner that will increase electricity system load factor and hence reduce average per kWh electricity costs. However, there is a limit to variable rate benefits. A predictable daily variation in the total load allows some generators to go off line during the off-peak period, which allows convenient scheduling of preventive maintenance. If these generators are committed 100% of the time, additional reserve generation is required to permit normal scheduled equipment maintenance.

A political problem with implementation of variable electricity rates is that at the time of initial implementation some parties benefit and others do not. This problem makes implementation of variable electricity rates politically difficult.

Variable electricity rates are essential to maximizing transmission/distribution efficiency over a 24 hour period. Examples of customers who will consistently buy electricity at a low price are owners of electric and plug-in hybrid vehicles, stationary electro-chemical energy storage systems, thermal energy storage systems, hybrid oil-electricity heating systems and electro-chemical production equipment. These same customers will decrease electricity usage at a high electricity price.

Examples of generators who will consistently attempt to sell most of their electricity output at a high price are owners of hydro electric generators with daily storage reservoirs and owners of biofuel generation.

Examples of parties who will buy electricity at a low price and sell it at a high price are owners of pumped hydraulic energy storage systems and compressed air energy storage systems.

In order to encourage development of these customer groups, and hence electricity market liquidity, it is necessary to adopt a regulated variable electricity rate with a daily price swing that is sufficient to allow all of these customer groups to exist and financially prosper. Thus far the OPA and the OEB have paid no attention to this critical issue. While there is a time dependent kWh rate there is no complimentary time dependence in the delivery charge. The total marginal electricity rate must have a daily swing over about a 3:1 range to financially enable energy storage technology.

It is shown under the heading Electricity Congestion Factor that a practical electricity rate varies with daily load factor.

Variable electricity rates can take the form of a rate that depends on Time-Of-Use (TOU) or a rate that depends on daily or monthly load factor. Historically monthly load factor was used because it entailed only a small amount of data that could readily be collected via monthly manual meter readings. However, the advent of smart meters that can collect and store fifteen minute or one hour interval data has made it possible to implement either TOU or daily load factor dependent electricity rates.

TOU electricity rates are superficially attractive to politicians because the TOU concept is easy to explain to the general public. However, there are practical problems in implementation of TOU rates. Simple time of use rate blocks have unintended side effects such as extraordinary local distribution load peaks during off-peak periods, rapid load changes at rate block boundary times and cross subsidization between rate groups. There are also problems with opportunistic use of off-peak electricity without complementary on-peak electricity purchases, leading to a utility wide revenue shortfall.

A much more robust variable electricity rate structure is a daily load factor dependent electricity rate. A major advantage of a daily load factor dependent rate is that a load customer cannot obtain off-peak kWh at below average cost of production unless that same customer also purchases a corresponding amount of on-peak kWh at above average cost of production. This constraint reduces cross subsidization between customer groups.

Ontario is in the process of implementing a TOU electricity rate in which the regulated values of the energy rate factors Ct and Cr are time dependent. However, in order for Ontario to realize the full benefit of TOU rates, rate variability will have to be extended to also make the regulated value of the transmission/distribution rate factor Cd time dependent. The billing formula is a summation over all the Time-Of-Use (TOU) intervals in the billing period. A time dependent regulated electricity price should encourage consumer use of off-peak electricity, which should increase the system load factor. However, implementation of simple TOU rates may lead to more rather than less total electricity usage and hence may increase the total required generation capacity. Implementation of TOU rates will likely lead to flyback demand peaks during the initial portions of off-peak rate periods. TOU rates also have the practical problem that, due to the complex time varying rate structure, they increase the number and complexity of customer enquiry telephone calls to the local distribution utility.

Another result of implementing TOU rates is that average electricity costs will increase for commercial customers and others whose energy use is concentrated in the on-peak period and that are unwilling or unable to take advantage of lower cost off-peak electricity.

This author's personal experience was that Ontario lost the benefits of TOU rates by years of vacillating about electricity rates and then failing to adopt and maintain TOU electricity rates that reasonably recover actual costs. During the 1960s and 1970s many buildings in Toronto were built with thermal energy storage systems. During the 1980s and 1990s these thermal energy storage systems were taken out of service because the electricity rates were changed such that continued operation of these thermal energy storage systems no longer made economic sense for the building owners. Building owners require a projected positive cash flow and certainty regarding long term electricity rates before they will make the capital expenditures on energy storage systems and/or behind the meter generation that TOU rates are intended to promote. From the point of view of major building owners, the Ontario government and the Ontario Power Authority (OPA) have zero credibility with respect to their claims regarding future electricity rates. In order to restore that credibility it will be necessary for the Ontario Energy Board (OEB) to fundamentally fix the electricity rate structure and then for the OPA to offer building owners and developers firm competitively priced electricity rate contracts with at least 10 year terms.

The load factor of a load customer is defined by the equation:
Daily Load Factor = (daily average power) / (daily peak power)
In order to minimize the impact of power demand peaks on the generation, transmission and distribution it is desirable to financially encourage all non-dispatched load customers to maintain a high daily load factor.

A high daily load factor is encouraged by use of an interval meter that records the energy consumption during each measurement interval and an electricity rate that rewards the building owner for maintaining a high daily load factor. Similarly small generators that are not dispatched by the IESO should have a compensation rate that rewards them for maintaining a high daily capacity factor. This new electricity rate regime should rely on the statistical independence of random maintenance shutdowns of behind the meter electricity generation, energy storage and load control equipment, rather than requiring continuous 100% operational availability of all equipment at each site. A maintenance shutdown should affect a customer's electricity bill for one day, not an entire month. The derivation of the required rate formulas is set out under the heading: Electricity Congestion Factor.

If energy storage systems have to pay transmission/distribution rates these energy storage systems will not be economic. To avoid this problem energy storage systems should be located either behind the generator meter or behind the load meter so that the energy storage improves the load factor or the net generator capacity factor and hence decreases rather than increases the equipment owner's transmission/distribution costs.

In order to achieve high generator capacity factor and high load factor it is desirable to implement energy storage at both generation sites and load sites. For this energy storage to be economically viable for its owners there must be suitable variable electricity rates guaranteed by credible long term contracts. It is necessary introduce congestion factors to make the electricity rate factors Cr, Ct and Cd suitably vary with load factor or generator capacity factor.

The variable electricity rate should cause non-dispatched generators to adopt sufficient energy storage to flatten their net generation profiles and should cause non-dispatched loads to adopt sufficient energy storage to flatten their net load profiles, so that the amount of dispatchable generation, dispatchable load and energy storage required for load following is minimized.

The object of a time varying electricity rate is not to create a new local demand peak during the off-peak period. The object is to encourage uniform supply of energy to the grid and uniform absorption of energy from the grid.

A useful strategy for balancing the generation and load for grid voltage and frequency regulation is to offer interruptible electricity under IESO dispatch control at a discount from normal electricity rates. The purchasers of such electricity are parties that can tolerate frequent and ongoing power interruptions. There are certain electrochemical processes that lend themselves to load dispatch with an interruptible electricity rate. These processes include production of ammonia fertilizers, electrolytic metal refining and production of ethanol via electrolysis of acetic acid.

These processes only make financial sense if the required electricity can be obtained relatively inexpensively. These processes are not time sensitive and can usefully absorb massive amounts of surplus off-peak electricity.

These processes will only exist on a large scale in Ontario if the OPA, OEB and IESO collectively act to offer suitable long term price discounted interruptible electricity supply contracts.

Discount interrruptible electricity purchasers might include:
a. Parties in the electrolysis and electrolytic refining business;
b. Owners of parking lots for electric and plug-in hybrid vehicles;
c. Owners of electro-chemical and pumped hydraulic energy storage systems;
d. Owners of thermal storage systems.
A problem with the IESO having direct dispatch control of customer loads is that such control can lead to higher power peaks on the local distribution systems than would otherwise occur. Hence, when the IESO exercises such dispatch control it must be prepared to financially compensate the owner of the controlled equipment for any extra electricity costs that arise as a result of the dispatch control action.

A potential problem with the IESO having dispatch control is the possibility that sooner or later the control communication network will be intentionally compromised, potentially leading to equipment damage or service interruption. The electricity network will be much more robust if the large majority of load customers have stand alone control systems that operate to maintain high load factor independent of dispatch control.

In order to avoid the limitations of peak kVA and peak kW metering this author recommends full implementation of congestion factor weighted directional kWh metering. Measurements of received energy and transmitted energy during a measurement time interval provide a good indication of the generation and transmission/distribution resources used during that measurement time interval.

The reasons for using congestion factor weighted directional kWh metering for cost allocation are as follows:
1. A directional kWh meter can easily output received and transmitted kWh;
2. Congestion factor weighting encourages high load factor;
3. Directional kWh meters reward good power factor;
4. Directional kWh meters reward low harmonic content;
5. Congestion factor weighting rewards uniform power transfer rates;
6. Congestion factor weighting reduces the cost impact of occasional random short term power transfer rate variations due to mechanical equipment repair and maintenance;
7. Congestion factor weighting penalizes ongoing daily variations in power transfer rate.

The fundamental fix that is required is congestion factor weighting of electricity rates for non-dispatched generators and non-dispatched loads. Properly chosen congestion factors will shift the rate burden from high load factor load customers to low load factor load customers, thus financially enabling load management, energy storage and behind the meter electricity generation. Congestion factors will increase compensation to high capacity factor generators and decrease compensation to low capacity factor generators, thus financially enabling energy storage behind wind generator meters.

This web page last updated January 17, 2011.

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