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Time of Day Pricing Explained

Roger Peters – May 12, 2014

Ontario’s electricity demand varies with the time of day and day of the week depending on how much we all need, and when we need it. To meet this demand the province’s grid operator must buy power from a variety of different power generators.

To provide a base amount of electricity, power is purchased from nuclear power plants 24/7. All the power produced by these plants must be purchased because they cannot be turned up or down. The current cost of buying base load power from these plants is quite low because the true cost has been masked by decades of subsidies which, as taxpayers and consumers, we are still paying for through “debt retirement charges” and taxes.

If more power is needed, the grid buys from hydroelectric power plants. These are a bit more flexible as water can be stored behind power dams (or in the case of Niagara Falls power plant in a large storage pond) until demand increases. Finally at peak times – weekday mornings and late afternoons in the winter and mid-day during the summer – the grid must buy power from natural gas turbine power plants that can easily be ramped up and down to meet demand. The cost of buying peak power from these natural gas plants is much higher – not only because natural gas is more expensive, but because the power plants are only run for a short time each day. Power generators must therefore charge more to obtain a return on investment.

Until recently, residential consumers were charged an average rate for all the power they consumed, independent of how much it cost the grid to buy it. This all changed with the introduction of so-called “smart meters” and time-of-day pricing. The meters allow consumers to be charged more closely to what it is actually costing the grid to buy power. This is why we pay a basic rate at off peak times, a higher rate at mid-peak and the highest rate at peak times. The objective is to encourage consumers to shift some of their power usage to off peak times so that the overall cost to the grid and consumers is lower.

But it is important to remember that these time-of-day prices reflect the current cost of purchasing power at different times of the day in Ontario – not the true cost of generating this power or its environmental and social costs. Base load generating costs will rise significantly when the Province’s nuclear plants go through expensive refurbishment over the next few years – much more if the Province purchases a new nuclear plant. Peak power costs will also rise with increases in the cost of natural gas.

On the other hand, there are many options for the Province to temper these rising costs. Ontario still has a huge potential to reduce electricity demand by helping consumers with efficiency measures and conservation – lowering energy bills even as prices rise. The introduction of power storage and “smart grid” technology will also let the grid be operated much more efficiently and allow renewable power sources to play a role. For example, solar PV output coincides very well with summer peak demand and also reduces grid system transmission losses. In many jurisdictions around the world, the cost of solar is close to parity with conventional peak power costs, and is still dropping.

So time- of-day pricing and rising prices for electricity are here to stay, but their impact would be significantly reduced if governments helped us maximize conservation and made the grid smarter and more diverse.


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