Canada: The expected (and unexpected) consequences of the Russo-Ukrainian war on the power sector
John Vellone
Borden Ladner Gervais, Toronto
Introduction
On 24 February 2022, Russia began its widely condemned invasion of Ukraine. By March of the same year, many Western countries, including Canada and the United States, prohibited the import, purchase or acquisition of petroleum oil, petroleum gas or other gaseous hydrocarbons from Russia, or any person in Russia, as part of an escalating series of sanctions.
The impact of the Russo-Ukrainian war on the power sector in Canada was most acutely felt through an increase in the cost of fossil fuels, including natural gas, which through the operation of thermal power plants acting as the marginal source of supply in numerous energy markets drove an increase in wholesale market pricing across North America.
A tale of two provinces: the expected – Alberta
In Canada, the average power pool price in the Province of Alberta in 2022 was the highest ever, in nominal terms, reaching CAD 16.25 ¢/kWh (an increase of 59 per cent from 2021). In the Province’s energy-only market, the price increase adversely impacted consumers that did not have a price hedge in place. It has also further spurred the active development of new merchant renewable generation and energy storage, putting further pressure on an already constrained transmission system.
A tale of two provinces: the unexpected – Ontario
By contrast, the average hourly Ontario wholesale electrical energy price increased from 1.39 ¢/kWh in 2020 to 4.71 ¢/kWh in 2022 (a 239 per cent increase from 2021) over the same period.
However, this is only part of the story. Under Ontario law, the wholesale energy price is only one part of the cost paid by a consumer. Consumers must also pay the global adjustment, which, pursuant to section 25.33 of the Electricity Act, 1998 (Ontario) funds, inter alia, amounts paid by Ontario’s independent electricity system operator for procurement contracts.
Ontario has a history of meeting the province’s resource adequacy requirement by, among other things, using a creditworthy statutory corporation to enter into power purchase agreements (PPAs) through various procurement mechanisms.
Currently, the Ontario independent electricity system operator is party to thousands of PPAs funding a broad range of electricity generation technologies, including renewable energy, natural gas and nuclear. Many (although not all) of these PPAs are structured as contracts-for-differences against the average hourly wholesale energy price. This difference is funded using the global adjustment. Consequently, the global adjustment charge tends to be inversely correlated to the hourly wholesale energy price.
What was the impact of this structural made-in-Ontario PPA hedge?
Consumers in Ontario saw the total commodity cost (the hourly Ontario energy price plus the global adjustment, excluding uplifts) decrease from 13.21c/kWh in 2020 to 10.05c/kWh in 2022 (a 23 per cent decrease) over the same period that natural gas and wholesale costs increased by over 200 per cent. In fact, 2022 represented the lowest average global adjustment charge in Ontario since 2012.
This has, in turn, driven some other truly unexpected consequences.
Under Ontario Regulation 429/04, certain large-volume consumers (those with peak demand greater than 500 kW) can opt-in to a global adjustment pricing regime. This calculates their global adjustment charge during a year (the adjustment period) based on the load consumer’s percentage contribution to Ontario’s top five coincident peak demand hours in the previous year (the base period). If you are able to curtail 100 per cent of your peak electrical demand during all five coincident peak hours during a base period, you can avoid 100 per cent of the global adjustment charge during the following adjustment period.
Global adjustment charges have represented approximately an average of 70–90 per cent of the commodity cost over the last decade. As such, this programme has, not unexpectedly, led to the creation of an industry focused on installing behind-the-meter generation and storage resources to help large-volume consumers reduce their peak demand during these five coincident peak hours.
Many (though not all) of the behind-the-meter resources installed are natural gas-fired thermal generators. As a consequence of sanctions arising as a result of the Russo-Ukrainian war, natural gas costs to operate their thermal generators in 2022 substantially increased for customers without a gas commodity hedge. These customers are also likely to see reduced benefits in terms of avoided global adjustment charges as we move into 2023 (global adjustment was approximately 53 per cent of the commodity costs in 2022).
The picture is less bleak for customers with behind-the-meter storage resources to the extent that they were able to charge during lower-cost off-peak hours to avoid some of the wholesale energy price increases in 2022, although they too are likely to see a reduced global adjustment.