Electricity costs for smaller and larger households

Regular economics commentator Frances Woolley turns her sights to electricity in a recent posting (‘http://www.theglobeandmail.com/report-on-business/economy/economy-lab/frances-woolley/why-ontarians-arent-saving-money-with-smart-meters/article2190147/’, The Globe and Mail, 4 October 2011).  I enjoyed much of her argument, but I will ‘dig into’ one aspect – and by doing so, return to a theme I have picked up in the past in this blog.

More specifically, she writes:  ‘ … Ontario’s old regulated price plans favoured small households over larger families. Consumers paid a higher price for power if they used more than a certain amount each month. So, for example, a one-person household consuming 400 kWh per month paid 6.8 ¢/kWh under the May 2011 rate schedule, while a four-person household consuming 300 kWh per person paid, on average, 8 per cent more, or 7.35 ¢/kWh.’  I agree with the specific statements, but take issue with some of the details.

She is comparing a ‘summer’ consumption of 400 kWh (one-person household) in a month with one of 1,200 kWh in a month (four-person household).  And, yes, under the two-tier system, the difference in the ‘commodity cost’ would be as she writes:  for the smaller household, all 400 kWh would be under the ‘summer threshold’ of 600 kWh and thus 6.8 cents/kWh; while the first half (600 kWh) of the larger household’s electricity consumption would be at 6.8 cents/kWh, and the second half (600 kWh) at 7.9 cents/kWh, to give an average of 7.35 cents/kWh.  My issue, however, is that these are not the ‘costs’ to the consumer – or the price that would be paid.  Instead, one must look at the total charges.

Using Hydro Ottawa as the service territory in the Ontario Energy Board’s bill calculator (Prof. Woolley is at Carleton University), I put in the consumption patterns, and got numbers as follows:

Charge	One-person household	Four-person household
Consumption in a summer month	400 kWh	1,200 kWh
Commodity charges	$28.14	$91.46
Delivery	$22.81	$48.15
Regulatory charges	$3.09	$8.78
Debt retirement charge	$2.76	$8.28
Sub-total	$56.80	$156.67
HST	$7.38	$20.37
Sub-total	$64.18	$177.03
Clean Energy Benefit	($6.42)	($17.70)
TOTAL	$57.76	$159.33
Cost/kWh	14.44 cents	13.28 cents

Two points to be taken from this.  First, it is important to flag that ‘commodity charges’ – though important – are not the ‘cost’ to the consumer.  And second, differences in commodity charges will not necessarily translate (‘exactly’) into differences in these final costs to the consumer.  Indeed, in the example above, the difference in the ‘per kWh’ cost to the consumer is not ‘8%’ (the 7.35 over 6.8), but instead is really ‘MINUS 9%’ (8.7% results from 14.44 over 13.28) -- that is, the larger household actually has the smaller unit cost for electricity.  Given that 'fixed charges' (reflected in delivery charges) are relatively large, and many of them fixed, regardless of one's consumption, these can overwhelm 'per kWh' calculations.  Therefore, while Woolley’s attention to distributional impacts is most welcomed -- and the ways in which smaller households and larger households will be affected by a move to time-of-use pricing is worth investigating further -- we should reflect further upon whether the difference in commodity costs for smaller and larger households in the conventional 'two-tier' system really told us the full story. 

Kitchen table chats

The image of Tim Hudak speaking to a couple about their electricity bills in their kitchen – in a Toronto Sun article from 3 October 2011 entitled ‘Retired couple gives PC’s a boost’ – brought back memories of past photo-ops in Ontario electricity policy campaigning.  It would be interesting to compare and contrast such kitchen-table chatter.  The one that I wanted to pull out – but which I could not find ‘copyright-cleared’ on the web – was of Premier Ernie Eves doing something similar.  Though not during an election campaign, his visit to the home of Keshab Hardett and family in Mississauga – to announce his price freeze – is an image that is still in my mind almost ten years later.  When I went back and looked at Ontario newspapers on 12 November 2002 – and saw it on the front page of many – I can more fully understand why it is so ingrained.  In the next election, perhaps a pool could be formed to guess the first time such a moment might occur!  :>

Large users' prices

On the website of the North Bay Nugget (though, as far as I can tell, not necessarily in the newspaper) was an article entitled ‘Energy Crisis Official with Smart Meter TOU rates - Ontario families feeling crisis to wrestle peak times/price hikes’ (30 September 2011).  A number of familiar themes can be found therein, but the passage I would like to explore is the following:  ‘Residential customers and small businesses are considered low volume users yet we’re targeted as the major cause of the energy problem and integral part of the solution. What about major corporations with multiple locations; Wal-Mart, Toyota Canada, et al. According to the FAQ page on the Ministry of Energy website, TOU rates only apply to low volume users.’

Factually, this is correct – namely, that time-of-use rates (TOU rates) only apply to low-volume users.  But it is not that larger users are on some kind of ‘flat rate’ or ‘two-tier system’, but instead they are on a system that is ‘truer’ to real-cost pricing than is time-of-use.  More specifically, large users pay the spot market price (the ‘Hourly Ontario Energy Price’ or HOEP), which is a function of supply of, and demand for, electricity in real time. (This is those who consume more than 250,000 kWh a year; these customers account for just under half of all electricity used in the province.)

To add further texture to this debate, I thought that I would pull out yesterday’s HOEP and show how it varies with time.  I did the former, but that does not necessarily show the latter.  Looking at the graph below – which is, in fact, HOEP from Friday, 30 September 2011 – one is struck by how flat it, indeed, is.  I have overlaid the ToU times and prices.  While these HOEP figures do not show ‘global adjustment charges’ (and which would thus push the whole graph upwards), they are remarkable for how constant they are.  Perhaps that is a function of being in the ‘shoulder’ season – between, that is, the peaking seasons of winter and summer.

Regardless, the relationship between ToU (prices and periods) and real-time pricing is an interesting one – one that I have explored previously in this blog and will probably do so again in the future.