In recent months, a little-known fee on our electricity bills called the Global Adjustment has gained a lot of attention. For most of us, this fee now makes up 50-75% of our total electricity costs.
In the fall of 2015, Ontario’s Auditor General Bonnie Lysyk outlined how the province paid $37 billion in excess electricity costs between 2006 and 2014, with Ontario estimated to pay an additional $133 billion by 2032 due to the Global Adjustment.
Yet, despite the Global Adjustment accounting for the largest share of our bills, it is usually hidden within our rates and nobody understands how it is calculated. Before we can control our rising energy costs, we must first understand the history of the Global Adjustment and how it impacts our energy costs today.
The Global Adjustment fee is a variable rate that is charged on every kilowatt hour of electricity that you consume. For larger consumers, it is shown as a separate line-item on their bills. For most consumers, however, it is hidden as part of your electricity rates.
The Global Adjustment fee is used to cover the costs of two major programs in the Ontario energy sector:
Firstly, this fee is used to cover the cost of all the energy conservation programs in Ontario, such as rebates for LED lighting and HVAC retrofits. This funding is also used for various recycling programs and other initiatives.
Secondly, in order to ensure a steady supply of electricity, the government promised electricity generators a certain level of income for the electricity that they produced. In almost every case, the electricity price guaranteed to generators is higher than the current wholesale cost of electricity. The difference between these two rates – the rate promised to electricity generators and the actual wholesale cost of electricity – is the Global Adjustment.
To cover the costs of these two programs, the Global Adjustment was added to the electricity bills of every consumer in Ontario.
When the Global Adjustment was initially introduced in 2005 it was relatively harmless. It helped to stabilize the market cost of electricity in the province, incentivized energy generators to invest in the province, and had minimal impact on the cost of electricity. Over the past decade, however, it has become a much larger portion of our bills. Today, it now makes up more than half of our electricity costs.
The Global Adjustment has successfully created a strong and diverse supply of electricity in the province. Ontario produces 10% more electricity than it consumes each year, and 8.3% of our electricity comes from new renewable sources: primarily from 2,465 wind turbines installed across the province.
Unfortunately, the Global Adjustment also has major negative side-effects. The most obvious of these is that it has caused electricity rates in the province to increase dramatically; Ontario now has the fastest growing electricity rates in North America. We will explore this point later, but first there are two major issues with how the Global Adjustment works that we will explore.
Largely due to the guaranteed rates offered to generators, Ontario has replaced its coal plants and increased production of electricity by 4.3% over the last 15 years. At the same time, due to conservation efforts and a reduction in manufacturing, our demand for electricity has decreased by nearly 10%. As a result, the actual cost of electricity – the wholesale rate – has decreased from roughly 6 cents per kilowatt hour (₵/kWh) to 1.2 (₵/kWh) in the past 15 years.
Normally this would be great for the province. As electricity prices drop the cost of manufacturing in the province should also decrease, leading to more companies coming to the province to create jobs. Unfortunately, because of the Global Adjustment, consumers in Ontario never got these cheaper electricity rates. Ontarians are made to pay for their electricity at the guaranteed rates promised to our generators.
While it may be reasonable that Ontarians pay these higher rates to ensure a reliable and clean energy supply in our province, the problem comes when we export this electricity to our neighbours at a discounted rate. As mentioned earlier, the province produces roughly 10% more electricity each year than it needs. We sell this excess electricity to our neighbours, but they only have to pay the wholesale rate for electricity, not including the Global Adjustment. Ontarians have to pay four to six times more for Ontario electricity than our neighbours do.
The result is that Ontarians pay roughly $1.6 billion to produce electricity that we do not need ourselves, and that we then sell to our neighbours for $300 million: a loss of $1.3 billion per year.
Due to the Global Adjustment, there is now a disincentive for the province to consume less electricity. This was made painfully clear in the spring of 2016 when, after the entire province consumed less electricity due to an abnormally warm winter, electricity rates were still increased.
This happened because energy generators have been guaranteed a stable income stream. So, if they produce electricity that is not consumed, they are still being paid for this energy production. This is a great way to attract investment to our province, allowing generators to earn a return on their long-term investments, but it is terrible for consumers.
For a simple example of how this works, imagine that you normally drive to see your parents twice a month. Before you leave town, you fill your tank at the local gas station and make the 3-hour trip. Last month you lost your job, however, and so you’ve decided that you will only drive to see your parents once a month now.
This is unfortunate for the owner of the local gas station. They invested in their business on the assumption that you would fill your tank twice per month. As a result they have now lost half the money that they used to make from you. The government decides that, in order to continue attracting investment to our gas station industry, when you go to the gas station you must pay twice as much per litre to ensure a guaranteed income stream for the business owner.
This is how the contracts have been constructed with our energy generators.
Fastest Growing Electricity Costs
Electricity rates in Ontario have risen from 4.3 ₵/kWh in 2002 to 11.2 ₵/kWh in 2016. That is an increase of 160%, an increase more than five times higher than the rate of inflation.
To better understand how the Global Adjustment has impacted electricity rates in Ontario, it is useful to take the rate paid by Ontario consumers and compare it to the wholesale cost and the Global Adjustment cost over the past 15 years.
Firstly, if we look at the average electricity rate paid by Ontarians over the past 15 years we can see that our rates have steadily increased since 2009. This is not the true cost of electricity in Ontario, but rather it is the average cost of electricity that utilities charge consumers.
When we compare the average electricity rate paid by Ontarians to the full market rate of electricity, we can see that the full market rate used to be quite volatile but now closely matches the electricity rate paid by consumers. For the sake of clarity, the yellow line is the actual cost of electricity in the market, and the grey line is the rate charged to consumers. Your utility is charged the yellow line and is paid the grey line for every kWh consumed by its customers.
The above graph would seem to indicate that consumers pay a rate very similar to the actual cost of electricity. The truth, however, is more complicated. The full market rate has two parts; the wholesale electricity rate and the Global Adjustment.
When we break these two parts down, we see that the wholesale electricity rate has been quite volatile, but in general has been decreasing steadily for the past 10 years. In contrast, the Global Adjustment moves opposite to the wholesale rate and has been steadily increasing.
The important thing to note in the graphs above is that the average rate paid by Ontarians has been increasing steadily even though the actual cost of electricity has fallen to around 1-2 ₵/kWh. This is because the Global Adjustment prevents Ontarians from paying the wholesale electricity rate, even though this is the rate that our neighbours pay for our electricity.
From 2002 to 2005 there was no Global Adjustment on our bills. During this time, consumers simply paid a flat rate for their electricity. The market rate during this time was quite volatile, but it was usually more than what consumers actually paid.
In 2005, the Provincial Benefit was introduced. This was the original name for the Global Adjustment, and at the time it could be either a credit or a cost to consumers. For four years, this rate remained a small part of our bills and helped to stabilize the cost of the electricity in the market.
Starting in 2009, with the introduction of Ontario’s 2009 Green Energy Act, the Global Adjustment increased dramatically and since then has almost always been substantially higher than the actual wholesale cost of electricity.
The Global Adjustment fee is the difference between the wholesale price of electricity and the rates paid to various regulated and non-regulated generators across Ontario.
The actual formula for the GA is shown as:
GA = (NUG + OPG + IESO) - HOEP
The first three variables – NUG, OPG, and IESO – are all major industry groups in our energy sector. These groups are the parties receiving our GA fees to cover the costs of providing our electricity and for managing Conservation and Demand Management (CDM) programs across the province.
When you get a rebate for installing LEDs in your house, they are paid for by the Global Adjustment. When a customer gets guaranteed high prices for the electricity produced by their rooftop solar project, they are paid by the Global Adjustment.
The Global Adjustment is also heavily dependent on the wholesale cost of electricity, also called HOEP (Hourly Ontario Electricity Price). If the wholesale price increases, the Global Adjustment decreases. If the wholesale price decreases, the Global Adjustment increases.
If you would like to know exactly how the billions of dollars collected by the Global Adjustment are being spent, that is far more difficult to determine. We know what programs are funded by the Global Adjustment, but there is no system of transparency which outlines how much money is being spent where.
The first step to controlling our rising energy costs is to understand why they are increasing, specifically how the Global Adjustment has led to Ontario having the fastest growing electricity costs in North America.
The more people who understand what the Global Adjustment is, and how it is driving up our electricity costs, the quicker we will be able to solve this problem. Raising awareness on this issue must come first; too many Ontarians simply believe that this is an unsolvable problem.
The recent pressure on our provincial politicians and our premier has helped to raise awareness of these issues. We need to continue raising awareness, specifically by asking our local MPPs to help fix our broken system. You can reach out to your local MPP by going to this site.
We are working to help consumers take charge of their energy usage and costs. Currently, we offer a buying-group that helps small businesses get off expensive day-time electricity costs and save on average $1,000 per year.
Unfortunately, this offer rarely helps homeowners or larger businesses. We are already working on several other solutions, however, and intend to help you too.