Markham, Ontario: In a move that could save its residents hundreds of thousands of dollars per year, the Town of Markham has decided to purchase electricity under a new energy procurement strategy that will use a combination of the spot market and other competitive supply options. Research by the Town estimates that its annual expenditure of $4 million to purchase power could be reduced by about $300,000 under the procurement strategy. Currently the Town buys its electricity under the Regulated Price Plan (RPP) overseen by the Ontario Energy Board, but a range of other options are available to large power consumers like municipalities.
Although the strategy is just getting started, it may be that the Town of Markham has found a way to tap into a range of significant benefits for the public by becoming more directly involved in Ontario’s wholesale power market. If Markham’s initiative is followed by similar ones in other municipalities, it could become an influential force in the shape and development of Ontario’s wholesale competitive electricity market.
Paul Murphy, the President and CEO of Ontario’s Independent Electricity System Operator, seemed interested in Markham’s kind of approach when he said on January 16: “New technologies and new approaches all around us are changing the way that electricity is supplied … delivered … and consumed. ... Customers are going to become active participants in the energy sector … something we need to encourage.”
Under the strategy, the Town of Markham expects to enter into agreements with a range of energy suppliers with the help of WattsWorth Analysis Inc., a consulting group who are actively engaged in the wholesale market. By partnering with a private sector company like WattsWorth, the Town was able to gain the technical expertise required to operate effectively in the complex and constantly-changing market for electricity.
On December 11, Markham Council adopted the recommendations of a report, “Electricity Procurement Strategy for The Corporation of the Town of Markham,” prepared by Viive Sawler, Markham’s Energy Conservation Manager. The report laid out a series of considerations that went into the plan and the expected benefits.
“The Town of Markham is proud to be on the forefront of combining its energy conservation efforts with an electricity procurement strategy that will contribute to additional cost savings, mitigate risks associated with rising electricity costs and yield savings that can then be re-invested in other conservation initiatives,” Sawler said. “These efforts will lead to reductions in greenhouse gas emissions, help secure the power supply for our community and promote a greener supply mix for all of Ontario.” The strategy is also expected to assist with budgeting for energy costs.
Although other municipalities have entered into similar kinds of procurement strategies, Markham’s initiative is noteworthy in that it is being put forward as part of its energy conservation program, and in a particularly open way, for public review and discussion. “I believe that Markham is improving public understanding about how the electricity system works and what consumers can do to make it work better,” says APPrO Executive Director Jake Brooks. Markham’s energy procurement strategy is part of a historic pattern of initiatives by the Town in energy development and environmental protection, which it views as integral to its economic development plan. In addition to an ambitious energy conservation program, the Town’s District Energy initiatives have been leading examples of their type in Canada. The Town is developing a “greenprint” for Markham, an overall plan for achieving environmental objectives, initiated and led by Mayor Frank Scarpitti.
The WattsWorth group will not actually be buying and selling power for Markham. They act as consultants, with no direct stake in any choice the Town might make to purchase from one supplier compared to any other. But it is not a small player: the company represents municipal customers with more than 1 billion kWh of consumption per year.
Todd Boyd, the Manager of Retail Energy Markets for WattsWorth, says: “The value of the forward contracts is that, in combination with the capped rates, it provides the stability of pricing like the RPP but at a lower cost. Thus, municipalities have budget-ability and cost savings. Markham’s strategy will be designed such that it compliments its energy conservation initiatives rather than penalizing them for saving electricity.” The approach recommended by WattsWorth will be a strategy it has designed specifically for municipalities, rather than the standard retail contract. A customized combination of hedges and forward contracts will reflect the Town’s particular characteristics in terms of consumption patterns and risk preferences.
Boyd expects that Markham will derive good value from the initiative. “In our experience, those municipalities that use a combination of the spot market and forward electricity contracts will save approximately 10 to 18% over the RPP and almost 50% on street lighting alone.”
Why are savings like this available to those who participate in the market? First of all, the RPP is not really ideal for large customers because most of their purchases are made at the second price tier, which has averaged somewhat above the spot price in recent years. Moving from second tier RPP prices to wholesale spot market prices is where the first part of the savings will likely come from. However, Markham may be able to save more money by using hedging and retail contracting in addition to the spot market. Why does the system work this way? Normally consumers under the RPP provide no advance information to the operators of the system on what their demands will be, so they are required to pay a blended monthly price that reflects all kinds of variations in the hourly prices that have occurred over the past month. However, because the Town can make reasonably reliable predictions about how much power it will need and when, it can make advance commitments to purchase power – allowing generators and system operators to plan their operations further in advance. The suppliers are often willing in such cases to sign supply contracts at relatively fixed prices, which tend to average lower than the spot market price. In summary, by participating in the market more directly, the Town of Markham will be allowing suppliers to better anticipate its needs by offering prices that are more predictable and often lower.
Although there is no guarantee that active involvement in the market for power will always save money, “The system as a whole can operate more efficiently when consumers enter into long term contracts,” says APPrO Executive Director Jake Brooks. “If retail contracting is used, then less of the supply that the system operator distributes across the province will have to go through the hourly price determination process.” Instead, generators and consumers, either directly or through marketers, make advance arrangements on how much they will supply and what it will cost. “All parties benefit from price certainty and consumers as a whole benefit because the contracting process transfers some of the risk from the overall system to the individual players,” Brooks says.
Paul Murphy concluded saying that, “(We) can work together toward a future where the downstream side of our industry is just as active as the upstream side … where the entire supply, delivery and consumption chain … is truly integrated.”
It appears that the Town of Markham is demonstrating how participating actively in the market for electricity can benefit itself and others.
For the report and recommendations on Markham’s procurement strategy, go to www.markham.ca and use the Search function at the top of the page to search for Electricity Procurement Strategy. A PowerPoint presentation and the Report to the General Committee are available.
For more information on WattsWorth, see www.wattsworth.com/
Municipal Energy Information
Ontario’s Independent Electricity System Operator is working closely with the Association of Municipalities of Ontario (AMO) to provide municipalities with information to help them control their electricity costs. The effort is particularly timely because a transition to hourly pricing is imminent for many of the municipalities. The IESO has published a booklet entitled “The Bottom Line on Managing Your Electricity Costs: A Guide for Municipalities,” as well as several case studies that provide tangible examples of good energy management practices. Interested readers can access further information on the Business & Industry section of the IESO’s web site: www.ieso.ca/imoweb/businessIndustry/bi_index.asp.