As described in the lead story, many in the utility business are concerned that the combination of energy efficiency and distributed generation could cause a decline in the volume of energy delivered by local electricity distributors, and long term revenue loss. There is a scenario where a city’s power utility hypothetically faces a dilemma, in some customers choosing to generate their own power – for a range of reasons such as cost control, security of supply and generation of heat as a useful byproduct – resulting in a possible loss of revenue to the utility, while at the same time the utility has trouble securing the capital needed to retain customers. Many distributors anticipate incurring costs in the near term for strengthening their systems to deal with aging infrastructure, grid modernization and climate-related contingencies. Meanwhile, the regulator, emphasizing cost control on behalf of the customer as in its mandate, declines to approve those extra costs. These interests can work at cross purposes.
Some commentary collected in the course of research for this story took the view that the Ontario Energy Board has been excessively conservative in its review of Toronto Hydro’s rate application, and has not been allowing the utility the revenue to pay for that extra resiliency.
Jack Simpson, Director – Generation and Capacity Planning at Toronto Hydro, explained in a phone interview that the situation is more nuanced. For one thing, he said, “Energy (kWh) charges are flow-through for us. Demand charges (kW) provide Toronto Hydro funding to invest in the distribution system. We need to provide peak system capacity for all customers. We have standby charges for customers who choose to install CHP and still have backup from our system. Customers provide a capital contribution to Toronto Hydro based on a 25-year forecast, consistent with the Distribution System Code. If customers don’t use the capacity they requested, they may be obliged to compensate us for that infrastructure.”
“Toronto Hydro has a dedicated interconnections group to help enable distributed generation across the system,” Simpson says. Sometimes a customer may be planning generation in anticipation of a supply crunch, but Toronto Hydro will in fact have capital projects for the area that will ensure sufficient supply and so they will advise customers that improvements in reliability are coming.
Second, he explains, restrictions that existed on the system some five years earlier, that might have limited distributed generation projects, have been removed. “There were fault current limitations in the rating of the breakers at main transmission supply points, Leaside and Manby, that have been addressed by recent Hydro One investments in those facilities.”
Those investments have had the effect of lifting system constraints on distributed generation all across downtown, he explains. “Local generation will change the flow of energy in a given area, and sometimes reduce the load on the system, but we have to consider that if there’s a fault, either due to generation or a large motor load, the fault can travel upstream and cause a wider outage. Because Toronto has a very heavy load, some of that equipment is operating close to the limit, and if we’d added more distributed generation in the last five years, we’d have exceeded some of those limits. For that reason some projects were deferred, but fortunately that situation is behind us now and we can generally connect distributed generation. The proposed generation facility needs to have the appropriate protective devices and not exceed the ratings on the equipment involved.
“Currently there are 144 MW of distributed generation in Toronto, consisting of over 1000 projects. That’s in comparison with an overall load of approximately 5000 MW. Distributed generation is projected to reach 626 MW by 2019. This growth is very location-specific. Consideration is given to feeder loading, connection point, generator type (rotating vs. inverter), etc. We have several tests, the most important of which concerns whether there’s sufficient fault capacity. Are the protective devices and equipment ratings adequate when things go wrong? This is key for system protection and other customers’ reliability. We analyze every generator interconnection and work closely with generator customers.
“The OEB plays a very important role in protecting the customer, helping ensure value and reliability,” he acknowledges. “That often means incremental change is chosen over big system change in the regulatory framework. Our approach is to put all the information into a business case and make prudent long-term decisions, based on asset life-cycle. For example, an issue may be addressed one way for the next five years, but then other upgrades are needed at year ten, year fifteen and so on. So we run through full asset life-cycle, typically a fifty-year planning horizon, and make sure we’re putting forth options that satisfy needs long term which provide value for the customer. That can be a challenging discussion with the regulator, in that they’re trying to balance value for the customer today. We have shared our rationale with many customers and stakeholders in attempting to get the balance right.”
The Ontario Energy Board provided the following statement in reply to an invitation to comment:
“The OEB is aware of the challenges utilities are facing as they deal with aging infrastructure, declining load and changing environmental conditions. Our goal at the OEB is to develop thoughtful and sustainable policies that keep pace with evolving utility challenges while managing impacts to customers.
One example is the Renewed Regulatory Framework for Electricity (RRFE), which provides rate-setting options that allow utilities facing significant challenges to customize their applications. The RRFE takes a longer-term view in relation to investment planning that offers the utility greater scope so that they can prioritize and pace large or unique investments needs and address sustainability issues.
Another example is the OEB’s recent policy on revenue decoupling which will allow distributors to recover their costs through fixed rather than variable rates. This new policy recognizes the changing role of the electricity grid. By ensuring revenue stability for the utility, the new rate design will encourage distributors to support greater customer use of innovative energy technologies.
The OEB applies its policies in individual rate applications based on the utility’s application. The applicant is expected to put forward a thorough and well-justified business case to support its request. We expect utilities to demonstrate effective long-term planning for their investments in the grid, including pacing and prioritization with consideration of cost impacts to customers.
It is the OEB’s mandate to ensure that decisions are made in the public interest. Our record of continuously renewing our policies to reflect an evolving sector and our decisions demonstrates that we are doing just that.”
Fernando Carou, lead energy planner with the City of Toronto’s Environment and Energy division, believes that in jurisdictions that are not growing there may be potential for LDC revenue loss from customer self-generation. LDCs are allowed to make unregulated investments in distributed generation and in fact capture that business and revenue, subject to certain rules. For example, Toronto Hydro has a partnership with the Environment and Energy Division for solar PV projects on city owned facilities, which has been very successful. However, Toronto is a fast-growing jurisdiction and Toronto Hydro’s annual revenues and number of customers are on an upward trend. In Toronto, customer self-generation behind the meter not only attracts private investment, but more importantly makes room in the electrical infrastructure for the steady influx of new residential and commercial buildings, he suggests.
No doubt the progress of the Board’s plans for revenue decoupling will have significant impact on the prospect for maintaining distribution revenue, not just for Toronto Hydro, but for all electricity distributors in Ontario.