Introduction

There is a significant new opportunity for some electricity users in Ontario.  The Industrial Conservation Initiative (“ICI”) has been expanded.  Incentive programs related to the Global Adjustment (“GA”) were, until recently, only available to large electricity users. Now, small and medium users (down to 500 kW monthly average peak loads) can take advantage of demand response tools like Energy Storage Solutions (“ESS”) to reduce their electricity expenses.  Moving forward, electricity users can take control of their electrical demand with solutions that are flexible and scalable.  This will allow them to reduce their demand or peak charges or give them the ability to shift their electricity use to another time.

The good news is there are a number of factors that now encourage decision makers to consider an ESS.  ESS pricing is trending downward; the GA recently hit an all-time high of 9.75 cents kW/h, and the ICI program has been expanded.  This trifecta now makes investing in an ESS something worth considering. 

For all industrial electricity users, controlling or reducing one’s electricity bill usually comes down to energy conservation.  Utility statements are made up of the Hourly Ontario Energy Price (“HOEP” or “commodity price”), the GA and the delivery charge.  In 2015, the GA on average was 5.28¢ per kilowatt hour*.  The cost of the GA in 2016 and 2017, on average, was 7.92¢ and 9.75¢ per kWh respectively*.  These are significant jumps.  The average HOEP in 2016 and 2017 were 2.36¢ per kWh and 1.66¢ per kWh, respectively*.  Herein lies the challenge but also the opportunity.  How can a user reduce the most significant component of their electricity bill, namely the GA?

There are industry players who believe an ESS should not be installed solely for reducing the GA or “GA Busting” as it is sometimes referred to. However, the good news is all stakeholders tend to agree that an ESS will have benefits regardless of how electricity is sold in Ontario and thus benefits beyond GA busting alone.  For early adopters, this means the value of an ESS will remain high and the use of an ESS will not become obsolete due to regulatory or market changes. 

This white paper will delve into issues, solutions, and decision making factors for executives and other stakeholders while proving a balanced approach, including the advantages as well as the risks and challenges to users. Overall, it is wise for a user to look at their utility bills and have a financially aware consultant review their situation.  Energy Storage is the present and the future.  It’s time to give it serious consideration.

What is Energy Storage?

With all the press about Energy Storage including Tesla, Elon Musk, and the Giga factory, Energy Storage has vaulted to the attention of the masses.  It is still widely misunderstood from a business case or financial impact perspective, but Energy Storage is one of the new buzz phrases. 

Energy Storage is a solution that stores electricity and allows users to use this stored electricity when it is of maximum benefit.   Owners can use an ESS for demand response purposes (using less electricity from the grid during high demand, high price periods), peak management (reducing or flattening electricity use peaks and the costs associated with those peaks), or when the grid is having power quality issues (e.g., providing backup power during grid outages).  

The type of technology currently making the most headway in Ontario and worldwide is lithium ion (“Li-ion”) battery solutions.  These batteries have become the most popular type for personal electronics, but the technology is also becoming the most prevalent solution for industrial scenarios, such as grid support, because of reduced cost, greater life compared to conventional lead-acid batteries, and low toxicity.   An industrial ESS usually comes in self-contained units or containers that allow scalability and flexibility in system capacity.  More details about the technology are provided in “What does an Energy Storage solution look like?” below.

An ESS can seem complex but does not have to be overly complicated.  The owner should consider a consultant or solution provider that has the necessary technical, financial and construction management expertise that take both short and long-term factors into account when proposing an ESS.

Why Energy Storage?

ORTECH recognizes that all facilities are different; nevertheless, an ESS will provide flexibility to almost all facilities. The primary benefit of installing an ESS is your ability to control your electricity demand for whatever reason.  Some of the key concepts for this are as follows:

• The Price of Energy Storage is dropping:  The average price of a lithium-ion battery based system for an industrial installation is currently $700 to $800 per kWh and trending downward.   The cost of lithium-ion batteries has dropped from about $1000 per kWh in 2010 to below $300 per kWh in 2017.
   
• Demand Management: Consists of using energy storage to store electrical power during off-peak price hours and discharging it to facility loads during higher peak price hours.
   
• Resilience / Reliability (Backup Power):  An ESS provides these benefits until the problem is fixed or other backup power comes online.  A battery system allows you to shut down gently and keep you running smoothly during a grid outage until your backup generation starts.
   
• Market Renewal:  Ontario is looking to change the entire electrical market system, but those plans are still being developed. The use of an ESS is supported by the current government (Liberal Party of Ontario) and the official opposition (Conservative Party of Ontario). An ESS will have a beneficial role to play in the future.
   
• GA Market Risk:   There is potential for significant changes to the GA.  As an example, the recently implemented Fair Hydro Plan refinances a large fraction of the GA so that payments are lower by $2.5 billion per year (about 21% of the total GA for 2017). However, an ESS will continue to provide its owners with benefits regardless of what changes are put in place by the government of the day, and in most of the likely future scenarios, an ESS will continue to allow reductions in the users GA payments.
   
• Peak Shaving Value to the IESO:  There is value to the Independent Electricity System Operator (“IESO”) if it can entice users to reduce their demand during peak usage (e.g. via an ESS) as it would not have to start up natural gas peaking plants or purchase electricity from neighbouring provinces or US states.

How can Energy Storage help?

If you are a Class A electricity user (monthly average peak demand exceeding 5 MW), an ESS can be effective in reducing your GA and Demand Charges.  Also, non-Class A users may qualify for the Class A as the ICI has lowered the threshold to 500 kW (monthly average peak demand).    The ICI, administered by the IESO, is a form of demand response that allows participating customers to manage their GA costs by reducing their demand during peak periods.  An ESS can be utilized to accomplish this, and the IESO encourages users to participate in the ICI  program as it helps them manage the electrical system during peaks.  Reducing peak demand costs is the fundamental pricing mechanism that will offset the cost of an ESS system.  Although the GA mechanism may change, an ESS will remain useful.  

What is the Industrial Conservation Initiative?

The Industrial Conservation Initiative (“ICI”) is administered by the IESO.  It is a form of demand response that allows participating customers to manage their GA costs by reducing their demand during peak periods.  In summary:  

• To qualify for the ICI, a customer’s monthly demand peaks must average above 1 MW or 500 kW for industrial facilities, over a one year period.
• Electricity users are charged based on their percentage contribution during the top 5 peak demand hours in Ontario over a one year period (from May 1 to April 30).
• Customers must qualify through their Local Distribution Company (“LDC”), based on the previous one year period. If they qualify, they have to opt into the ICI program by June 15th of the year.

What is the Global Adjustment?

For most electricity users, the GA is the difference between the regulated rate of electricity and the wholesale market price. The wholesale market price is the price that the government pays electricity generators (public or private).  However, there are other costs which are paid for by the GA.  These include the expense of building new electrical generation assets, the cost of running the IESO, and delivery of energy efficiency programs to drive conservation.  Although users have little control over these costs overall, an ESS can be of value in managing GA costs on their electricity bill.

To put wholesale (commodity) and global adjustment costs into perspective, the following is a summary for 2015 to 2017.

How can you reduce your Global Adjustment and Demand Charges?

Global Adjustment: In order to reduce GA charges, facilities need to reduce their demand during the five monthly average peak periods either by shedding load, shifting load or using an alternative source of electricity such as solar, backup generation or energy storage.  An ESS typically has a bank of lithium ion batteries with tools for remote communication and control.  This is ideal for customers who want a “Fire and Forget” solution.  In this scenario, a vendor like ORTECH can provide Engineering, Procurement and Construction solutions and then assist in controlling the system during the various monthly average peaks throughout the year.  In other cases, the system can be scheduled to run during set periods each day to cover every possible peak.  Typically, the five monthly average peaks in Ontario occur between 4 and 6 pm on weekdays. 

Demand Charges:   A review of your current load profile will indicate when your facility has its monthly average peaks. By reducing monthly average peaks, you will reduce your monthly demand charges.

Sample Solution:  Install an ESS based on your initial monthly average peak load.  The ESS is typically sized to reduce your load significantly for a period of 1, 2 or 3 hours.  The system is either turned on automatically each day (e.g. between 4-6 p.m.) or during anticipated facility and provincial monthly average peak periods throughout the year. The facility’s monthly average peaks are determined relative to Ontario’s monthly average peaks (Note:the IESO provides tools to indicate the days when the provincial demand is in the top range for the year). 

What does an Energy Storage solution look like?

At its core, ESS has three major components, each equally important. The Batteries are where the electrical power is stored in DC, the Inverter converts electrical power from DC to AC, and the Battery Management System manages when and how long the system operates.

Batteries are the main consumable item, but it is essential to give careful consideration to the other two components.  Good choices of inverters or battery management systems will lead to better results.  Good performance, decreased lifecycle costs and higher internal rates of return can all result from proper planning and design of your system.

Batteries:

Selecting the right batteries is essential. Li-ion batteries are currently the preferred choice due to cost and performance. However, reviewing other emerging battery types or possibly other storage technologies and asking your solution provider smart questions will assist you in determining the optimum solution.

Inverter:

The inverter will supply the batteries with electrical power to be stored and also convert battery electrical power (DC) to facility electrical power (AC).  The inverter takes electrical power from the grid, preferably during low peak periods.  It must also control or isolate the system when the grid is down or under maintenance, for safety reasons.  The inverter needs to determine where  electrical power is coming from and what critical load needs to be managed using electrical power from the batteries in order to get the best electricity savings and financial return possible.

Battery Management System: 

A battery management system (BMS) helps control parameters such as battery temperature, depth of discharge and state of charge so the batteries are not over- or under-charged, which would reduce their usable lifespan.
The BMS is usually a software function internal to a charge controller or more sophisticated charging device.

What are the risks to consider?

To ensure this white paper presents a balanced approach, some threats or possible challenges regarding energy storage include:

1. The most significant assumption solution providers make is that the current potential GA savings will be similar over the next five years.  There is a market risk in this assumption.  GA is roughly inversely proportional to the Hourly Ontario Energy Price (“HOEP”), and if HOEP increases, the GA will decrease.  The combined HOEP plus GA (the total commodity price) is likely to increase over time, so there is room for incremental inflationary growth to GA, but since HOEP is already very low, there’s not much room for decrease in the HOEP and resulting increase in GA.  This is a market risk that comes with little potential for further reward.
2. Potential GA impacting developments are in process.  IESO is engaged in Market Renewal, which is being advertised as saving $2.2 to $5.2 billion over ten years.  These savings will result in lower total commodity prices, so while energy costs will still go down for the facility, the savings from an ESS could also go down.  To be clear, an ESS should still result in lower purchased electricity costs for the facility regardless of what impact Market Renewal has, but the payback period may be longer.
3. Another potential significant GA impact is nuclear refurbishment and the Pickering site shut down.  As such, a substantial amount of nuclear energy will be removed from the system. Since these facilities typically bid into the Ontario electricity market below zero, removing them will likely increase the HOEP, with a corresponding drop in GA.  Note that the Pickering shutdown is not planned to take effect until 2024 (or later) so some of this impact will not occur until after some of the ESS capital costs have been paid back in utility cost savings.
4. A mitigating factor for points 2 and 3 is that the IESO is well aware that capital investments are being made for Class A GA reduction.  In addition, reducing Ontario’s five highest monthly average peaks will still provide value to the IESO (likely even more value) after nuclear is taken offline.  It seems doubtful that the IESO will do nothing to mitigate potential losses for facilities with ESS if the GA shrinks by a large amount.

What should you do NOW? 

Contact a consultant with the necessary expertise and start investigating how an energy storage solution can help you.  A potential scope of work includes the following:

1. Understand your load.
2. Determine your ability and willingness to shed or shift demand during peaks periods.
3. Investigate alternatives or combinations of solutions. For example, energy management coupled with using existing backup generation with a smaller energy storage solution.
4. Determine the financial impact including capital costs, cost savings, incentives, emissions impact, internal rate of return and financing costs.
5. Generate a report with findings, solutions mixes and low-risk recommendations to get you started.

Conclusions

All companies have competing agendas and areas where capital investment is needed.  A key factor illustrated in this white paper is that overall electricity costs are trending up and becoming more challenging to control from a user point of view. Energy storage solutions can be a useful tool in reducing your overall cost of electricity by reducing your Global Adjustment and through demand management (i.e. charging during off-peak price periods and using this stored electrical power during higher-peak price periods).  Also, an ESS can also provide backup power and stability.

For more information or a FREE assessment of your situation, contact Michael Tingle at 905-822-4120 x 680 or mtingle@ortech.ca.