Report to:  General Committee                                              Report Date: November 30, 2007

SUBJECT:                          Electricity Procurement Strategy for the Corporation of Town of Markham

PREPARED BY:               Viive Sawler, Manager, Markham Energy Conservation

Office (MECO), x 7523

RECOMMENDATION:

THAT the Report entitled, “Electricity Procurement Strategy for The Corporation of the Town of Markham” be received;

THAT Council authorize the Mayor and Clerk to execute an agreement with energy retailer, Constellation New Energy (CNE), for the purpose of moving the Large Net System Load Shape (LNSLS) accounts to the wholesale spot market until April 30, 2008, or such longer period if deemed appropriate by the Treasurer, in a form satisfactory to the Treasurer and the Town Solicitor;

THAT Council authorize the Treasurer to move the interval metered accounts from the Regulated Price Protection (RPP) Plan to the wholesale spot market until April 30, 2008, or such longer period if deemed appropriate by the Treasurer;

THAT Council authorize the Mayor and Clerk to execute a service pricing contract with WattsWorth and supply contracts with suppliers qualified by WattsWorth, beginning May 1, 2008, for a one year term with provision for renewal, if deemed appropriate by the Treasurer, in a form satisfactory to the Treasurer and the Town Solicitor;

THAT Council authorize the Treasurer or her designate to commit the Town to a supply deal in accordance with WattsWorth’s RFP process if she deems it financially pruduent;

THAT the Treasurer will report to Council annually with respect to the commodity price hedging agreements in place;

THAT a by-law be enacted to adopt the attached Commodity Price Hedging Policy;

THAT Staff be authorized and directed to do all things necessary to give effect to this resolution, including renewal of supply contracts in accordance with the recommendations of the Strategy and removing accounts from or returning accounts to the Regulated Price Protection Plan.

EXECUTIVE SUMMARY:

Not applicable

1. Purpose                     2. Background                      3. Discussion                        4. Financial

5. Others (Environmental, Accessibility, Engage 21st, Affected Units)             6. Attachment(s)

PURPOSE:

The purpose of this Report is to obtain authorization to implement the Electricity Procurement Strategy for the Town summarized below and outlined in detail in the attached WattsWorth proposal, Electricity Procurement Strategy for the Town of Markham, October 29, 2007, and to provide for a short term movement of the Large Net System Load Shape and interval metered accounts to the spot market.

BACKGROUND:

The Town of Markham purchases all of its electricity requirements through the Provincial Regulated Price Protection (RPP) Plan with the exception of street light electricity which is currently being procured through the spot market until April 30, 2008 when the one year contract expires, in accordance with the April 30, 2007 Report, “Authorization to enter into a one year contract to procure electricity from retailers for the Town of Markham’s street light energy account.” If this contract is not renewed, the street light electricity account will automatically be converted back to the RPP.

Under the RPP, effective November 1, 2007, the first tier rate is 5 cents per kilowatt hour for the first 750 kWh consumed per month and 5.9 cents at the second tier for consumption over 750 kWh.  As a municipality consuming approximately 40 million kWh of electricity annually, less than 2% of our electricity consumption is billed at the first tier rate.  This suggests that for most of our electricity needs we are paying at the second tier, an amount which in most cases is higher than we could be paying if we were to move select accounts to the spot market and/or enter into a fixed price contract for a targeted volume of electricity.  Prior to November 1, 2007, the RPP rates were 5.3 cents and 6.2 cents for the first and second tiers respectively.

OPTIONS/ DISCUSSION:

Staff has been working with WattsWorth, a professional, energy services firm that assisted the Town of Markham with moving the street light energy account to the spot market under a one year retail contract, to develop an electricity procurement strategy for other Town accounts.  The Strategy recommends renewing the street light contract on the spot market on its expiration on April 30, 2008 in order to continue the savings achieved through the spot market.  The Strategy also addresses the Town’s other account types, which are divided into the following three categories, Small Net System Load Shape (SNSLS), Large Net System Load Shape (LNSLS), and Interval.   SNSLS accounts consume less than 16,000 kWh of electricity annually and consist mainly of park and sports field lighting.  The LNSLS accounts make up approximately 17% of our consumption and consume more than 16,000 kWh of electricity annually. There are also eight interval metered accounts including the Civic Centre, the large community centres, the Markham Theatre and a pumping station.

Short Term Strategy – January – April 2008

The short term strategy proposes to move the Town’s LNSLS and interval metered accounts to the spot market.  While the spot market fluctuates, the government mitigates up to 70% of the risk with price caps for the portion of the electricity produced by Ontario Power Generation.   The tables below show the estimated net savings for these two accounts if moved from the RPP to the spot market, for the proposed four month period.

Legislation requires that non-interval accounts such as the LNSLS accounts be billed via a supplier/retailer.  It is proposed that the Town enter into a contract with Constellation New Energy, who is the retailer handling our street light account, to move the LNSLS accounts to the spot market for a fee of $15,000 for the four month period.  The interval accounts can be moved directly to the spot market through the Local Distribution Company (PowerStream,) at no additional cost.

LNSLS - Spot Market – Jan – Apr-08

Average Electricity Unit Cost

5.28 cents/kWh

4 month saving over RPP

$13,846

RPP Credit (1 time)

$21,500

Billing Fee to Retailer

$(15000)

Total Savings over 4 months

$20,346

Interval – Spot Market – Jan – Apr-08

Average Electricity Unit Cost

5.28 cents/kWh

4 month saving over RPP

$35,547

RPP Credit (1 time)

$56,478

Total Savings over 4 months

$92,025

Therefore, if the LNSLS and Interval accounts are moved to the spot market for the four month period of January to April, the estimated net savings will be $34,393.  This does not include the one time credit of $77,978 that will be received for exiting the RPP ($21,500 + $56,478).

Long Term Strategy

Towards the end of the four month period described above, the savings achieved through the spot market over the RPP will be evaluated to determine whether the best option is to continue to procure electricity through the spot market or to enter into the strategy described below that includes using the spot market with a hedge for the LNSLS and interval accounts.  Employing a hedge may provide more certainty in terms of final cost and will also offset the majority of the price risk.  WattsWorth will assist the Town in determining the best strategy going forward.

The table below summarizes the consumption and average commodity prices of the current strategy (on the RPP), average commodity price of the proposed strategy that includes keeping the SNSLS accounts on the RPP, utilizing the spot market with a hedge for the LNSLS and interval accounts and renewing our streetlight contract to allow that account to remain on the spot market.

Account Type

Number of Accounts

Annual Consumption (kWh)

Average Commodity Price *

New Average Commodity Price

Estimated Savings

SNSLS

93

2 million

5.27¢/kWh

5.27¢/kWh

N/A

LNSLS

40

6.7 million

6.13¢/kWh

5.63¢/kWh

$33,500

Interval

8

17.6 million

6.13¢/kWh

5.5¢/kWh

$110,880

Streetlights

1

13.7 million

6.13¢/kWh

4.91¢/kWh

$167,140

Total

142

40 million

$311,520

* Average Commodity Price – calculated based on RPP rates between April 1, 2005 and November 1, 2007 – Ontario Energy Board (www.oeb.on.ca)

Procurement options for these account types include:

Option 1 – The Regulated Price Protection (RPP) Plan - (status quo – “do nothing”)

Option 2 – The Spot Market without Hedging*

Option 3 – The Spot Market with Hedging

Option 4 – Retail Contracting

* Hedging is a strategy used to limit or offset probability of loss from fluctuations in the prices of electricity.

The optimal procurement option will vary from account to account based on specific consumption requirements.  The strategy for each of these accounts is summarized as follows:

Street Lights – The proposed strategy for this account is to continue procuring the electricity requirements from the spot market without hedging (Option 2) which will require a renewal of the energy retail contract that expires on April 30, 2008.  The Town also received a credit of $37,123 in August 2007 for exiting the RPP when this account was moved to the spot market.  The streetlight spot market price in September averaged 3.3 cents/kWh, significantly lower than the 5.9 cents/kWh for the RPP rate.

Spot Market without a Hedge

Average Electricity Unit Cost

4.91 cents/kWh

Avoided Costs Over RPP

$167,140 annually

SNSLS – The proposed strategy for these accounts is Option 1.  They are small enough that the majority of their consumption is purchased at the first-tier RPP rate ($0.05/kWh) which is very attractive for small users.  The cut-off between small and large NSLS designation is approximately 16,000 kWh of annual consumption.  Below this consumption, the account should remain on the RPP.  These accounts represent less than 4% of our total electricity consumption.

LNSLS – Options 1 and 4 would provide the Town with certainty for budget purposes, but WattsWorth’s experience has shown that such certainty comes with a price premium.  Therefore, the recommended strategy for these accounts is Option 3, a combination of the spot market with a hedge, or a contract power block.  The contracts are defined by their volume (kWh), duration per week, and the hours within each day that the contract applies.  It is proposed to purchase 5 x 16 blocks at a volume of 400 kW from January through to December.  This contract matches the periods when electricity consumption and therefore spot market prices are at their maximum.  In Ontario, this is defined as the period Monday to Friday (5 days) from 7:00 a.m. to 11:00 p.m. (16 hours).  Only six percent of the annual kWh consumption will be exposed to the spot market.  The expected net cost of electricity utilizing this strategy is $0.0563/kWh.

Spot Market with Hedge

Average Electricity Unit Cost

5.63 cents/kWh

Annual Savings Over RPP

$33,500

Interval – Similar to LNSLS accounts, Options 1 and 4 provide certainty at a premium price. Therefore, the recommended strategy for these accounts is also Option 3, a combination of the spot market with a hedge, to provide a conservative balance of the minimized average cost of the commodity with financial risk.  The hedge contracts for these accounts would be 5 x 16 blocks at a volume of 750 kW from January to June and 900 kW from July through to December.  Eleven percent of the annual kWh consumption will be exposed to the spot market.  The expected net cost of electricity utilizing this strategy is $0.055/kWh.

Spot Market with Hedge

Average Electricity Unit Cost

5.5 cents/kWh

Annual Savings Over RPP

$110,880

For the LNSLS and Interval accounts that require a hedge to protect them from market risks, the hedge volume will recognize the government sponsored hedges (Provincial Benefit and ONPA Rebate) that fix up to 70% of the spot market at a weighted average of 4.82 cents per kWh.  Thus, the maximum hedge volume will be 30%.  It should also be noted that the volumes purchased within these blocks reflect consumption patterns of the account type.

The total anticipated savings are approximately $311,520 per year over the cost of the RPP including the streetlight account that has already been moved to the spot market.  In addition, the Town will receive a one-time payment of $77,978 for moving the LNSLS and interval accounts off the RPP as per the short term strategy.  For moving the street light energy account to the spot market, the Town already received $37,123 in August, 2007, as the RPP credit for the street light portion.

Staff has investigated other electricity procurement programs including the one offered through the Association of Municipalities – Local Authority Services (AMO-LAS).  WattsWorth and AMO-LAS are the only two companies offering a purely municipal buying group.  WattsWorth’s initial fee for the first term of the proposed strategy which will expire April 30, 2008, is $0.30 per annualized contracted MWh.  This equates to:  4,918.4 MWh x $.30 = $1,475.  On May 1, 2008, an RFP process will take place to purchase electricity as described above for the various accounts, and the WattsWorth fee to the Town will be 10% of proven annualized savings over the RPP to a maximum of $1,000 per month, or $12,000 annually.  The AM0-LAS fee is $1.00 per contracted MWh which is applied to the larger volume they are contracting (75% vs. 30%) and therefore, the AMO-LAS fee is substantially higher and would be approximately $18,800 annually.

WattsWorth’s current municipal buying group includes; Halton, Mississauga, London, Burlington, Woodstock, Cambridge, Richmond Hill, Tillsonburg, Halton Hills, Central  Elgin, Community Living London and a few others.  They are also working with the Region of Durham, and the cities of Windsor, Barrie and Oshawa.  By May 1, 2008, these four other municipalities are expected to be included in their buying group.

FINANCIAL CONSIDERATIONS AND TEMPLATE: (external link)

The financial consideration for the short term component of this proposal (January to April 2008) is a $15,000 fee to Constellation New Energy (CNE) for moving the LNSLS accounts to the spot market.  CNE is the retailer from whom we currently procure spot market prices for our street light account.  The fee will be paid out of the net savings from this strategy that amount to an estimated $34,393 including the savings from also moving the interval accounts to the spot market that do not require an energy retailer.

After April 30, 2008, the Town could continue procuring electricity as per the short term strategy or pursue the long term strategy commencing on May 1, 2008 and utilizing the services of WattsWorth to procure electricity from the spot market with a hedge, the fee to the Town will be 10% of proven annualized savings over the RPP to a maximum of $1,000 per month.  The contract with WattsWorth would be renewable after one year if deemed financially prudent.  If WattsWorth is unable to prove its value, the Town can join another buying group, pursue a strategy of its own, or return to the RPP at no cost.

ENVIRONMENTAL CONSIDERATIONS:

Not applicable

ACCESSIBILITY CONSIDERATIONS:

Not applicable

ENGAGE 21ST CONSIDERATIONS:

Not applicable

BUSINESS UNITS CONSULTED AND AFFECTED:

Finance Department

Legal Department

RECOMMENDED

BY:    ________________________

Allan Seabrooke

Commission Lead, Community & Fire Services Commission

ATTACHMENTS:

Appendix 1 - Commodity Price Hedging Policy

Appendix 2 - WattsWorth – Electricity Procurement Strategy for the Town of Markham, October 29, 2007.

Appendix 3 - WattsWorth – Electricity Procurement Options for the Town of Markham, October 4, 2007.