Thomas Watson
Canadian Business.com
December 9, 2002

Energy industry watcher Tom Adams has a dream. Someday, he hopes, the provinces of Canada will rise up and live out the true meaning of energy market deregulation. In his ideal world, individual and corporate consumers alike would pay bills based on the actual price of the power they use at the time they use it. Residential users would say goodbye to that robotic-looking, glass-faced device that some folks (those who know watts from volts) call the Ferraris disk meter, which was invented in 1890 and has lived well past its best-before date. Why? For starters, the Ferraris must be read manually, which means a lot of manpower is wasted on meter reading. Furthermore, the old standby offers nothing more than the total amount of energy consumed between readings. That may serve a market with fixed prices. But in a deregulated environment, where prices change by the hour, low-cost users without fixed-supply contracts blindly subsidize power pigs with whom they share costs. So, out with the Ferraris and in with high-tech interval meters that can transmit data electronically, not to mention record and date-stamp consumption by the hour or in minute intervals. As a result, says Adams, cool features would follow. In Italy, for example, interval meters control residential demand (which is capped for households) by load-shifting between appliances, such as the microwave and dish washer, when needed. Like industrial users who invest in energy management technologies, Web-enabled interval meters could also empower residential customers to watch market prices in real time, giving them an incentive to switch energy usage to low-cost periods.

According to Adams, executive director of Toronto’s Energy Probe, a public policy watchdog that has been fighting for energy industry deregulation for years, sophisticated interval meters and other emerging energy management technologies are perfect examples of market forces in action. Indeed, years ago, when Canadian politicians in Alberta and Ontario first started jumping on the deregulation bandwagon, Negative Nellies screamed about extreme price increases and possible blackouts without offering any real suggestions beyond maintaining the status quo – which is what led Ontario Hydro to build up $38 billion in debt. But more enterprising citizens, such as the believers who invested in E2MS Inc., a Toronto-based energy management software maker, saw an opportunity to make money and create jobs by helping large power users reduce energy bills and manage costs in a deregulated market.

Unfortunately, in Ontario at least, turncoat conservative politicians have transformed the dream of a free energy market into a nightmare. Former Ontario premier Mike Harris repeatedly delayed plans to give the private sector a shot at powering the province. The market was finally opened May 1, but new conservative leader Ernie Eves – who was Harris’s right-hand man when the Common Sense Revolution was sold to the public – pulled the plug on floating prices (with belated support from the hey-we-buy-votes-too Liberal opposition). That announcement came after a turbulent six-month run that saw prices rise as high as a buck per kilowatt-hour during peak periods due to supply problems created, in part, by government policy.

Now, the price Ontario consumers pay for electricity will be capped at 4.3¢ until 2006. Believe it or not, that covers all users, including the largest industrial customers, many of which spent millions getting ready for deregulation.

According to more than one board member of Ontario’s Independent Electricity Market Operator (IMO), the organization set up to run Ontario’s deregulated power system, Eves’ surprise move could very well create a California-style energy crisis: it’s no real secret that supply problems put Ontario on the edge of the blackout cliff last summer. And the government has just made it more difficult to attract investments in power generation. The new policy could also cost billions because taxpayers must cover any gap between what consumers pay and the actual market price of electricity (which was about 8¢ as this sentence was being written).

Whatever the outcome, Ontario’s price freeze appears to be the final nail in the coffin for energy management software start-ups (not to mention electricity retailers that offered consumers fixed-rate contracts) that bought into the Conservatives’ Common Sense platform before it became the Nonsense Revolution. Indeed, after helping large power users across North America collectively trim more than $60 million from their electricity bills, the once-ambitious E2MS has reportedly been forced to close its doors by Ontario government policy.

"It’s hard to have a serious conversation on this subject," says Adams, who helped design the initial rules for a competition-oriented electricity market between 1998 and

2001. He calls the about-face a recipe for disaster and can’t figure out why the government decided to foot the bill for industry when it could have bought votes by coming to the aid of consumer households alone. (A spokesperson for the premier wouldn’t even confirm the government meant to include industry in the price cap, although Energy Minister John Baird’s people say it’s a done deal that’s "subject to change.")

If industrial energy users are included, Adams has no idea how the government will make its new policy work, pointing out that companies no longer have any incentive to play in the wholesale energy market or buy software designed to reduce costs and shift usage to non-peak periods. In fact, thanks to the government, there is now a pretty good incentive for all users (including consumers) to shift usage back to periods of high demand.

"The government is dreaming in Technicolor," Adams says. "Let’s just pour gasoline over the top of the system and light a match. Supply is already in trouble. Demand will go up. Prices will go up. And although customers won’t see the rising price, the government will have to fund it." As for those giddy companies that publicly applauded the rate cap, such as Hamilton-based steelmaker Stelco Inc., Adams simply says, "Enjoy your frozen energy prices while you’re camped in the dark."

Like Energy Probe’s disillusioned executive director, most people who supp orted energy deregulation in Canada’s largest province feel betrayed by the new conservative premier, who has been unceremoniously dubbed Blackout Ernie. Rob Kirkby, president of Energy Advantage, a Toronto-based outsourcing outfit that purchases and manages more than $1 billion worth of energy annually for clients across North America, has mixed feeling about what he calls the government-sponsored chaos in Ontario, where his firm generates most of its revenue. "In the short term, the new policy is probably good for business," he admits. "In the long term, however, it’s probably not so good. This move, in and of itself, is obviously going to reduce interest in energy management."

Inco Ltd., the Sudbury-based global metals and mining outfit, has spent a lot of time and money getting its energy house in order. To get ready for market deregulation in Ontario, the $2-billion company called in Accenture to help implement an energy management solution offered by Silicon Energy Corp., a California-based software start-up targeting large companies and utilities in deregulated jurisdictions. The objective was to allow Inco to move rapidly into the wholesale electricity market in Ontario, something that may no longer make much sense since the government’s fixed rate is probably going to be cheaper than market prices.

But, hey, before you crank the heat and skip your company’s next energy committee meeting, remember fluctuating prices are not the only reason to look at how and when you use energy. David Abood, a management consultant and partner with Accenture, points out that power is typically one of the top five corporate spend items (large industrial users can direct more than a third of their operating budgets to pay for energy). And while the Eves government may have dramatically reduced price as a driver of demand for energy management technologies in Ontario, Bill Morris, who heads Accenture’s energy practice in Canada, thinks the need to control emissions could very well fill the driver gap as Kyoto-type requirements come online. The dream of lower maintenance fees and fear of post-blackout costs could also encourage large users in Ontario to pursue system-friendly usage patterns. Either way, as Kirkby says, "one has to question the staying power of the [Ontario price cap] because there is a supply and demand problem, and Economics 101 says this isn’t the way to solve it."

Furthermore, as Silicon Energy’s vice-president of product strategy Eric Miller points out, energy management solutions do a lot more than simply allow companies to play in wholesale markets and shift loads to non-peak periods. They also, for example, allow users to reduce costs by collecting detailed utility data (water, natural gas and electricity), identify inefficient processes, verify bills and seek damages for electrical equipment problems caused by bad power. "It’s not uncommon," he says, "for a large business to find multihundred-thousand-dollar errors on their bills."

Even if spending on high-end procurement technology doesn’t turn your crank, significant savings can be gained from applying best practices. "The ability to significantly reduce energy consumption is always there, independent of deregulation," says Miller, adding that it is relatively easy to cut building heating costs by 15% without major investments.

In addition to deploying energy management technology solutions, Inco, which generates about 20% of its own energy, is considered a breeding ground of best practices for fighting consumption. Last year, Inco’s audited energy index represented a 16% improvement relative to 1990, beating its target of a 1% annual improvement. In 2001 alone, its energy index decreased 7%. As for greenhouse gas emissions, well, they’re already 8% lower than in 1990, which is the baseline year for the Kyoto Protocol.

Inco began reducing peak loads in the 1970s. Over the next two decades, it expanded conservation efforts by retrofitting equipment and installing low-energy lights and more efficient motors. After watching the cost of natural gas increase threefold in 2000, however, Inco took energy consumption to the next level in order to further cut costs and prepare for deregulation.

Under the leadership of Sean Brady, a project engineer whose father had a marketing background, the company took its conservation efforts to the people last year under the banner PowerPlay, an internal awareness campaign (including advertising, branding and the use of focus groups) that encouraged employees to come up with conservation ideas by educating them on the costs associated with energy usage.

According to Brady, operating rules of a particular process are established over a long period of time and rarely challenged because most people learn how to do their jobs from incumbents. "We needed to involve people at the plant level," he says, "because the workers know the plants best, know where waste exists and where opportunities lie. We asked them to reconsider and question operating processes."

In its pilot phase, PowerPlay generated 650 ideas – with 60 being implemented for combined savings of about $10 million based on prices for electricity and gas at the end of 2000. The program, which has now generated more than one idea per employee, encouraged suggestions big and small. A welding shop turned off the heat at night. An oxygen plant changed its temperature settings. Smelter operations killed one of two 400-horsepower fans used to clean air after determining there would be no adverse effect on safety. Overall, PowerPlay ideas have enabled Inco’s Ontario operation to surpass its $12-million energy costs reduction goal by $1.5 million in 2001. This year, similar results are expected, and the company is now expanding the program as part of its overall effort to fight procurement costs, of which energy is a major component.

In Ontario, Inco will have to wait and see what happens before it alters plans to participate in the wholesale market. Either way, company officials insist the information that will be available from Silicon Energy’s technology will identify more workable ideas created by PowerPlay. Unfortunately, it can’t tell Inco what party to vote for in the next provincial election.