Global adjustment smokescreen: it works

I’m surprised it took so long for the Ontario government to wave out some kind of “fix” to the Global Adjustment as a solution to high electricity prices. Nobody has any idea what the GA is, let alone what it does, which is why I had expected it to feature much earlier in the government’s defence of the policies that have made electricity expensive in the first place. Mainstream media, especially those friendly to the government, are sure to obligingly take their commentary down the explanatory rabbithole, leaving those who have to pay the high bills and wonder why they are so high no less (and likely more) misled than before.

Since nobody other than a tiny minority of Ontarians knows what the GA actually is, what is it? It is simply a price recovery mechanism. It is the difference between the price the government promised any particular electricity generating company and the “market” price of electricity. Generators get two cheques. The amount on the first one represents their output times the “market” price (which varies by the hour). The amount on the second cheque represents the difference between the “market” rate and the rate the government promised them. The second cheque is the global adjustment.

If the “market” price for a particular hour is say 2 cents per kilowatt-hour, and Generating Company A has been promised 12 cents, then the global adjustment for Generating Company A for that hour is 10 cents. Generating Company B was promised 15 cents, so Generating Company B’s global adjustment is 13 cents. Company C was promised 7 cents, so C’s global adjustment is 5 cents.

The “market” price fluctuates, which means the GA fluctuates. But the prices promised to companies A, B, and C are fixed. It is those fixed prices we all pay. (“Fixed” has several meanings, all of which apply in any explanation of the GA; in this particular instance I mean “stays the same.”)

I put “market” in quotations because there actually is no market. Nobody in Ontario, absolutely nobody, pays the market price that is reported by the IESO. No generator lives off it, and no ratepayer pays it. Every generator lives off the price it has been promised by the government, and all provincial ratepayers pay that price though some pay more than others.

This means the GA is simply a convoluted, and impossible-to-explain, smokescreen that covers up the fact that the government has promised outrageous prices to certain generators. I seriously wonder if the “market” price exists just so we can confuse and cover up things further by slathering yet another layer of obfuscation onto the whole schmozzle with the GA.

So to “fix” the problem of high electricity prices by “fixing” the global adjustment is to either misunderstand the problem or to try to obfuscate people’s understanding of it. The problem is not the 10 cents global adjustment owed to company A from the example above. It is the 12 cents that were promised to that company. Who promised that price, and why did they promise it?

It is as if the province of Ontario were a dysfunctional workplace, where you have a bunch of employees producing identical widgets, but who get wildly different wages for producing them. A poster over the watercooler proclaims that all employees get $5 per widget. But in reality some get $15, some get $100, some get $6.

So over a pay period, employee Joe, who produced say 10 widgets, gets a cheque for $50—he produced 10 widgets, so multiply 10 by $5.

Employee Mary made 100 widgets, so she gets a cheque for $500.

Employee Bob made only 4 widgets, so he gets a cheque for $20.

But the employer has cut separate deals with each one of these employees. This means that each gets a different pay rate than the nominal $5. Bob is the employer’s favourite, so the employer has promised Bob $100 per widget. The widgets Bob produces are identical to the ones Joe and Mary produce so the $100 is for the intrinsic and ethereal “Bob-ness” of the Bob-produced widgets. The employer likes Joe too, so Joe actually gets $15 per widget, in reward for the “Joe-ness” of the Joe-produced widgets.

Mary is a serial high producer, by far the highest, but she is not the employer’s favourite. The employer has grudgingly agreed to pay her $6 per widget.

This means Joe, Mary, and Bob each gets a second cheque, which covers the difference between the original one and the amount they are actually owed. Joe’s nominal paycheque is $50, so his second one is $100 (10 widgets @ $15 per widget, and his first cheque was $50); Bob’s nominal cheque was $20 so his second one is $380 (4 widgets @ $100 per widget, and his first cheque was $20).

If you ask Joe or Bob what they get per widget, if they are honest they will tell you $15 and $100 respectively. If they are smart, they will say something like “well, I get $5 per widget, plus, uh, Global Adjustment, to cover the, uh, special properties of the widgets I produce.” Mary, if she is listening, can be forgiven for suspecting some funny business behind the scenes which results in employees who produce less than she does getting paid more for each widget, even though their widgets are identical to hers.

Out in the marketplace, none of the purchasers of the company’s widgets gives a damn about “Bob-ness” or “Joe-ness.” None of them cares whether Bob or Joe or Mary made the widget. Widgets are a commodity, and one is the same as the next.

You might wonder why the employer bothers to keep up the charade of $5 per widget. No employee actually gets $5. If the employer runs into financial difficulty and has to borrow money to meet payroll, he might tell his creditor he needs to rethink his policy around the second cheques he hands out to his employees. In reality, he needs to rethink the special deals he has cut with Joe and Bob. Fifteen dollars and $100 per widget, when Mary outproduces both for $6? The creditor will demand the obvious: either drop the prices promised to Joe and Bob, or get rid of them. And whatever you do, keep Mary.

This is pretty much an exact analogue to the Ontario electricity situation.

Ontario’s problem with high electricity prices is not the Global Adjustment. It is the high prices the government promised to certain types of generators. These generators are wind and solar. Wind and solar are the government’s favourites. This is why they get rates of 11+ cents and 35+ cents per kilowatt-hour respectively.

To actually address high electricity prices, the government has to at the very least renegotiate (downward) the rates paid to wind and solar. This will effectively put an end to the fake green energy rush in this province. The rush is a rush for free money: profits that are guaranteed to low, unreliable producers by forcing ratepayers to pay them ridiculously high prices. Let the wind and solar “entrepreneurs” find some other sucker.

The chance of this happening is slim. The Global Adjustment smokescreen is a gambit that appears to be working. The mainstream media appears comfortable in trotting out misdirections and obfuscations like this one from CBC:

The global adjustment was added to the electricity price in 2005 to recoup the expected $50 billion dollar costs of refurbishing power plants…

The GA is a smokescreen that works.

In a related article, CBC attempts to explain high prices. At the top of the list of reasons is the oversupply of power. That has it absolutely bass-ackward. The over supply is because of the high price.

Here is realtime energy demand:

Click on “Cost rate”; note the difference between the cost of electricity and that of heat.

The over-supply of Ontario electricity would get smaller if we shrunk the difference between the cost of electricity and the cost of heat. At some point, it would become an under-supply.

The only way to shrink that difference is to get rid of the Bobs and Joes, and get more Marys.

13 comments for “Global adjustment smokescreen: it works

  1. February 13, 2017 at 17:02

    Let these entrepreneurs find some other sucker.

    You mis-spelled “rent-seekers”.

    A sufficiently ruthless government could fix the GA problem very easily:  just tax GA payments at a steep rate, like 70%, and rebate this on electric bills.  Solar generators would be put out of business almost overnight, wind would take somewhat longer.  Once they’re gone, the government refuses to sign any more such sweetheart deals and the GA becomes what it was purported to be in the first place… and a lot smaller.

    • February 13, 2017 at 17:30

      sure that would be easy, but it would mean alienating thousands of homeowners who lunged at the free money by installing solar panels on their roofs. Those thousands of homeowners are now government patronage recipients, and loyal voters for the party that introduced the patronage. Cut their patronage and they’ll vote for another party.

      I think the government feels sufficiently protected by global adjustment bafflegab that it can afford to pretend to fix things without most voters realizing it’s not fixing anything other than long-term revenue streams for its patronage recipients.

  2. February 14, 2017 at 10:53

    I would like to tell you of my latest book, “Human Caused Global Warming”.
    Available on ‘Amazon.ca’ and ‘Indigo/Chapters’.
    http://www.drtimball.com

    • February 14, 2017 at 18:39

      I have grudgingly approved this “comment” (which is actually an advertisement) only because you are a well known climate change skeptic whose views, while I disagree with them, I find interesting. Should you wish to participate in the comment space on this blog, please ensure that any subsequent contributions are actual comments.

  3. February 14, 2017 at 11:51

    We put solar on our barn’s roof last summer with a contract price of 29 cents per KwH — but when we did the math, even at that price it was a risky investment. I could have put my money into GICs and had a more stable and assured return. We did it as a defensive measure financially — maybe in 20 years it will generate cheap/free power for us (but maybe not), and to understand first-hand the challenges with solar. We’ve learned a lot — especially how little energy is produced in the winter, and how something as simple as a few clouds going by drops the energy output to a trickle. In my view, the whole thing is insane public policy.

    • February 14, 2017 at 12:52

      The truth is unpleasant! Solar is still a very expensive and limited method!

    • robert budd
      February 26, 2017 at 21:42

      Thanks for your honest reply Bruce. Having lived with solar near a Great Lake for 28 years, it still amazes me how limited a resource it is for much of the year. Looking at stats from our local municipal building solar install, there’s a 10x difference between the lowest months generation and the highest.
      The fact that the “low” month also coincides with Ontario’s highest energy requirement tells me solar will always be boutique power here. Nothing can change that. Try to explain this to Ontario RE policy advocates, who have never lived a day off renewables and they will generally shun you as if you have committed a sacrilege.

  4. Bruce Miller
    February 14, 2017 at 14:06

    Time for a clean out of Liberal bottom feeders and Liberal maggot infestations in Ontario!

  5. Kevin Jones
    February 21, 2017 at 12:30

    Good read. I understand the “all widgets are equal” for the purposes of explaining the convoluted Global Price Adjustment, but I have to add, solar and wind “widgets”, are inherently less valuable than those produced by synchronous generation (hydro-electric, nuclear, gas, oil, coal, et al). Under the current model, as far as I know, no wind or solar producer in Ontario is capable, or required, to provide reactive power…the stuff that makes power flow, motors turn, and supports voltage. Nor do they provide any generator droop characteristics necessary to maintain a stable grid. Another analog might be, dispatch-ability, vars, speed droop, are the “meat and vegetables” required for a healthy grid, while wind and solar are fizzy soft drinks with “empty” calories.

    • February 21, 2017 at 13:08

      well put. I have called wind/solar brain candy but I think I like fizzy drinks better.

      Yes, in my analogy NOT all widgets are equal. Some are shiny but worthless trinkets.

  6. Ron Hartlen
    February 25, 2017 at 08:03

    Brilliantly effective explanation and presentation.
    Thanks

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