Power Perspectives 2022 - Ontario Regional Overview
2021 has been a busy year for procurement plan development in Ontario. Readers may recall that in 2020 the IESO released its tripartite Resource Adequacy Framework, identifying short term capacity auctions as the primary procurement method for near-term capacity needs, and competitive contractual (RFP) procurements for medium-term (three years, with a potential two year extension) and long-term (seven to ten years) capacity needs in Ontario.
Assuming existing contracted resources are re-procured, the IESO’s 2020 Annual Planning Outlook (2020 APO) forecasted a capacity need arising in 2024, which would eventually become an energy need in the late 2020s and early 2030s. Such needs are driven primarily by expiring contracts, nuclear refurbishments, the retirement of the Pickering Nuclear Generating Station and moderate demand growth (due to projected increases in residential load from COVID-19 related work from home protocols, mining and agriculture sector resiliency and new rail transit electrification projects).
In furtherance of its Resource Adequacy Framework and 2020 APO, the IESO released its inaugural Annual Acquisition Report (AAR) in July 2021. The AAR:
- set capacity targets (for the December 2021 Capacity Auction) of 1,000 MW for the 2022 summer obligation period and 500 MW for the 2022-23 winter obligation period;
- established a minimum target threshold of 500 MW for future capacity auctions and, beginning with the 2022 Capacity Auction, using resources qualified on an Unforced Capacity basis;
- confirmed that a medium-term RFP would be issued in late 2021 for up to 750 MW with a three-year commitment period beginning in 2026;
- signaled an intent to issue a long-term RFP in late 2022 for at least 1,000 MWs also beginning in 2026; and
- confirmed that specific bilateral arrangements (for approximately 2,000 MW) would be pursued where reliability needs in specific regions of the province could not be addressed in a timely matter through competitive processes.
Following stakeholder concern that the commitment periods for the medium-term and long-term RFPs were insufficient to warrant the large scale capital spend required to refurbish existing resources (with expiring contracts or otherwise) or to build new resources to compete for these RFPs, the IESO announced in December 2021 that successful resources for the medium-term RFP would be automatically committed for a 5 year term and could commence their contract terms as late as May 1, 2026 (instead of May 1, 2024 or May 1, 2025). Notably, the IESO simultaneously announced that it would be working with the Ministry of Energy to permit automatic extensions of expiring contracts to the nearest subsequent April 30 date.
This was on the heels of the IESO’s release of its 2021 Annual Planning Outlook (2021 APO) which reaffirmed expected emerging growth at an average rate of about 1.7% per year, particularly in the industrial, mining and agricultural sectors, as well as major expansion in transportation, manufacturing and industry electrification in Ontario. The 2021 APO did delay Ontario’s potential capacity shortfall by forecasting such shortfall to begin in 2025-2026 and to increase significantly closer to 2029 (assuming all existing resources are re-procured). This forecast is now likely bolstered by the provincial COVID-19 related lock down that started in December 2021 and the resulting lag in anticipated growth from commercial sector COVID-19 recovery efforts.
The 2021 APO further asserts that evolving carbon policy, including a possible moratorium on new-build natural gas facilities, could result in lower than predicted availability of gas generation while the number and types of new technologies (e.g. distributed energy resources, storage and demand response) on the system could significantly increase. This may be true for energy storage now that the IESO has made significant efforts to implement energy storage participation at the wholesale level. However, the question of whether demand response resources will contribute to Ontario’s evolving capacity and energy needs (and the extent to which such resources will contribute to such capacity and energy needs) remains unanswered; the IESO confirmed in mid-December 2021 that its enabling resources work plan is prioritizing the development and implementation of certain generation and storage hybrid participation models over new demand response participation models at the wholesale level.
Indeed, it is also unclear whether a moratorium on natural gas is likely or possible in the short term. As further discussed on our blog, on November 10, 2021, Ontario’s Minister of Energy released a letter (Letter) to the IESO making comments and requests on a number of the IESO’s current and planned measures to meet the province’s anticipated electricity capacity needs. Key highlights of the Letter include the Minister’s request to advance several initiatives beginning in December 2021 and the Minister’s notable support for energy storage, the continued operation of small hydro power facilities and the re-contracting of biomass facilities. However, despite the references to decarbonization and zero emissions renewable electricity, what stands out is the absence of a clear goal of aligning electricity procurement in Ontario with achieving zero emissions or clarity on the role of natural gas in the energy transition going forward.
This goal is becoming increasingly important given the outcome of the IESO’s natural gas phase out study (Phase Out Study). The study was released on October 7, 2021 and undertaken by the IESO in response to municipal-level resolutions calling for the complete phase out of natural gas generation in Ontario by 2030. The IESO concluded that such a phase out is not possible, primarily for the following reasons:
- new forms of energy supply (e.g. energy storage, small modular nuclear reactors) are either in the development phase or are not ready to operate at the scale needed to compensate for the loss of natural gas generation capacity. The IESO estimates that replacing 11,000 MW of natural gas generation capacity would require 17,000 MW of non-emitting forms of capacity and 1,600 MW of energy conservation;
- new hydro and nuclear capability cannot be constructed within the next 8 years;
- there is insufficient time or resources to build the necessary generation and transmission infrastructure within the next 8 years. The IESO estimates that the cost of such infrastructure would be C$27 billion and that, on average, a single new transmission project currently takes 7 to 10 years to complete under ‘optimal’ circumstances; and
- a phase out would result in frequent and sustained blackouts.
The absence of a clear “net-zero” procurement strategy is also evident in other facets of the IESO’s Resource Adequacy Framework. While, as detailed in our blog post, the draft Medium-Term RFP (Draft RFP) released by the IESO on November 2, 2021 provided some clarity on the process and criteria by which the IESO would procure up to 750 MW of capacity from existing generating or storage resources, it notably lacked any mandatory scoring or criteria related to emissions reduction. Arguably, there is an opportunity to further integrate emissions-related criteria in the Medium-Term RFP to address the potential but conceivably imminent increased electricity demand in Ontario resulting from possible future broad based transport electrification and natural gas phase-out.
Sector participants might anticipate further procurement direction from the Ministry following the IESO’s responses to the Minister regarding: (a) existing barriers to energy storage (due to the Minister by March 31, 2022); and (b) a moratorium on the procurement of new natural gas generating stations in Ontario and an achievable pathway to phase out natural gas generation and achieve zero emission in the electricity system (due to the Minister by November 2022).
However, in the interim, sector participants should take some comfort in the province’s developing procurement strategy, notable progress towards Canada’s clean energy goals, and a growing appetite for new projects. Sector participants deciding whether to invest in new generation or storage assets, or to invest in existing facilities, may find some relief in the provincial government’s support for the IESO’s approach to capacity procurement. Ontario has demonstrated its support for emerging technologies; as described further by our colleagues in the SMR article of this publication. Ontario Power Generation Inc. has chosen a developer to engineer, design and permit Canada’s first-of-a-kind commercial, grid-scale small modular reactor.
Somewhat surprisingly, despite several years of industry pessimism due to the dearth of new-build opportunities in the province, 2021 has brought renewed optimism. In addition to the foregoing, additional developments (such as the Ministerial directives from August 27, 2021 and May 20, 2021 relating to the 250 MW Oneida Battery Park Project and the 1,000 MW Lake Erie Connector Project (an underwater transmission intertie between Ontario and Pennsylvania) and the AAR’s confirmation that bilateral contracts (for up to 2,000 MW) are contemplated to address the upcoming capacity shortfall) seem to confirm that the IESO is once again poised to enter into new contracts, which will be welcome news for patient industry participants and investors.
 “Unforced Capacity” is defined as a “consistent capacity service, supporting fair competition amongst all resource types by equalizing the contribution of each megawatt of capacity to the system’s resource adequacy”.