The Independent Electricity System Operator (IESO) released its resource adequacy update, providing final results from the Expedited Long-Term Request for Proposals (E-LT RFP) and Same Technology Upgrades (Same Tech). The results are an update from the previous month’s results and include the weighted average price of the procurement. Through the E-LT RFP, the IESO has procured 930 MW of storage and 318.5 MW of gas-fired generation.
The IESO also updated results of the Same Technology Upgrades, including more contract extensions for a number of existing gas-fired generators. The upgrade capacity totalled 251.4 MW, although there is an additional 40 MW of upgrades expected, but under ongoing negotiations with the IESO.
The cost of procurements differs between storage and non-storage assets, with storage contracts have a term of 20+ years (i.e., contract term ends 2047, length depends on in-service date), while the non-storage contracts have a term of 13 years.
As discussed in our previous client note on the initial E-LT RFP and Same Technology results, the IESO did not achieve their non-storage (i.e., gas-fired generation) target of 600 MW in the E-LT RFP, falling short by roughly 280 MW. The IESO through the E-LT RFP design can procure more storage with the leftover non-storage procurement target. The IESO did so but only 30 MW compared to the potential to procure an additional 280 MW. The IESO provided no reasoning for why it did not procure to the full E-LT-RFP target capacity amount.
Power Advisory Commentary
Power Advisory congratulates the IESO on the conclusion of the E-LT RFP and Same Technology Upgrade procurements. After a decade of minor procurement activities, the IESO has completed contracting for substantial capacity expansion in Ontario.
Using Power Advisory’s internal modelling, the weighted average prices for storage resource provides two key insights. First, the E-LT RFP competition was intense with the prices reflecting aggressive bidding behaviour based on capital costs and market revenue expectations. This is not surprising given the large number of sophisticated developers with strong financial backing. Further, Ontario’s long history of start/stop procurement activities would have driven some proponents to view the E-LT RFP as a potential one and done procurement for storage in the province. Second, it is reasonable to assume many bids included the 30% capital expenditure grant from the Investment Tax Credit (ITC) for storage announced by the Federal Government. While many details remain on how the ITC will be applied and what expenditures are eligible, the potential cost savings are readily apparent.
The next challenge is to bring these resources into service so they can provide Ontario much needed capacity and support as the system is expected to grow rapidly over the next decade. History shows there will be attrition, how much will depend on the flexibility and compromise that might be required to get projects to commercial operation.
The weighted average price for both categories is higher than both the maximum capacity auction clearing price (MCACP) for the IESO’s short-term Capacity Auction (i.e., $516/MW-Business Day), which offers commitment periods of only 6-months and the most recent Medium-Term RFP which included a capped reserve price of $470/MW-Business Day. The MCACP is determined by an estimate of the cost of new entrant (CONE) by the IESO. While there are many nuances with the risks and opportunities in the E-LT Contract, the high price differential between the long-term contracted amount and the MCACP demonstrates that the CONE calculation used in the Capacity Auction likely is not incorporating external policy and market revenue risks appropriately. While this does not mean the MCACP must be changed as the Capacity Auctions short-term objective is only part of a broader resource adequacy framework for the IESO, price discovery is needed to help inform future procurement activities.
Power Advisory believes there is significant benefit for Ontario rate-payers from the establishment of a procurement roadmap that incorporates all the different resources that may be able to offer services to the Ontario’s future electricity system needs. Power Advisory believes a procurement roadmap would provide confidence for proponents to invest in developing projects and ensuring they are successful in being awarded a contract and reaching commercial operation with community support. Time and commitment are needed to achieve these goals and reduce the risk of public backlash from too much building too fast in concentrated areas.
Further, a procurement roadmap can enhance the benefits from robust competition by offering appropriate platforms for different resources to compete. In particular, the IESO must determine a path for existing (e.g., continued operation, expansion, or repowering) and new build projects to compete. Power Advisory’s suggestion is to allow proponents to offer different term lengths into a procurement that would allow proponents to reflect different amounts of capital investment in their bids. For example, an existing facility with an expiring contract could offer a 5-year term for continued operation (i.e., minimal capital investment), or a 15-year term for expansion and partial repowering. Further, the proponent could offer a 20-25 year term for complete repowering of the facility. These could all be compared to new build facility that could offer between 20 – 30 year terms.
A key benefit for such an approach to the IESO is that it could select the right mixture of contracts terms and resource types that would align with the latest long-term forecast and the existing committed supply mix (i.e., contracted and rate-regulated resources). Power Advisory views this approach as similar to how governments borrow over different terms to manage long-term expenditures and fluctuating interest rates. Through flexible term proposals, the IESO would be able to view the impact of capital cost and financing over different time periods and select whatever term length or investment is appropriate at that time.
Finally, and in Power Advisory’s view perhaps most importantly, the IESO included the following statement in the June 2023 Resource Adequacy update.
As the IESO continues to adapt its practices to meet evolving market and system needs, it will provide individual contracted capacity prices when all agreements are finalized, encouraging transparency and helping to ensure our market is robust and competitive. Contract capacity prices for the expedited procurement reflect competitive market value, as 44 proposals competed to offer a total of 3,500 MW to the system. These positive results set the stage for the next stage in the procurement process which is launching this fall.
Power Advisory is very encouraged by this commitment and believes it will result in significant long-term benefits for Ontario rate-payers, policy makers and proponents. Price discovery is vital to competitive markets. While individual winning proponents reasonably may not want there bid prices published, in Ontario’s hybrid electricity market where procurements are primarily done by a single buyer (i.e., a monopsony), publishing prices is a vital ingredient to support transparency and fairness. Ontario’s electricity sector is embarking on the its next build cycle, the contract awards for E-LT RFP and Same Technology Upgrades are only the first steps on what could be a vastly different electricity system over the next two decades.