To: Clients and Colleagues
From: Travis Lusney and Michael Killeavy, Power Advisory
Re: IESO 2021 Annual Planning Outlook – Summary and Commentary
The 2021 Annual Planning Outlook (APO) is the third annual outlook published by the Independent Electricity System Operator (IESO) for the Ontario power system. The APO informs stakeholders of system needs and the 2021 APO covers the period from 2023 to 2042.
The APO is intended to provide stakeholders with the data and analysis to make informed decisions based on future system needs. It is also aimed at providing policy makers with the information they need to craft policy for the Ontario electricity sector.
The 2021 APO is composed of seven sections: demand forecast, supply and transmission outlook, resource adequacy, transmission security, integrating electricity needs, outcomes and other considerations, and uncertainties. This note provides Power Advisory’s summary and commentary on the 2021 APO.
The APO forecasts annual net energy demand to grow from 147 TWh in 2023to over 200 TWh by 2042 – an almost 2% per year annual growth rate over the outlook period. This is a significant departure from historic demand patterns, which have been relatively flat and ranged between 132 TWh to 137 TWh over the past 5 years. The 2020 APO predicted energy demand would grow at 1.1% rate annually, the 2021 APO almost doubles the growth rate. Ontario is expected to remain a summer-peaking jurisdiction with summer peak demand predicted to grow from 24 GW in 2023 to 31 GW in 2042. Winter peak demand is expected to reach 30.5 GW by 2042.
Figure 1: Energy Demand By Sector
Figure 2: Seasonal Peak Demand
Growth is primarily attributed to electric vehicles (EVs), agricultural greenhouses, mining expansion, steel producer electrification in northern Ontario, and continued residential sector growth. The IESO states that there is a high degree of uncertainty in its demand forecast due to the transformation of the Ontario economy driven by policies aimed at climate change mitigation, such as electrification and decarbonization.
The transportation sector demand outlook has the most significant change with an annual average growth rate of 20%. EV charging is the primary driving force behind this growth. The APO forecast aligns with the recent federal government announcement on zero-emissions vehicle sales targets, which projects 6.4 million EVs in Ontario by 2042. This increase in EVs results in an annual charging demand of 24.4 TWh and peak demand of 1,200 MW. In addition to the transportation sector, demand growth in the agricultural sector is also forecasted to be high at about 4% per year, driven by greenhouse expansion. The industrial sector has been affected by government announcements related to northern Ontario resource extraction and processing (e.g., Algoma Steel announced its plans to construct an electric arc furnace in July 2021, adding potentially 300 MW to the Sault Ste Marie area).
Supply and Transmission Outlook
Ontario has 40,300 MW of installed supply capacity as of 2022, which includes both transmission-connected and embedded distribution-connected resources. Nuclear generation, gas-fired generation, and hydroelectric generation resources represent roughly a quarter of installed capacity each. The remaining installed capacity comes from wind generation (14%), solar generation (7%), and bioenergy generation (1%).
Figure 3: 2022 Installed Capacity by Fuel Type
The Ontario nuclear generation fleet will undergo significant change over the outlook period. Six generation units at the Pickering nuclear generation station (NGS) in 2024/2025. In addition, the ongoing nuclear refurbishment program will see 9 generation units refurbished (G2 at Darlington NGS was returned to service in 2020).
In addition to nuclear generation refurbishment, contracts for generators held with IESO will expire during the outlook period. The APO distinguishes between installed capacity, which is a resource’s maximum output, and effective capacity, which is the resources expected capability to meet peak demand during a season (i.e., summer or winter). If generators do not remain in-service after their contracts expire, the effective summer capacity of the supply mix drops from 25,000 MW in 2023 to 16,000 MW by 2042.
Figure 4: Summer Effective Capacity Without Contracted Resources
The bulk transmission system ensures Ontario’s supply resources can deliver energy to load centers and maintain the province’s resource adequacy criteria. Ontario is subdivided into ten electrical zones. To maintain the reliability of the bulk transmissions system, several transmission projects have been planned for during the outlook period (see table and figure below).
Table 1: Planned Transmission Projects
Figure 5: Transmission Zones and Anticipated Transmission Projects
Resource adequacy metrics ensure there will be enough resources available to supply demand in any given hour. The IESO performs a probabilistic resource adequacy assessment in comparing the demand forecast to the anticipated performance of supply resources to arrive at a Loss of Load Expectation (LOLE). The IESO maintains sufficient supply capacity in the system so that the LOLE is not greater than 0.1 days per year.
The IESO also uses a reserve margin calculation to determine the amount of supply capacity above peak demand during normal weather conditions needed to maintain system reliability. Even with continued operation of existing generators,the 2021 APO’s forecast of reserve margin projects Ontario to have a deficit in reserve margin available by 2026 (following Pickering NGS retirement).
The APO also analyzes capacity adequacy in relation to demand and resource assumptions for both the summer and winter periods. A capacity deficit signals the need to acquire additional capacity to satisfy the LOLE requirement. Summer and winter capacity needs emerge in 2025 due to Pickering NGS retiring, outages from nuclear generation refurbishments, and increase in demand. The APO forecasts a need for new supply capacity of 3,800 MW by 2030 with the continued operation of all generators post expiry of their contracts. Without continued operation of these generators,the IESO projects Ontario will need greater than 11,000 MW of supply capacity for the summer period.
Figure 6: Summer Capacity Deficit
The APO indicates that there are a number of potential sources of supply capacity available to help meet the need for more capacity(but will not meet all supply needs):
In terms of potential energy supply needs, the IESO believes that operating generators can meet the province’s energy needs until the mid-2030’s. Further, the APO forecasts that surplus baseload generation will diminish throughout the 2020sas Pickering NGS retires and other nuclear generation units will undergo refurbishments.
Ontario will become a net energy importer if none of the existing generators continue to be available in the mid-2020s as forecast demand increases. Without the potential continued operation of generators post expiry of their contracts, the province is forecast to import 44 TWh by the end of the outlook period, as demand increases, generators retire, and intertie limits are reached regarding imports.
Locational Considerations Based on Transmission System Limitations and Integrating Electricity Needs
In addition to supply capacity requirements mainly driven by forecast provincial demand growth, there are locational capacity needs throughout Ontario’s transmission system due to local constraints. Capacity needs resulting from transmission security requirements are identified in the following regions.
A summary of the local supply capacity needs is shown in the figure below.
Figure 7: Summary of Summer Capacity Needs including Locational Requirements, without Continued Availability of Existing Resources
Outcomes and Other Considerations
The APO indicates that with the planned outages from the refurbishment of units at Darlington NGS and Bruce NGS in the 2020s and2030s, gas-fired generators will become the marginal resources providing needed supply. Higher carbon prices and more operating hours from gas-fired generators are expected to increase both carbon emissions in the electricity sector and marginal costs. As such, the APO predicts greenhouse gas (GHG) emissions from the electricity sector to increase from approximately 5 mega tonnes (Mt) in 2021 to 11.9 Mt by 2030. The APO notes, however, that increased electricity sector emissions do not necessarily mean higher Ontario economy-wide emissions because the province’s generation fleet is already relatively non-emitting. With electrification (i.e., switching from carbon-intense fuels to electricity such as EVs or space heating) economy-wide emissions may decrease. The IESO forecasts GHG emissions from Ontario’s electricity sector and illustrates the impact of two electrification scenarios: EV charging, and Electric Arc Furnace. The IESO projects net provincial electricity sector GHG emissions to be negative by the late 2030s despite gross electricity sector GHG emissions increasing. The 2021 APO aligns with the latest federal policy announcement of $170 per tonne CO2e by 2030.
Figure 8: Electricity Sector Greenhouse Gas Emissions, Historical and Forecast
For the first time the IESO devoted an entire section of the APO to the uncertainties that exist in its base forecasts. The primary drivers for uncertainties are government policy and economic activity. The IESO notes that government decarbonization initiatives could create a long-term increase in electricity demand. In addition, rapid economic recovery and government policy support (e.g., Ontario’s Critical Mining Strategy) could lead to significant industrial demand growth. As these policies evolve it becomes difficult to predict the timing, location, and scale of likely increases in demand. In light of these uncertainties, the IESO developed a High Demand scenario which includes current trends towards electrification and potential large industrial demand growth. The High Demand scenario has 11% more net annual energy demand compared to the Reference Scenario over the outlook period. Peak demand in the summer and winter periods converge at just under 34 GW, 8% higher than the Reference Scenario summer peak demand by 2042.
Figure 9: Energy Demand by Scenario
Figure 10: Season Peak Demand by Scenario
The high demand forecast will obviously have an impact on resource adequacy since capacity needs are driven by demand. The supply need under the High Demand scenario emerges a year earlier (55 MW in 2024). By 2030 the supply need under the High Demand scenario is over 6,000 MW – even if all generators with expired contracts continue operations.
Figure 11: Resource Adequacy Need with Continued Operation of Existing Resources by Scenario
Power Advisory Commentary
The IESO should be commended on their third iteration of the APO. The just released APO provides a wide view of Ontario’s power system needs for stakeholders to consider. The growing consistency of data points for comparison to past years is incredibly helpful as the electricity sector manages significant uncertainties in the future from changing government policy (e.g., climate change) to new and emerging technologies.
A key result from the 2021 APO is the increase in the Ontario demand outlook with higher growth expected throughout the outlook period. After years of moderate demand growth, the IESO now has two scenarios where forecast demand growth ranges from 1.7% per year to 2.2% per year. This demand growth is not concentrated in one sector but spread across many sectors. Demand growth is responding to multi-government policy objectives to tackle climate change and support economic growth following the COVID-19 pandemic. In Power Advisory’s view, the demand outlook scenarios presented by the IESO are reasonable and pragmatic given today’s economic circumstances and policies.
The 2021 APO also continues to evolve and address shortfalls from previous analysis from past APOs. For example, the 2020 APO presented growing electricity sector GHG emissions with limited context on how those emissions fit with the broader Ontario economy. This led to questions being raised regarding the capabilities of the electricity sector to support net-zero policies. The 2021 APO has provided information on the potential net emissions potential from the electricity sector that could be a critical component to achieving lower GHG emissions overall within Ontario.
After roughly a decade of little to no demand growth, the timing for the arrival of higher demand growth will frustrate many other electricity initiatives underway. For example, the IESO-Administered Markets (IAM) will undergo fundamental reforms through a significant overhaul of Ontario’s wholesale electricity market (i.e., IAM) through the Market Renewal Program (MRP). MRP will bring in a US-style wholesale electricity market including Locational Marginal Prices (LMPs) for energy and operating reserve and a Day-Ahead Market (DAM). Another example is the Ontario Energy Board (OEB) led consultations regarding potential changes to Ontario’s regulatory framework to support the integration of distributed energy resources and evolving utility business models. Further, government policy and corporate business environmental, social, governance (ESG) objectives are driving adoption programs aimed to improve environmental performance resulting in investment in new and emerging technologies along with changes to customer energy choices. Together, these examples are creating much uncertainty within Ontario’s electricity sector – at a time when supply capacity is clearly needed for most years withinthe planning outlook.
A critical component to help reduce uncertainty and to help stakeholders manage risks is the availability of data and analysis. The 2021 APO and its data tables are a good start but the IESO must go further. The IESO should continue striving to publish detailed data and information on the power system and IAM. As noted in a recent Leave to Construct decision by the OEB, “In order to carry out those [IESO] responsibilities and objectives, robust stakeholdering and advance planning with potential capacity providers need to be undertaken as part of the initial project steps.” The IESO has agreed to share more planning data as part of the settlement agreement with intervenors in the IESO’s fees application. In Power Advisory’s view, the IESO’s data sharing and planning analysis transparency is starting to lag other jurisdictions. For example, the Alberta Electric System Operator (AESO) publishes all market data for stakeholders, including offer data that provides a clear view into daily operation of the grid and assessment of market revenue potential. Many system operators in the U.S. utilize standard confidentially agreements with market participants to enable their access to data and information relating to respective power systems and wholesale electricity markets. The IESO should enact an updated data and information sharing framework and leverage processes established in other jurisdictions as a guide. This will help instil confidence in stakeholders regarding their participation and investment decisions within Ontario’s broad electricity market and within the IAM.
Projected supply capacity needs within Ontario have been well known for many years – especially considering the planned retirement of Pickering NGS. There is now little room to maneuver to meet the forecast supply capacity shortfall beginning in the mid-2020s, so it is clear that continued operation of most generators will be required post expiry of their contracts and new supply resources will need to be built. Therefore, in part, the Ontario government has issued Directives to the IESO to investigate and contract for specific resources (e.g., battery storage, pumped storage, hydroelectric and biomass generation,transmission). Even if all these resources are maintained or developed, Ontario still requires new supply capacity to be built by in the late 2020s to meet summer peak demand needs. By Power Advisory’s estimate, a minimum of approximately 1,500 MW of new supply is needed by 2030 and could potentially grow to approximately 3,800 MW under the IESO’s High Demand scenario.
To help address the forecast supply capacity shortfall,the IESO must determine how it will handle the many operating generation facilities and few operating storage facilities that will be reaching the end of their contract terms over the next dozen or so years. Given the heightened uncertainty and history of changing electricity policy direction within Ontario, multi-year contracts will be required to convince asset owners and their investors to continue operation of their facilities. Even though many of these supply resources have paid off the initial capital investments over the initial contract term, continued operations will require capital investments and on-going costs that must be compensated at a fair return to attract maintain and attract new investments. The reforms planned for within the MRP along with changing policy direction within Ontario recent past can reduce investor confidence in stable market revenues therefore resulting in higher risks. Further, asset owners and their investors do not operate in Ontario isolated from other markets. That is, better returns and/or less uncertainty can attract investment capital away from Ontario and/or raise financing costs to maintain operating assets and build new projects in Ontario. The IESO needs to be sensitive to this dynamic and therefore carefully design and administer procurement initiatives in combination with planned IAM reforms (e.g., IAM) to best ensure asset owners and investors maintain needed facilities and build needed new projects in a timely manner.
Most of the operating supply capacity with expiring contracts over the next several tears are gas-fired generators – many sited in or around major demand locations within Ontario. In response to a number of municipalities across the province calling for a phase out of gas-fired generation in Ontario by 2030, the IESO published an assessment of the impact of phasing out gas-fired generation by 2030 . The IESO’s analysis concluded that phasing out gas-fired generation by 2030 will result in frequent and sustained blackouts while costing Ontario’s ratepayers at least $27 billion. Even with those findings, the IESO study prompted a letter from the Minister of Energy to evaluate both “a moratorium on the procurement of new natural gas generating stations and develop an achievable pathway to zero emissions in the electricity sector”. The Minister’s letter combined with growing public support for taking action on climate change increases uncertainties in whether gas-fired generation will practical help meet Ontario’s projected future supply capacity shortfall. If gas-fired generation will be relied on less towards meeting projected capacity shortfalls, this will require either new resources to be built to replace gas-fired generation and/or some of the operating gas-fired generation to determine how to use lower carbon intensity fuels in the future (e.g., hydrogen, renewable natural gas).
In Power Advisory’s opinion, the IESO should explore potential changes to their analysis regarding metrics towards determine power system reliability and how resources work towards meeting power system reliability. Historically, resource adequacy and accompanying Loss of Load Expectation (LOLE) analysis targets peak demand hours and assesses the failure rate of supply resources to produce energy along with the transmission system capability to deliver energy under extreme situations. However, as the resource mix continues to evolve towards more non-emitting resources (e.g., higher integration of variable renewable generation, etc.), demand patterns continue to change (e.g., due to electrification, etc.), the approach to measure and maintain resource adequacy must adapt as well. The Energy Systems Integration Group (ESIG) published an excellent report on redefining resource adequacy for modern power systems in 2021 with many conclusions that should be considered within Ontario towards addressing the forecast supply capacity shortfall. Specifically, targeting analysis and procurement processes around peak demand hours is likely insufficient in the future. Resource adequacy and its requirements will need to consider different operability challenges at different times of the year and recognize limitations and strengths of all supply resources towards maintaining reliability and doing so cost-effectively. For example, volatile wind energy production in the ‘shoulder’ seasons (e.g., spring, fall) can require a significant amount of fast response resources (e.g., storage, etc.) outside of peak demand hours with a year.
Perhaps the most important take away from the 2021 APO is that the need to build new supply projects is growing rapidly with a smaller subset of resource options to choose from. Power Advisory’s gas-phase out report published in April 2021 for the Ontario Energy Association and the IESO’s gas-phase out report listed the remaining options and the different advantages and drawbacks for each. Many options (e.g., nuclear generation, large hydroelectric generation) will take many years to develop and will likely not be able to address all power system needs. In Power Advisory’s view, no single resource will be the answer. Instead, a portfolio of resources must be maintained and developed to most effectively meet all power system needs and manage the uncertainties within Ontario’s electricity sector. The IESO’s procurement processes will need to continually evolve and adapt to recognize these challenges and provide different paths for needed resources to be maintained and developed.
 Decision and Order for Trafalgar TS to Richview TS upgrade (EB-2021-0136), page 8/9 - https://www.rds.oeb.ca/CMWebDrawer/Record/734293/File/document.In addition, a similar conclusion was reached by the OEB in another Leave to Construct application for Ansonville TS by Kirkland Lake TS refurbishment project (EB-2021-0107). https://www.rds.oeb.ca/CMWebDrawer/Record/734320/File/document
 IESO Application for Approval of 2020 and 2021 Expenditures, Revenue Requirement and Fees (EB-2020-0230)
 Decarbonization and Ontario’s Electricity System – Assessing the impacts of phasing out natural gas generation by 2030 - https://www.ieso.ca/en/Learn/Ontario-Supply-Mix/Natural-Gas-Phase-Out-Study
 Redefining Resource Adequacy for Modern Power Systems - https://bit.ly/RAforModernPowerSystems
 Implications of Shutting Down Ontario’s Gas-Fired Generation by 2030 - https://energyontario.ca/Files/PDF%20files%20to%20share/Power%20Advisory%20Ont%20Gas%20Fired%20Generation_14Apr2021.pdf