IESO LT1 Initial Results

May 13, 2024
Travis Lusney & Brady Yauch & Roy Hrab

On May 9, 2024, the Independent Electricity System Operator (IESO) released the results of its Long-term 1 (LT1) RFP. The LT1 procurement is the single largest procurement by the IESO in more than a decade and is the first step in a series of long-term procurements by the IESO over the next decade as it seeks to maintain reliability and resource adequacy in the face of growing demand and shifting supply mix priorities (i.e., customer and government lower carbon emission intensity objectives).

The LT1 awarded 410 MW of non-storage (i.e., natural gas and biogas) contract capacity (436 MW of nameplate capacity) to three proponents at an average weighted price of $1,681/MW-Business Day (BD). For storage resources, LT1 awarded 1,784 MW contract capacity (1,885 MW of nameplate capacity) to ten proponents at an average weighted price of $672/MW-BD.

The lone gas-fired generation facility was awarded to Atura Power as part of a 430 MW expansion at its existing Napanee Generating Station (“Napanee”). Napanee currently has a contract capacity of 900 MW, bringing the total nameplate capacity of the plant to more than 1,400 MW in addition to the 265 Napanee BESS that was awarded through E-LT.

The two largest storage projects in LT1 have a nameplate capacity of 412 MW and 400 MW, respectively, and a contracted capacity of 390 MW and 380 MW.

In total, the IESO awarded 2,195 MW of capacity as part of the LT1 procuement. The results fall short of the IESO’s target for LT1 RFP of procuring over 2,500 MW of capacity from expansions and new build resources. The IESO has continued to miss its targets for capacity from non-storage (i.e. gas-fired) assets. The IESO under-procured gas-fired generation in both the expedited LT-1 (E-LT1) and the Medium-Term RFP.

The resources included in LT1 are to be online by May 2028. The IESO is now in the process of offering contracts to these successful proponents.

The contract awards are just a process step in the development of resources in Ontario. Successful proponents must now execute their contracts and work to achieve commercial operation – which will require arranging financing, engaging communities and First Nations, acquiring permits and approvals, undergoing connection impact assessments, registering facilities in the IESO-Administered Markets (IAM) and completing construction.

Power Advisory Commentary

There are a few main takeaways from the LT-1 results.

First, the cost of capacity from storage assets continues to decline (see the graph below). The average cost in the E-LT1 was $837/MW-BD for Category 1 projects and $1,111/MW-BD for Category 2 projects. The LT1 contract price dropped to $672/MW-BD. Some of this decline is a reflection of decrease in raw material prices (i.e., lithium) since the submission of the E-LT bids.

Second, both the cost of capacity from gas-fired assets continues to increase and the amount of capacity procured continues to miss the IESO’s target. The E-LT1 gas capacity contracts settled around $1,093/MW-BD, while LT1 increased to $1,681/MW-BD. While the IESO has repeatedly stated that it needs gas-fired capacity to maintain reliability on the grid, both the cost and challenge of siting that capacity is becoming increasingly clear. Future procurements of gas-fired capacity are likely to be similarly challenging for the IESO.

Third, through LT1 and E-LT procurements, the IESO has initiated the construction of almost 3,600 MW of new capacity in Ontario. This represents close to a 10% increase in installed capacity for the Ontario supply mix, a significant growth of market participation and integration of new resources into the IESO-controlled grid. The expanded capacity is all located in Southern Ontario due to the IESO eliminating all northern Ontario development due to deliverability concerns. The new capacity is fairly spread out with the East having the highest amount of new capacity with ~1,400 MW while all other southern Ontario IESO zones receiving some new capacity. Again, the IESO’s restrictive deliverability assessment ensured projects were not concentrated in one specific area.

Fourth, adding the necessary capacity – regardless of whether it is storage, gas or another technology – to the Ontario grid is expected to remain challenging for a variety of reasons including connection and siting challenges, lack of municipal support, contract design and broader economic and financial uncertainty. The IESO has missed its capacity targets in multiple different procurements, with LT1 being the latest example. Furthermore, attrition of capacity from contract award to commercial operation always occurs and therefore it is likely that that not all of the contracted projects in LT1 will be built. The IESO will have to manage potential attrition of contracted projects and the risk this introduces from a reliability and resource adequacy perspective.

And finally, the awarded price for long-term capacity in E-LT and LT1 continues to demonstrate the high cost of the IESO’s prescriptive procurement designs and the impact of the IESO’s desire to shift risks to proponents – including those risks that are not under the control of proponents such as final connection costs and community design requirements. The Capacity Auction (CA) – with only 6-month commitment periods – has a maximum clearing price of less than $600/MW-BD, while the 5-year term Medium-Term RFP’s maximum price was less than $500/MW-day. It is clear that the cost of acquiring capacity resources in Ontario is higher than those capped values. The IESO should reconsider the maximum price among the different procurements to ensure that participants are sent the same economic signal. For example, if the maximum clearing price in the CA is supposed to be set on the Cost of New Entry (CONE) that value should broadly align with the LT procurements, which are targeting new assets. If the CONE value in the CA is significantly below the LT procurements, then it is not reflective of the true cost of capacity in Ontario. Given the short commitment period of CA, there is an argument that no maximum clearing price should be used, or that recent long-term procurements should guide the maximum clearing price for short-term commitments. For example, the IESO could use similar logic to what is currently in the CA and apply 125% to the weighted average price in LT procurements to establish the CA maximum clearing price.

Overall, the results of the LT1 procurement show progress towards meeting Ontario’s resource adequacy and reliability needs. Many challenges lay ahead including meeting the fast-approaching energy adequacy needs through future LT2/LT3/LT4 procurements.