IESO’s Long-Term 2 RFPs

December 12, 2023
Travis Lusney & Brady Yauch

The Independent Electricity System Operator (IESO) has announced that it expects to procure up to 5,000 MW of new capacity by 2035 from non-emitting sources of supply, including wind, solar, biofuel and hydroelectric assets. The procurements will be “cadenced” and occur in blocks, with the first 2,000 MW of new-build resources RFP launching in 2025 and expected to be in service by 2030.  Subsequent procurements will launch in 2027 and 2029 for an additional 1,500 MW each to be in service by 2032 and 2034 respectively.

The procurements are part of what the IESO is calling its Long-Term RFP 2 (LT2) procurements and subsequent LT3 and LT4.  These procurements come in the wake of the LT RFP 1 (LT1) procurement that recently closed and is expected to award contracts by May 2024. Details and the need for the LT2 procurements were provided in a report from the IESO to the Minister of Energy (“Minister”) that evaluated procurement options needed to meet resource adequacy needs.

While LT1 focused on capacity needs (i.e., the ability to deliver energy during peak demand hours), LT2 and subsequent procurements will be predominantly focused on procuring energy from non-emitting sources of supply.  The majority of non-emitting resources are intermittent in nature – producing energy when fuel is available (e.g., wind blowing and sun shining) – and will be balanced with the 4,000 MW of capacity resources that are expected to be built between now and 2030 (procured as part of LT1 and the Expedited Long-Term (E-LT) procurement that proceeded it).[1] The IESO specifically highlighted wind, solar, biofuel and hydroelectric assets in its report as resources that are expected to participate in LT2. It also noted that Distributed Energy Resources (DERs), which are assets connected to Ontario’s distribution system, will be allowed to participate in LT2.

The future procurements are a direct result of forecasted demand growth from the IESO – largely a combination of electrification related growth from Electric Vehicles (EVs), space heating (i.e., heat pumps), and broader industrial load growth from battery and other factories – that is occurring concurrently with ongoing nuclear refurbishments and retirements. The IESO is forecasting that it will require 5 TWh of energy between 2029 and 2031 – with energy demand expected to continue to grow throughout the 2030s. Ontario’s annual electricity demand is currently around 140 TWh and, according to a background document released by the IESO, is expected to grow by 40 percent by the mid 2040s and experience similar winter and summer peak demand needs. The report from the IESO to the Minister provides a preview of the upcoming Annual Planning Outlook (APO) – the IESO’s annual long-term forecast of demand growth and other needs of the electricity grid. The IESO has indicated the 2024 APO will be published in February 2024.

The 2024 APO provides two forecasts for future energy needs – one where current contracted assets are retired and one that includes a number of supply options laid out in the province’s most recent energy policy document, Powering Ontario’s Growth,  that notably included support for new nuclear resources, among other options. According to the IESO’s forecast, the amount of “unserved energy” – which is essentially a shortage in energy supply to meet demand – may reach upwards of 50 TWh by 2035.

The IESO also said it expects to continue to rely on what it calls Medium-Term RFPs, which offers contract lengths of up to 5 years and are targeted to assets with expiring contracts currently in operation in Ontario. The first Medium-Term RFP by the IESO was completed last year and contracted predominantly existing gas assets and one wind asset – almost all assets were procured at or near the price ceiling of the procurement.

Power Advisory Commentary

Ontario’s electricity grid is officially entering a new era. After more than a decade of extreme supply surpluses, the province will soon require significant amounts of new supply. The report from the IESO confirms a reality that has been slowly dawning on policy makers, market participants, developers, and the IESO: demand growth is coming and delaying procurements carries a significant reliability risk (among other broader economic risks for the provincial economy).

Importantly, the IESO is telling developers that the procurements will be ongoing over the next decade, and they should be prepared to continuously engage with the IESO and the Ontario wholesale market. The LT1 and expedited procurements can now be seen as a precursor to what is now going to be a long-term development opportunity in Ontario. In Power Advisory’s view, this is a critical shift and recognition by the IESO.  

All infrastructure, including the energy sector, has continuous renewal and expansion needs to meet the demands of economic growth.  Continuous procurements provide many benefits that the IESO will hopefully leverage.  

First, continuous procurements provide confidence to investors to develop projects and assess enhancement options for existing resources.  Second, continuous procurements may help to reduce the negative impact of rushed community engagements that come with one-off procurement programs.  The government has repeatedly indicated that it prioritizes community support to develop new projects. Ongoing procurements can provide the necessary time for to develop local support and engagement.  Third, ongoing procurements provide the opportunity for both existing resources with expiring contracts and new resources to compete for contracts, allowing the IESO and the province to optimize the quantity and type of resources procured over time.  Ongoing procurements allow the IESO to better fine tune procurement targets to meet the ever-changing system needs.  Continuous procurements should hopefully result in higher or lower quantities procured without the stops and starts that have led to so many issues for the Ontario electricity sector. Finally, ongoing procurements support the processes needed for project development including connection assessments, environmental approval, and other permitting requirements.  

The report from the IESO – and directive from the Minister – also marks a significant departure from Queen’s Park, which had shown little support from renewable development in the province. The IESO analysis and Powering Ontario’s Growth report show that while nuclear and large hydro – predominantly developed by Ontario Power Generation (OPG) and Bruce Power – will continue to play a major role in Ontario’s wholesale market, other developments will be required. In particular, the IESO is signaling that large-scale developments of nuclear and hydro will take years – if not decades – to materialize, while demand growth is happening at a much faster pace. In short, Ontario will need both the large development of nuclear and hydro, along with the private development of wind, solar and other smaller assets. With the IESO signalling the need for upwards of potentially 90 TWh by 2040, everything will be required if the province is serious about decarbonizing the electricity sector.  Even partial decarbonization will require significant new energy needs across all non-emitting fuel types.

In addition to development of renewable resources, the IESO has also indicated a need for ongoing expansion of Ontario’s transmission system.  Already the IESO has initiated multiple bulk and regional transmission expansion projects throughout the province that should both support demand growth, as well as open connection capability for new renewable generation.  In particular, the IESO has indicated an expectation that some of the new renewable generation capacity will be developed in northern Ontario – a region that previous renewable procurements and programs excluded due to limited transmission transfer capability.  Growing resource extraction and industry load will help support new renewable generation connection.  

Given all of the energy needs facing the province based on the information published by the IESO, it is clear that existing gas-fired generation will be required for the foreseeable future to maintain cost-effective and reliable electricity system operation. The IESO’s forecast includes the possibility of facing up to 50 TWh of unserved energy by 2035 – a significant energy “hole” that will introduce risk both to the electricity grid and the broader economy.  

Decarbonizing the electricity sector – let alone the entire economy – is a function of many trade-offs that include considerations regarding the pace of decarbonization, the evolution of cost-effective, economic growth, policy objectives and customer preferences.  With Investment Tax Credits (ITCs) available for renewable generation from the federal government, acquiring new renewable generation should offer the lowest cost energy that the system needs.  Over time, the amount of renewable energy that can be cost-effectively and reliably integrated into the Ontario system will depend on many factors, many of which are inherently uncertain as of today.  

Clearly the next build cycle for the electricity sector has begun.  Over the next number of years there will be greater clarity on other policy decisions (e.g., how much new and refurbished nuclear generation will be pursued) along with a better understanding how the electricity sector and the general economy will evolve.  This information will influence the quantity and objectives of future procurement processes. In Power Advisory’s view, the plan laid out by the IESO and government for ongoing procurements of renewable energy, commitment to exploring nuclear expansion, and continued operation of the gas-fired generation fleet for system operability offers a reasonable path to lower carbon intensity while maintaining safe, cost-effective and reliable electricity supply.

[1] E-LT procured 930 MWof storage capacity and 319 MW of gas-fired generation.  LT1 is targeting the procurement of 1,600 MWof storage capacity and 905 MW of non-storage capacity (i.e., gas-firedgeneration)