January 2023 Ontario Electricity Market Update: When is a Contract not a Contract?

January 31, 2023
Avi Lipsitz

Recent months have seen a flurry of rather unusual regulatory applications across the United States: energy and/or storage suppliers asking regulators to approve increases to the amounts they are to be paid for their services, not in the procurement and bidding stages, but after contracts have been signed, and in many cases when project development is well underway. Thus far such requests have been made in at least five states, in each case because proponents have found their projects to suddenly be un-financeable or unprofitable owing to some combination of steeply rising costs, labour shortages, and material/supply chain issues brought about by high inflation, the ongoing pandemic, and war in Ukraine:

• New Mexico, where PNM obtained the regulator’s blessing (in case no. 20-00182-UT, document no. 1215162) for price increases to a solar generation and its associated battery storage facility (27.5% and 24% increases, respectively);

• California, where Pacific Gas & Electric requested and secured revisions to contracts for four battery storage facilities;

• Hawaii, where Hawaiian Electric received a ⅔ increase to its per-MWh price for a solar plus battery storage project and over a year’s extension to the commercial operation date;

• Maine, where BNRG has petitioned the regulator to approve an increase to its contract payment for two solar projects procured in 2020/21. A decision on this request is still pending as of late January;

• Massachusetts, where the Department of Public Utilities has upheld procurement contacts for two offshore wind projects over the objections of the proponents, one of whom has now filed an appeal while suggesting they may simply walk away from the contract; and

• New York, where no formal requests appear to have been made as of mid-January but where, according to a participant in the Maine proceeding referenced above, developers are also seeking contract adjustments/price increases.

Naturally, these developments have raised concerns about the fairness and integrity of open procurement processes, particularly where multiple contracts were awarded and where there is now some question about whether other contracts from the same procurement ought to be reopened as well. On the one hand, developers, in preparing bids, are expected to consider a variety of scenarios; some of the requests mentioned above relate to contracts that were only finalized in mid-2022, at which point the impacts of inflation, the Russian invasion of Ukraine, labour shortfalls etc. were known or at least well-expected. On the other hand, regulators have a duty to act in the public interest; if a developer cannot proceed according to their original agreement for whatever reason and can justify that it would be in the public interest for the regulator to approve modified terms of that agreement such that the developer would be able to proceed, then it is not necessarily unreasonable for the regulator to do so.

This brings us to the implications of these developments for Ontario and for the Independent Electricity System Operator’s (IESO) procurements that are currently underway. Developers have had much to say to the IESO in its consultations on the RFP and contract for the Expedited Long-term 1 (E-LT 1) RFP, including with respect to building in adjustments for inflation, materials costs, interconnection issues, force majeure, offramps – all topics that have been salient in the various renegotiation attempts in the United States. The IESO has been receptive to stakeholder concern on some of these topics, but other feedback was ultimately not reflected in the final procurement documents, and at this point it remains to be seen how that intransigence might impact bids.

It is not clear how E-LT 1 contract holders will be treated in the event they encounter issues similar to those of their American counterparts after the IESO has issued contracts; IESO has been adamant that E-LT 1 (and subsequent processes) are reliability procurements and that they will only be selecting projects that have a high likelihood of success. And yet by the same token it is not hard to imagine a scenario in which a tight supply situation would lead the IESO, or even the Ontario government, to make concessions after-the-fact to contract holders in the event they run into problems of the kind encountered by American developers – even though the IESO is attempting to address at least one major issue, inflation, through the materials cost indexing provision. From a fairness perspective, a key difference here in Ontario is that the regulator (the Ontario Energy Board (OEB)) has no authority or role in reviewing IESO-procured supply contracts, unlike the regulators in the United States noted above. Any proponent’s attempt to renegotiate a contract price or terms would thus not likely be conducted with the same degree of openness and scrutiny as we see in the United States. Another key distinction in Ontario is the presence of a large Crown generator, which could well be interested in “filling the gap” should issues arise with one or another proponent’s performance. These differing dynamics mean that although developers here may encounter similar post-award issues as in the United States, the buyer’s response and opportunities for reopening – and especially for across-the-board enhancements, as may yet occur in some American states – are likely to be quite different.