March 2022 Ontario Electricity Market Update: Ontario's Looming Capacity Deficit

March 31, 2022
Michael Killeavy

In December 2021, the Independent Electricity System Operator (IESO) released its Annual Planning Outlook  (APO), which is the third outlook published by IESO for Ontario’s power system.  The APO informs stakeholders of system needs and the 2021 APO covers the period from 2023 to 2042.

After a decade of little or moderate demand growth, 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 dramatic growth is primarily attributed to electric vehicles (EVs), agricultural greenhouses, mining expansion, steel producer electrification, and continued residential sector growth.  The transportation sector demand outlook has the most significant impact on the demand outlook, with an annual average growth rate of 20%, which is due primarily to EV charging.  

With this growth in demand, coupled with the retirement of Pickering Nuclear Generation Station and other nuclear plant refurbishment outages, IESO has identified a need of between 4,000 MW and 6,000 MW by 2030, with a capacity need starting in 2025.  This assumes that existing contracted resources will continue to operate, which is not guaranteed.

This capacity need has several significant implications for the sector.  After years of planning its now abandoned Incremental Capacity Auction and eschewing contracting for resources, IESO’s Resource Adequacy Framework now embraces contracting as one of the tools in its resource adequacy toolbox. This is a sea change for IESO and it now plans to issue Request for Proposals (RFPs) for contracts for medium-term (MT) and long-term (LT) needs, while continuing to use annual capacity auctions for short-term needs. In January 2022, IESO launched its first MT RFP and issued a draft Request for Qualifications (RFQ) for its first LT RFP.

The acknowledgement that contracting is needed is a positive development for generators; however, IESO procurement of resources faces several challenges. Firstly, these procurements are being done against the backdrop of an electricity system that is entering the next phase of decarbonization.  In October 2021 the Minister of Energy directed IESO to evaluate a moratorium on procurements of new gas-fired generation and to develop a pathway to zero emissions in the electricity sector.  Ontario has also had a checkered history of siting and developing new gas-fired generation, having had two plants relocated at considerable expense to mollify communities opposed to siting these plants in their communities. Given these circumstances, it is unlikely that procuring new gas-fired generation will figure into IESO’s procurement plans to satisfy the capacity needs that are emerging.  

Secondly, the identified capacity needs begin to occur in 2025, which is three years from now.  This compressed timeframe severely limits IESO choices for acquiring new capacity. Three years is not enough time to site and construct new generation projects.  Previous experience in constructing new generation projects have shown development timeframes of at least four years before being brought into service. Further, as an example, renewable energy projects were previously being developed under the permitting regime introduced by the Green Energy and Green Economy Act, 2009, which removed much local municipal control over siting projects.  The Green Energy and Green Economy Act, 2009 was repealed in 2018 reinstating local municipal control, which could make siting projects more challenging than in the past.

Thirdly, we anticipate that energy storage and hybrid resources will play a major role in the first LT RFP.  Currently, the IESO-administered markets (IAM) do not cater to these types of resources. The Enabling Resources Workplan indicates that the hybrid foundational design and implementation will not be completed until July 2025, after the first LT RFP is concluded and the capacity need emerges (summer).  This creates a great deal of uncertainty for prospective proponents, which may deter their participation in the first LT RFP.

Fourthly, IESO has initiated a very time-consuming procurement process with its first LT RFP.  IESO has indicated a preference for these new capacity resources to be in service as soon as possible to meet the emerging capacity need in 2025, and in any event by May 1, 2027.  It plans to implement a two-stage procurement process with an initial RFQ followed by an RFP for those proponents that are successfully qualified through the RFQ process. On February 28, 2022 IESO publish edits draft RFQ, with a view to finalizing the RFQ by the end of June this year and reporting back to the Ministry of Energy on the RFQ results in the autumn of this year.  Consequentially, the LT RFP will not be issued until January 2023, with successful proponents being identified in Q3 2023.  This leaves about three and a half years to site, obtain approvals for, construct, complete all connection assessments, and commission resources.  IESO’s reasons for an initial RFQ to be followed by an RFP are unclear to us. The RFQ process will likely consume 9 to 12 months of precious development time.  Any qualification process for potential developers could very easily be incorporated into the initial stages of the LT RFP evaluation process, advancing the process by almost a year. For example, New York State Energy Research and Development Authority (NYSERDA) has operated annual competitive procurements without a formal qualification stage, and Hydro-Québec launched two renewable energy RFPs last December without a qualification stage.

With the first LT RFP, IESO intends to procure at least 1,000 MW of capacity to be in-service between 2025 and 2027.  This will mean that many generation projects will need to be developed in a very short period.  Partially due to political uncertainty and previous capacity surplus, very little large-scale project development has occurred in Ontario in the last decade.  IESO will need to play a leading role in making sure that the supporting infrastructure required to develop these projects is in place and ready.  Resourcing and the approvals of and from ministries and local distribution companies (LDCs) were issues at times past procurement initiatives.  Let’s hope that IESO has learned from this and that it has undertaken a readiness assessment and consulted with these entities and relevant stakeholders. Building energy infrastructure in Ontario at this scale requires complex coordination between many different entities to be successful. There is a risk that this procurement will be undersubscribed.

For reasons outlined above, there is a very limited pool of resources upon which will likely participate within the first LT RFP.   Furthermore, the procurement process for the needed capacity resources is being launched far too late to have the resources in-service when they are required.  In the past decade when the province was flush with capacity, IESO wielded considerable leverage over generators.  With supply needs emerging quickly, generators now have more leverage to secure the types of contract conditions (e.g.,revenue sufficiency, contract term, permitting/approvals assistance) they require to secure financing or investment capital.  Hopefully, IESO will pragmatically approach the first LT RFP understanding these constraints and work with generators to get projects into service as soon as possible. The magnitude of capacity need means that the LT RFP is only the first phase, many more procurements will be required.  Each iteration will offer IESO, policymakers, and participants opportunities to improve and adapt. Renewing and expanding Ontario’s energy infrastructure never stops; however, the province is entering into a phase of rapid acceleration against the backdrop of severe global uncertainty.  Power Advisory believes the electricity sector is up to the challenge, but action now is needed to avoid unintended outcomes.