May 2022 Ontario Electricity Market Update: Corporate Power Purchase Agreements Can Close Ontario's Supply Gap

June 6, 2022
Michael Killeavy

In the March 2022 edition of the Ontario Market Update we laid out the supply problem that is confronting Ontario. Since then, the Independent Electricity System Operator (IESO) has published its 2022 Annual Acquisition Report (AAR), and the problem is bigger and more acute than previously reported. IESO is now forecasting a much greater capacity supply need emerging and has embarked on several procurement processes to acquire between 5,000 MW and 6,000MW of new effective capacity, which may translate into more than 10,000 MW of installed capacity, by 2030.

The enormity of this task cannot be overstated. IESO has embarked on a mix of competitive procurements and bilateral negotiations to address this capacity need. These procurement processes are complex and time consuming. Notwithstanding the fact that Ontario has an experienced and capable developer community, IESO has launched a Request for Qualifications (RFQ) for the first Long-term RFP (LT 1 RFP) and the Expedited Procurement RFP. This seems to us to be an unnecessary process that just consumes valuable development time. IESO will also be launching a same technology upgrade procurement for owners of existing facilities to upgrade or expand but will not permit the installation of storage despite the requirement that such upgrade or expansion provide firm energy. In short, the IESO appears to unnecessarily be sub-dividing, categorizing and restricting development options – during a time when new supply is needed only within a few years.  

We wonder if there are other ways to help close the supply gap alongside the IESO’s announced procurement initiatives. In Power Advisory’s opinion, we believe that corporate power purchase agreements (PPA) (i.e., bilateral contracts between private sector buyers and generation asset developers/owners)may help address the supply need in a much timelier manner. Corporate PPAs have been around for several years in the U.S. with more than 20 GW of renewable supply under contract, and more recently in Alberta with just under 2 GW of supply under contract. In such transactions two private sector parties can get to “yes” on a deal in a much more efficient fashion since they do not need to labour under the burden of government procurement processes that are designed to focus on accountability and not necessarily efficiency. Also, multiple corporate buyers acting in parallel could bring more supply online faster than sequential IESO procurements. Finally, corporate PPAs allocate risk away from Ontario ratepayers as the success of the agreement is between two parties.  Failures or short-comings of either party are limited to those participating in the agreement.

Why have corporate PPAs not taken hold in Ontario? There are two main impediments to corporate PPAs in Ontario: Global Adjustment (GA); and lack of a market for environmental attributes, which are purchased by corporations to their Environmental, Social, and Governance (ESG) goals. The provincial government has started to address the second issue with its January2022 direction to IESO to develop a Clean Energy Credit (CEC) registry. This registry could be an effective mechanism for tracking the creation and retirement of CECs making it easier for buyers and sellers to transact corporate PPAs. The registry is currently being designed, but initial feedback from stakeholders is that it needs to focus on additionality – new CECs from new renewable generation projects through PPAs. If so, this could help foster the development of corporate PPAs. The treatment of GA may be a tougher nut to crack, but we believe that there are ways to ensure fairness regarding allocating supply costs to all customers while ensuring that double charging buyers who enter into corporate PPAs does not occur.

Additionally to helping meet ESG objectives, corporate PPAs will also enable companies to better plan and manage their own electricity consumption since they would be able to contract for it directly. We have recently seen that LG Chem’s decision to invest in a $2.5 billion in a plant in Windsor-Essex and created up to 1,500 new jobs has been placed at risk because the 15 MW of energy it required in 2024 would not be available. One potential solution could be to enable corporate PPAs to help solve for local supply constraints, without putting any additional risk on the broader Ontario rate base.

Currently IESO is the only effective buyer in Ontario. Corporate PPAs may help IESO develop its wholesale markets by having more than a single buyer. As the only buyer, it wields exceptional monopsony power in the marketplace, which diminishes competition in the market. In the past six years, or so, IESO has been focused on making changes to the wholesale market design in Ontario to enhance competition; however, such changes will only have limited effect if it remains the sole buyer in the wholesale market.

Corporate PPAs could be a win-win for both corporations achieving their ESG goals, as well as managing their energy and having price certainty, and IESO acquiring the much-needed capacity. Moving forward, Power Advisory believes that greater discussion and market interest will be focused on corporate PPAs in Ontario, given their potential to both contribute to helping close Ontario’s supply gap, while providing customers with competitive electricity costs with the desired clean energy attributes consistent with ESG goals. All in all, the ability for corporations to secure their own electricity supply could be an important tool for the province to attract and anchor investment in Ontario – bringing economic development and job growth.