May 2023 Ontario Electricity Market Update: IESO Announces Initial Results of E-LT 1 RFP and Same Technology Upgrade Solicitation

June 19, 2023
Brady Yauch & Travis Lusney

In May the Independent Electricity System Operator (IESO) released initial results from the Expedited Long-Term Request for Proposals (E-LT 1 RFP), procuring 318.5 MW of gas-fired generation and roughly 780 MW of battery storage under the Category 1 storage category.  Additional storage capacity is likely to follow from the so-called Category 2 storage proposals, i.e., those proposals whose price exceeded an undisclosed IESO threshold and which were referred to the Canadian Infrastructure Bank (CIB) to seek potential price reductions through lower project financing costs. The IESO also announced results of the Same Technology Upgrade solicitation, including contract extensions for some existing gas-fired generation facilities.  Average upgrade capacity of 144.9 MW was identified, with a further 146.1 MW expected but currently under continued negotiation between proponents and IESO.

The IESO did not achieve its non-storage (i.e., gas-fired generation) target of 600 MW in the E-LT 1 RFP, falling short by roughly 280 MW.  As per the E-LT 1 RFP design, the IESO can procure more storage with the leftover non-storage procurement target, which means that up to 402 MW of storage projects could be procured under Category 2.

The results of the E-LT 1 RFP and Same Technology Upgrade solicitation highlight the challenges facing Ontario when it comes to securing adequate capacity to meet projected demand. First, the failure to achieve the target for non-storage resources is another example of the challenges of developing gas-fired generation projects in Ontario, even as Power Advisory’s analysis suggests that maintaining reliability and resource adequacy will require continued operation of gas-fired generation. With a 600 MW target for non-storage resources in the forthcoming Long-Term 1 RFP (LT1 RFP), the IESO must determine if additional gas-fired generation ought to participate, and what changes may need to be considered to the LT1 RFP and Contract if IESO decides more gas-fired generation is needed to maintain the reliability of Ontario’s power system.

Second, the shortfall in procured gas-fired generation projects and potential additional procurement of energy storage will directly impact the energy adequacy outlook for the province. Energy storage resources are net loads, given cycling losses during withdrawal and injection of energy. A key benefit of gas-fired generation is the ability to provide both firm capacity and energy depending on how often these facilities run. With less gas-fired generation than anticipated, the province will need to speed up the exploration of new energy resources.  

That being said, the inclusion of contract extensions for gas-fired generation under the Same Technology Upgrade solicitation helps to resolve some of the long-term energy needs, particularly if the contracts whose negotiation is still underway include contract extensions to 2034/2035. The IESO has extended roughly 2,200 MW of gas-fired generation to 2035, with potentially more to follow once the negotiation results are published. However, even with the contract extensions and procurements, accelerating demand growth will still require new resource development. The gas-fired generation extensions to 2034/2035 would align with the 2035 federal target for net-zero electricity.

The potential procurement of almost 1,200 MW of energy storage projects through the E-LT 1 RFP (depending on the outcome of the Category 2 proposals) represents the largest procurement of energy storage ever within Canada.  Of those 1,200 MW, roughly two-thirds were considered Category 1 and came in under the IESO price threshold for CIB funding discussions. The remaining one-third are currently negotiating with the CIB to determine options to lower their bid prices. This suggests that many of the energy storage project bids were relatively expensive compared to IESO’s undisclosed threshold. With over a decade since major procurements have been completed in the province, price discovery is important and must be undertaken to understand the current situation and the opportunities for improvement. In Power Advisory’s view, restricting pricing information does not benefit ratepayers and limits competitiveness of future projects.  Markets function properly with open data and competitive tension.  

Contract awards are just a process step in the development of resources in Ontario. Now successful proponents must execute their contracts and achieve commercial operation. This will require arranging financing, engaging communities and First Nations, acquiring permits and approvals, undergoing connection impact assessments, and completing construction. There are no guarantees that all contracted projects will successfully be built. How the IESO manages potential attrition of contracted projects not achieving commercial operation through the development process will inform future opportunities in Ontario.