To: Power Advisory Clients and Colleagues
From: Brady Yauch, Manager of Markets and Regulatory
Travis Lusney, Director of Power Systems
The IESO has released the results from its first Medium-Term RFP (MT-RFP 1), procuring around 310 MW and 380 MW of effective capacity in the summer months and winter months, respectively, from six different operating facilities with contracts soon expiring.
Gas-fired generators accounted for the majority of the MWs procured, amounting to 98% and 96% of effective capacity in the summer and winter months, respectively. Wind and energy storage capacity accounted for a small amount of the procured MWs.
Power Advisory Commentary
The results and information from the MT-RFP 1 highlight a number of shortcomings with the procurement processes being launched by the IESO.
First, the amount of MWs ultimately procured is well short of the 750 MW of effective capacity – amounting to more than 1,000 MW of installed capacity – the IESO initially targeted as part of the MT-RFP 1 process. In April, the IESO lowered the amount of MWs it intended to procure to 475 MW of effective summer capacity in order to maintain “robust competition” – i.e. the IESO knew that participation in the MT-RFP 1 process was below initial expectations resulting from the participant registration stage of the procurement process. Ultimately, the MT-RFP 1 procured just 310 MW of effective summer capacity – well below the lowered amount announced in April.
Second, the announced results of the MT-RFP 1 provide little price transparency both to ratepayers and participants for future procurements. The IESO established a maximum price of $470/MW-day as part of the MT-RFP 1, but the announced results do not state what price was awarded to each of the proponents. The MT-RFP 1 was run on a “pay-as-bid” model, where successful participants are paid the capacity price they bid into the procurement. As a result, no one knows the actual cost of procuring capacity on a medium to long-term basis in Ontario – at a time when the IESO is embarking on one of its largest ever procurement processes (the announced Long-Term RFPs). Competition is supported by price transparency. By not disclosing the cost of capacity, the competitiveness of future procurements will be reduced, while ratepayers will be left in the dark on the costs associated with this (and future) procurements.
We need only to look to New York as a counter example. The agency responsible for procurements (NYSERDA) publishes an annual list of the contracted cost for every one of its projects. The IESO (and the Ministry of Energy and the OEB) should take note.
And finally, the prevalence of gas-fired generation – and lack of a material amount of MWs from non-emitting supply – in the MT-RFP 1 should be a wake-up call on the design of future procurements and associated contract structures. It is no secret that thousands of MWs of existing gas-fired capacity will be coming off contract over the next decade. If the future procurements are similar in design and contract as the MT-RFP 1, gas-fired generation may continue to be prevalent in the MWs ultimately procured by the IESO. While Power Advisory recognizes the vital role of gas-fired generation in Ontario, the current policy environment – federally, provincially, and municipally – is moving in the opposite direction.