November 2023 Ontario Electricity Market Update: Ontario to Enable Corporate Power Purchase Agreements

December 1, 2023
Jason Chee-Aloy and Roy Hrab

On November 2, 2023, the Ontario Ministry of Energy posted a proposed framework to amend Ontario Regulation 429/04. This proposed framework aims to help facilitate eligible electricity customers (i.e., buyers) to enter into corporate power purchase agreements (PPAs) with clean energy suppliers (e.g., renewable generators, battery storage, etc.). As a benefit towards enabling needed supply to be developed during times of significant and growing supply needs, these customers will be charged lower Global Adjustment (GA) commensurate with energy produced by these clean energy suppliers during the five peak demand hours per year (i.e., borrowing components from the Industrial Conservation Initiative (ICI) program). The proposal does not include draft language that would amend O. Reg 429/04 – for example, setting out any specific requirements or definitions regarding eligible corporate PPA arrangements, calculations for determining GA charges for eligible customers who execute a corporate PPA, or criteria for establishing eligible suppliers. The proposed effective date for the amendments is May 1, 2024, and stakeholders have been given until December 17, 2023 to submit feedback.

Power Advisory believes the proposed framework is a good first step to opening a much needed serious and broader discussion on the role of corporate PPAs in Ontario’s electricity market.

While bilateral contracts are permitted in Ontario’s electricity market, the economics of the wholesale electricity market have not supported such contracts. Further, the policy environment, primarily centralized supply procurement through government back-stopped contracts, and deep political involvement in the sector more generally (including taxpayer-funded price subsidies), have also worked to discourage buyers and suppliers from pursuing corporate PPAs for many years.

Power Advisory has previously argued how clean energy corporate PPAs are increasingly driving development of renewable energy supply (see also here) and economic development across multiple jurisdictions.

Corporate PPAs offer significant potential for a jurisdiction, such as Ontario, to meet supply needs, develop clean energy supply, help corporations meet their environmental, social and corporate governance goals, as well as attract private capital from organizations and funds with net zero objectives. In all these ways, corporate PPAs can enhance economic development, competitiveness, job growth, and attractiveness for new capital investment.

For example, in Alberta, a recent report from Business Renewables Centre-Canada states that as of November 10, 2023, a total of over 3,300 MW of renewable energy supply and associated Environmental Attributes (EAs) (e.g., Renewable Energy Certificates (RECs)) have been purchased through corporate PPAs, amounting to over 5,900 jobs and over $5.5 billion in capital investment.

In the United States, large-scale clean energy PPAs by buyers have grown significantly over the last decade, especially by technology companies. The American Clean Power Association reported that as of the close of 2022, buyers had contracted 77 GW of clean power (about  USD 55 billion in capital investment) with corporate PPAs accounting for 80% (62.2 GW) of the renewable energy supply purchased (the majority of the remaining purchases were through utility offered green tariff programs).

In Ontario, facilitating corporate PPAs can allocate supply cost risks away from electricity ratepayers while simultaneously helping to address power system supply needs. It is clear that Ontario needs new supply to support electrification and economic development, and it is likely that energy resource development through corporate PPAs will address supply needs more expeditiously than Ontario government or Independent Electricity System Operator (IESO)-led procurement processes, which by design are burdened (rightly) with rigorous transparency and accountability mechanisms.

It is also important to recognise that the Ministry of Energy’s proposed framework addresses operational and cost impacts that ICI participants have raised – lost production from shutting down operations to avoid the top five peak hours and the costs of installing behind-the-meter energy resources. Corporate PPAs could offer ICI participants an alternative to shutting down to avoid the top five peak hours while simultaneously allowing them to avoid the upfront capital costs of directly purchasing and installing resources behind-the-meter of their facility. This would appear to be especially cost advantageous to ICI participants with multiple eligible facilities in the province. Similarly, the ability to enter a multi-buyer corporate PPA with a supplier could enable eligible smaller firms with less resources to now participate in the ICI while also facilitating clean energy supply development by enhancing the ability of project developers to acquire financing from lenders.

With the IESO has forecast significant demand growth in the future, new supply brought online by corporate PPAs will benefit customers executing PPAs as well as other electricity ratepayers (such as Class B customers). Power Advisory’s modelling shows that all of Ontario’s ratepayers can benefit from the needed supply brought on through corporate PPAs, which puts downward pressure on the Hourly Ontario Energy Price (HOEP) while not adding to GA charges (because this supply was not contractually procured by the IESO).

If this proposed framework is successful at facilitating corporate PPAs among eligible buyers, it may help enable a more comprehensive discussion of potential policies and regulatory reforms to foster the use of PPAs more broadly, lessen reliance on government-directed, centralized procurement in Ontario, and reduce overall system costs.