Ontario’s Industrial Conservation Initiative and the Treatment of Clean Energy Corporate Power Purchase Agreements

November 22, 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 (O. Reg. 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 proposed framework states that clean energy supply eligible for a corporate PPA may include wind, solar, small hydroelectric (i.e., less than 10 MW), and biofuel genera tors and battery storage.

The proposal does not include draft language for a proposed new 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 O. Reg. 429/04 amendments is May 1, 2024.

The deadline for stakeholders to submit comments to the Ontario government on the proposed framework is December 17, 2023.

Power Advisory Commentary

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.

In brief, corporate PPAs are contracts between a Buyer and Supplier that can take the form of a: (1) physical contract where the Buyer agrees to purchase a specific amount of energy output from the Supplier at an agreed upon price; or (2) a financial contract typically set up as a contract-for-differences (CfD) where the agreed upon contract price is settled against the wholesale price of energy (i.e., Hourly Ontario Energy Price (HOEP)) without a requirement for physical delivery of energy.
A corporate PPA can involve a single Buyer entering into a contract with an Supplier, or multiple Buyers signing individual corporate PPAs for a share of the energy output of a Supplier’s single project.

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 (ESG) goals (such as the development of net zero supply chains, for example, in automotive manufacturing including batteries), as well as attracting private capital from organizations and funds with net zero objectives as part of their investment strategies.  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 (CAD) in capital investment.

Source: BRC-Canada Deal Tracker

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 $55B (USD) 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).

Source: American Clean Power Association, Clean Energy Powers American Business

In Ontario, facilitating corporate PPAs can allocate supply cost risks away from electricity ratepayers while simultaneously helping to address power system supply needs.  It has been made clear that Ontario needs new supply to support electrification and economic development.  Recent statements by the IESO on emerging energy needs indicate that “procurements will need to focus on recommitting existing resources as well as incent net-new resources to meet approximately 5 TWh of energy needs.”

Indeed, it is likely that energy resource development through corporate PPAs will address supply needs more expeditiously than Ontario government or IESO-led procurement processes, which by design are burdened (rightly) with rigorous transparency and accountability mechanisms.

In addition to the features note above, 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.  Further, some customers eligible to participate in the ICI cited these same issues as preventing them from participating in the program (e.g., the costs of shutting down and restarting production is prohibitively expensive).

These concerns were voiced when the Ministry of Energy conducted a consultation on industrial electricity pricing in 2019.  Stakeholders indicated that they preferred an alternative to shutting down production, noting “…in lieu of disrupting production, they would consider installing, or have already installed, behind-the-meter generation or electricity storage systems.  Others mentioned that they struggled to justify the cost for investing in electricity generation or storage solutions to their head offices or thought that these investments “seem risky”.”

The facilitation of corporate PPAs could potentially address both concerns by offering participants an alternative to shutting down to avoid the top five peak hours and allowing participants to fully contract-out energy systems, avoiding 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 forecasted 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).  Based on Power Advisory’s modeling, the graphic below shows that all of Ontario’s ratepayers can benefit from the needed supply brought on through corporate PPAs, which puts downward pressure on 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 and lessen reliance on government-directed, centralized procurement in Ontario and reduce overall system costs.