The Independent Electricity System Operator (IESO) released its first Annual Acquisition Report (AAR) on July 19, specifying Ontario’s future supply needs and plans for the use of procurement contracts and other mechanisms to meet capacity and energy needs forecast to materialize over the next decade. The AAR supports IESO’s on-going resource adequacy stakeholder engagement where IESO plans to utilize sole-sourced bilateral contracts and Request for Proposals (RFP)/contracts in addition to capacity auctions to procure capacity to meet forecast needs. The combination of procurement mechanisms will be administered by IESO to meet capacity needs forecast for different timeframes – short-, medium- and long-term mechanisms. Figures 1 and 2 at the end of this commentary note provide an overview of IESO’s proposed procurement process.
For short-term capacity needs, IESO will continue to rely on annual capacity auctions, but will now include a minimum winter capacity target of 500 MW and a minimum summer capacity target of 500 MW, although the actual need for summer capacity is expected to increase to 1,800 MW by 2026 – up from 1,000 MW in 2022.
For medium-term capacity needs, IESO will introduce multi-year commitments ranging from three to five years. These procurements are expected to be done through a “competitive procurement such as an RFP, or an enhanced capacity auction,” although the details around the process remain unclear at this time. IESO expects to procure 750 MW on a medium-term basis starting in the fall of 2021, with the obligation to deliver procured capacity beginning in 2026 via contracts with expected terms of three to five years.
Regarding long-term capacity needs, IESO is expecting to procure a particular resource for “at least seven years” (our emphasis) via contracts. According to its “acquisition strategy”, IESO is now planning to procure up to 1,000 MW of capacity on a long-term basis to meet needs in the 2026 to 2029 timeframe. This is the first time that IESO has been explicit in the forecast amount of capacity that will be procured to meet long-term needs (see figures at the end this note).
The AAR also lays out sole-sourced bilateral contracts that IESO plans to execute over the next decade as well as recommendations for transmission development. The two bilateral contracts are both for gas-fired generators – the Brighton Beach generating station (GS) near Windsor and the Lennox GS near Kingston. For Brighton Beach GS, the contract term is expected to run until 2028, while for Lennox GS the contract term is expected to run until 2029. Due to the potential for limited capacity on the Flow East to Toronto (FETT) interface due to planned retirements of generation resources (e.g., Pickering Nuclear GS (NGS)) and refurbishments (e.g., Darlington NGS) in eastern Greater Toronto Area (GTA), IESO has recommended that Hydro One upgrade transmission lines from Trafalgar transformer station (TS) to Richview TS by 2026. Even with these transmission system upgrades, IESO expects there may be a need for supply resources in eastern GTA.
And finally, IESO reiterated its plan to procure resources on an unforced capacity (UCAP) basis, which reduces the amount of a capacity a resource can offer based on historical outages and other capabilities and constraints given its statistical ability to produce energy during peak demand periods. The details around how IESO will define resource-specific UCAP is still being discussed with stakeholders but appears to directionally being leveraged from calculations of UCAP used in the northeast U.S. wholesale electricity markets that administer capacity markets (i.e., NYISO, ISO-NE, PJM).
Power Advisory Commentary
Both the release and the details of the AAR mark a pivotal moment for the IESO-Administered Market (IAM). While the previous decade was defined by capacity and energy surpluses and the signing of a multitude of long-term contracts for both system needs and policy objectives, the next decade is expected to be one of capacity shortfalls (and potential energy shortfalls) coinciding with the end of current contracts for a variety of resource types. While IESO has maintained that it will focus on competition to enhance market efficiency and address future capacity needs – in rationalization with the IAM redesign through the Market Renewal Program (MRP) and adoption of the Resource Adequacy Framework – the application of the AAR and identified procurement mechanisms may at times be challenged to ensure effective competition to procure resources and drive competitive outcomes within IAM.
While the AAR is the first ‘kick at the can’ at such a report and likely to evolve significantly over time, it raises important points for needed discussion amongst IAM market participants and broader stakeholders.
1. Process Matters
At a high level, IESO-led process underpinning their capacity procurement plans laid out in the AAR will be of a vital importance to maintaining effective competition, market confidence, and economic efficiency within IAM over the next decade. For example, governance and oversight of designing procurement mechanisms that potentially target specific resource types (e.g., baseload, flexible, small, large, etc.) with specific supply attributes must be clearly articulated to prospective procurement participants. The process for how IESO designs the long-term procurement mechanism compared to the medium-term procurement mechanism – including which resources are eligible to participate – will also need to be clear. While stakeholders may accept IESO’s forecast for needed capacity (as does Power Advisory), more details about IESO’s process to address these needs will be required. If stakeholders do not support the process, the result will be reduced competition – as certain resource types refuse to participate – and the likelihood of higher costs for Ontario’s electricity ratepayers over the long-term. It may also worsen the forecast capacity need, as certain capacity suppliers may exit Ontario – leaving ratepayers on the hook for higher cost capacity procurements.
2. Time for a Robust Integrated Resource Plan
The combination of IESO’s Annual Planning Outlook (APO) and the AAR should mark the beginning of a move towards IESO launching a full-blown and robust Integrated Resource Plan (IRP). A detailed IRP would provide stakeholders and policymakers with an in-depth look at the details behind forecast capacity needs, resource options considered to meet these needs, and clear linkages to plans to procure capacity to meet forecast needs. The APO and the AAR would be annual updates to the IRP, including updates to demand forecasts, supply mix projections, capacity forecasts, policy updates, etc. Most importantly, the IRP should be thoroughly consulted and vetted with stakeholders and, as such, would also include the views from stakeholders that are growing in number within Ontario representing emerging resources (e.g., distribution energy resources (DERs), storage, other behind-the-meter (BTM) resources, etc.). The grid of the future is a (at times delicate) combination of front-of-the meter (FTM) and BTM resources. By including the entire range of resource types that currently – or are expected to – participate in Ontario’s electricity sector, by way of connection, technology, fuel-type, etc., IESO can provide stakeholders and policymakers with a macro view of the sector over the coming decade – and reach beyond IAM as defined today.
3. Need for Greater Regulatory Oversight
IESO’s procurement activities have over the last decade and a half operated outside of independent regulatory review. With the significant amounts of needed procurements that the AAR identifies for IESO to undertake over the next decade, an independent review will be more important now than ever. How IESO designs various procurement processes and mechanisms, who is able to participate, and what assumptions are underpinning the procurements will all need to be thoroughly discussed and analyzed in an independent forum overseen by the Ontario Energy Board (OEB). The most efficient oversight would see OEB hold an annual hearing to review the AAR to ensure it aligns with the IRP and results in procurements that cost-effectively meets forecast supply needs. The AAR provides a clear example for why regulatory oversight is needed. The AAR lays out IESO’s plan for sole-sourced bilateral contracts (Brighton Beach GS, Lennox GS), although the details on those contracts – and the justification for their length – are limited (given information stakeholders have today). The bilateral contracts may be necessary from a reliability perspective and may provide good value to ratepayers, but neither of these concepts have been clearly articulated or adequately analyzed in a transparent manner for all stakeholders to understand. We note as well that the Ontario government had previously commenced consultation related to long-term planning in Ontario, including roles for government directives and potential new roles for OEB oversight.
4. Increased Competition Neededto More Effectively Meet Future Capacity Requirements
Power Advisory has long argued for the introduction of Load Serving Entities (LSEs) in Ontario as means to increase competition and to increase buy-side liquidity. The release of the AAR simply solidifies this view. The AAR provides IESO’s view on what resources will be required to meet future capacity needs – mainly via large-scale, transmission-connected resources. It provides a limited view on what other resource types could reduce the need for AAR’s procurement forecast. Using the LSE model as a reference point, the provincial-wide capacity needs could be mitigated – potentially to a significant extent – by unlocking competition at all levels within Ontario’s electricity market and mostly through a more active and participatory buy-side. Additionally, IESO needs to move as quickly as possible to fully enable exiting resources and emerging resource types – ranging from ‘hybrids’ (e.g., renewables plus energy storage, etc.), energy storage, DERs, etc. – as they become increasingly more cost-effective as well as increasingly customer and investor preferred (i.e., policy reasons (e.g., decarbonization, etc.), capital market drivers (e.g., environmental, social, governance (ESG), etc.).
5. Need for Greater Definition of Ontario Power Generation’s Role in Ontario’s Electricity Market
The role of Ontario Power Generation (OPG) within IESO’s procurement framework – and within IAM overall – needs to be addressed. No other wholesale electricity market has the same level of supply-side concentration as OPG presently holds within IAM. When the wholesale and retail electricity markets were launched in May 2002 there was a clear policy to limit (and reduce) OPG’s market power. However, that policy appears to have mostly been abandoned, even though by way of licence conditions OPG ‘must-offer’ supply within IAM. If OPG is allowed to participate in future procurements, clarity is needed regarding how OPG may participate. Overall, additional to present licence conditions, there needs to be general consideration of applying some type of specific market power mitigation to OPG broadly within IAM and specifically regarding future procurements administered by IESO.
Figure 1 – IESO Resource Adequacy Framework
Figure 2 – IESO Capacity Auction Forward Guidance
 See https://www.ieso.ca/en/Sector-Participants/Planning-and-Forecasting/Annual-Acquisition-Report