Power Advisory’s Commentary on the IESO’s Decarbonization and Ontario’s Electricity System Report

October 8, 2021
Brady Yauch, Travis Lusney, Jason Chee-Aloy

To:        Power Advisory Clients and Colleagues

From:    Brady Yauch (Manager of Markets and Regulatory), Travis Lusney (Manager of Procurement and Power Systems), Jason Chee-Aloy (Managing Director)

Closing Ontario’s fleet of gas-fired generators by 2030 will result infrequent and sustained blackouts, while costing electricity ratepayers at least $27 billion, or an additional $100 per month, according to an analysis by the IESO.  The IESO’s study was undertaken in response to a number of municipalities across the province calling for a complete phase-out of gas-fired generation in Ontario by 2030.  

Even with those findings, the IESO study prompted a letter from the Minister of Energy to evaluate both “a moratorium on the procurement of new natural gas generating stations and develop an achievable pathway to zero emissions in the electricity sector.”

Nonetheless, the IESO’s conclusion is clear – such a rapid phase out cannot be done while maintaining current levels of reliability or cost-effectively.  The IESO’s analysis repeatedly highlights the flexibility and reliability services currently provided by province’s fleet of gas-fired generators, which potential alternative resources would be unable to fully replicate.  

Notably, the short timeframe of any potential phaseout – eight years is a relatively short period in terms of grid-level planning and investment – means that many of the needed investments would not be in place by 2030.  The IESO admits its analysis is based on a number of “optimistic assumptions” and the practical reality of building the necessary infrastructure in such a short timeframe will likely not be possible.  Even with those optimistic assumptions, the IESO “would frequently need to resort to emergency actions such as rotating blackouts to manage energy shortfalls.”

While comparisons have been drawn to Ontario’s phaseout of all coal-fired generators between 2005-2014, the IESO’s conclusion is that there “is no like-for-like replacement supply that can offer similar operating characteristics of gas generation.”  The coal-fired generation phaseout resulted in $4 billion in costs, compared to at least $27 billion required to shut down all gas-fired generators.

The IESO estimates that replacing supply from gas-fired generators will need at least 17,000 MW of non-emitting supply and more than 1,600 MW of conservation.  Installed wind generation capacity, for example, would have to double from its current level.  

The IESO’s analysis reviewed a number of replacement supply options often raised when discussing any potential shutting down of all gas-fired generation– imports from Quebec, combined storage and renewable generation investments and conservation/demand response (DR).  

Hydro Quebec (HQ) will soon be facing its own supply shortfalls in the winter, limiting its ability to potentially supply Ontario without having to construct new supply resources.  Additionally, flowing HQ energy to load centres (e.g., Toronto and southwestern Ontario) will require more than $1 billion in transmission investment and nearly a decade of planning and construction.

Storage resources are currently unable to provide energy for long enough durations of time, according to the IESO. Its analysis calls for up to 47 hours of uninterrupted energy output from storage resources – a level of performance that is far greater than anything currently available or expected in the coming years.  

DR capacity will have to increase to 2,000 MW and be prepared to constantly respond to IESO activations.  The IESO forecasts that DR resources will be required to shutdown operations up to four times a week, with some activations lasting tens of hours.  

Power Advisory Commentary

The IESO’s assessment of phasing out all gas-fired generators broadly aligns with the analysis Power Advisory completed for the Ontario Energy Association (OEA) in April 2021.  In combination with the letter from the Ministry of Energy, there are a number of key takeaways that sector participants and stakeholders should consider.

1.       Phasing Out Gas-Fired Generation is Risky and Costly

The IESO’s analysis reaffirms our view that phasing out all gas-fired generation by 2030 will increase reliability risks on the province’s grid.  Blackouts are a worst-case outcome for power systems and is a term that reliability coordinators (e.g., IESO for Ontario) rarely use.  

This 2021 summer provided a clear example of the challenges such a policy would create.  During one week through this summer’s heatwave, there was nearly 7,000 MW of gas-fired generation online during a peak demand hour – excluding amounts that were providing reliability services such as operating reserve (OR).  On average, throughout the week, energy output from gas-fired generators averaged around 4,400 MW.  It is not immediately clear how that energy would be replaced by 2030 given the current or expected supply mix if all gas-fired generation were removed.

In addition to reliability concerns, the IESO’s analysis puts the cost of phasing out all gas-fired generation at $27 billion – squarely within our estimated range of $20 billion to $60 billion. This estimate does not include potential cost overruns and scheduling delays – both likely in our view when attempting to build a significant amount of new generation and transmission infrastructure.  In short, the IESO’s estimate of cost is likely optimistic (they admit as much) given the issues flagged within our report for the OEA.

2.      Decarbonizing the Ontario Electricity Sector Will Take Time

With over 11,000 MW of gas-fired generation existing and a further 2,000MW to 3,000 MW of new supply needed over the next decade, fully decarbonizing Ontario’s electricity sector will be a long and complex endeavor.  While the IESO report provides an overview on challenges in decarbonizing the grid, more needs to be done by the IESO to work through that process and provide a reasonable plan for next steps –particularly in response to the letter from the Ministry of Energy.

In our commentary note on the IESO’s Annual Acquisition Report (AAR), we recommended that the IESO move towards a full and robust Integrated Resource Plan (IRP).  Such a plan will provide stakeholders and policymakers with an in-depth look at system needs and possible solutions.  The IESO correctly points out that new transmission can take between 7-10 years to build – those timelines require decisions to be made now to support long-term solutions for decarbonization.

3.      Increased Importance of Enabling New Resources

The Minister of Energy’s response directing the IESO to evaluate both a moratorium on new gas-fired generation and a plan to phase-out all gas-fired generation altogether means the push to enable new resource types should be of particular focus.

As currently contemplated by the IESO, the Mid-Term Request for Proposals (RFP) procurement, to be administered by the IESO, presently contemplates restrictive eligibility requirements for resource participation.  The potential eligibility restrictions are expected to limit most of the participation to existing gas-fired generators coming off their contracts.  This is counter to what the letter from the Ministry of Energy is directing the IESO contemplate. Therefore, the IESO should expand the eligibility of the Mid-Term RFP to allow all resources to compete – incenting lower carbon-intensive resources to compete with existing gas-fired generation to meet system needs.  Enhanced competition will provide value for Ontario’s ratepayers and help to meet decarbonization goals.  

In addition to the IESO’s procurement mechanisms, such as the MT RFP, other initiatives should be given greater priority by the IESO.  These include: the Hybrid Integration Project to support storage integration with existing or new generation; aggregation of Distributed Energy Resources (DERs) and their full participation in Ontario’s wholesale electricity, in general alignment with FERC Order 2222; greater incentives for DR resources and non-dispatchable loads to participate within the IESO-Administered Markets (IAM); and enhancing IESO’s systems and tools to fully integrate energy storage resources within the IAM, as per the conclusions of the IESO’s storage design project.

4.      Enhance Buyer Choice in Meeting Energy Needs

In addition to the more than 30 Ontario municipal councils that have passed resolutions calling for the phase-out all gas-fired generation, there are growing number of corporate entities that have adopted environmental, social, governance (ESG) objectives that is resulting in exponential growth in transacting for renewable energy supply via Corporate Power Purchase Agreements (PPAs).  Customer preferences for lower carbon-intense generation is not appropriately reflected within the current IESO Resource Adequacy Framework that focuses on a centralized procurement on behalf of meeting the reliability needs for all of Ontario’s electricity customers.  

The IESO and policymakers should encourage and enable customers and other potential electricity buyers (e.g., communities, etc.) to make their own supply decisions – particularly if customers are willing to make supply-related decisions based on non-economic criteria (e.g., environmental, economic, etc.).  Power Advisory has long argued for the introduction of Load Serving Entities (LSEs) in Ontario to increase buy-side liquidity and to enhance assurances of maintain reliability of supply on behalf of all customers.   Supporting customer-specific resource acquisitions provides an added benefit of reducing the need to procure resources for the remainder of the Ontario electricity system.  

5.      Imports from Hydro-Quebec are Limited

On September 20, 2021, the New York State Energy Research and Development Authority (NYSERDA) announced the selection of the Champlain Hudson Power Express project for the Tier 4 – New York City Renewable Energy procurement.   The project is backed by HQ imports and joins the New England Clean Energy Connect project in committing large portions of HQ’s export supply capability to U.S. markets in the northeast.  In Power Advisory’s view, the ability for Ontario to receive firm imports from HQ are severely limited and nowhere near the quantity needed to potentially phase-out gas-fired generation.  In addition, HQ has indicated they will focus on procurement of renewable generation project within Quebec from Independent Power Producers, namely wind generation, over the next decade and will not be pursuing any new large hydroelectric generation project developments at this time.  

Any potential new imports from Quebec will require HQ to build new supply for Ontario, in addition to investments in transmission infrastructure in both provinces to ensure flows of energy to load centres (e.g., Greater Toronto Area).  Large hydroelectric generation facilities and the supporting transmission infrastructure required to move that energy to southern Ontario – either in Ontario or Quebec – will take over a decade to plan, permit, and build.