On January 19th, 2024 the Ontario Government released the Report of the Electrification and Energy Transition Panel (EETP or Panel). That report, encouragingly titled Ontario's Clean Energy Opportunity, has been greatly anticipated by Ontario energy sector stakeholders and observers. The EETP was established by Ontario's Energy Minister in April, 2022 to:
- Advise government on the highest value short, medium and long-term opportunities for the energy sector to help Ontario's economy prepare for electrification and the energy transition.
- Identify strategic opportunities and planning reforms to support emerging electricity and fuels planning needs in the context of energy demand, emerging technologies, environmental considerations and overall costs to consumers.
Following extensive consultations with, and briefings by, expert agencies and stakeholders, the EETP provided its report to the Minister in December, 2023. Much will be discussed and written about this report in the weeks and months to come. Here are seven initial observations on the report and its implications for the future of Ontario's energy sector.
1. The future is electric
The EETP report is clear from the outset: the future is electric. Therein lies Ontario's clean energy advantage.
Based on the broad consensus on which the Panel proceeded, that "the clean energy transition will primarily involve the electrification of energy services," the report strikes an upbeat prognosis on the impact of that transition on Ontario. The Panel notes that Ontario's electricity supply is largely emissions-free because of historic investments in our clean hydropower resources and in nuclear, and our government's leadership in retiring coal-fired generation, expanding renewables, investing in nuclear refurbishments, and maximizing conservation and demand management programs.
The Panel sees Ontario as being in an enviable position, poised to build on its existing clean energy advantage. Add to that the province's wealth of critical minerals and recent large scale investments in the EV supply chain and clean steel-making, and the Panel envisions a bright future for Ontario.
There is… a unique alignment between the global trend of decarbonization in energy and economic policy and the traditional and emerging strengths of Ontario's energy sector. The province is well positioned to seize the economic opportunities of the energy transition, position itself in emerging global value chains, and maximize prosperity while pursuing decarbonization. If Ontario embraces this unique alignment, the future is bright.
2. What of natural gas?
The EETP report is the second highly anticipated Ontario energy sector development in as many months. The first was the December release by the Ontario Energy Board (OEB) of its decision on Enbridge Gas Inc.'s (EGI) massive rate rebasing case, considered by the OEB in a comprehensive regulatory process that spanned 2023. A central issue in that case was the future role of natural gas in an energy transitioning Ontario. The EETP has much to say about this issue as well.
As we recently wrote about, one aspect of the OEB's decision was the direction to EGI that new customer connections should be paid for up-front, rather than over 40 years as has historically been the case. The OEB reasoned that this would level the playing field for choices between gas and electric space and water heating for new homes, and preclude the risk of stranding the cost of new gas connections if homeowners later abandon natural gas for heating in favour of emerging electric heat pump technology.
The Energy Minister quickly and publicly expressed "disappointment" with that aspect of the OEB's decision, and vowed to overrule it, expressing concern for its impact on housing affordability (though as we previously reviewed the OEB had actually considered that possibility in its decision and concluded that facts before it indicated otherwise). The EETP has squarely addressed this particular issue in its report, concluding, in alignment with the OEB, that:
Levelling the playing field between electricity and natural gas might encourage developers and other customers to make choices that are more aligned with government's clean energy economy commitment. Given the provincial government's commitment to significantly expedite the construction of new housing and target 1.5 million new homes by 2030, regulatory action could be a significant support and ensure alignment with an overarching clean energy economy commitment.
The EETP report recognizes that in respect of the current pervasive use of natural gas "Ontario faces a fundamental conundrum with regard to the future of this resource." The EETP considered that between power generation, industrial input use and building and water heating, natural gas makes up almost 40 per cent of Ontario's energy mix today, with space and water heating representing just over half of that.
The Panel also noted that "[t]here are growing indications that it is unlikely that the natural gas grid can be decarbonized while continuing to deliver cost-effective building heat", and "it is no longer clear that natural gas is the cheapest way to heat buildings." The Panel concludes, as did the OEB, that; "This leads to a real risk of economically stranding the rate-regulated distribution assets used for home heating, with significant risk to customers, investors, and public finances."
The Panel notes that navigating this part of Ontario's energy transition will require careful analysis and policy guidance, and that "the OEB will play a central role in this process, in both its regulatory policy role and as adjudicator of utility rate applications." As noted above, the OEB has taken regulatory action on this issue, though the Minister has very publicly expressed his concern with that action. As the Minister considers his follow-up actions in light of that expressed concern, he will no doubt consider the EETP's recommendation 15:
To facilitate development of the clean energy economy, the OEB should conduct reviews of:
a. Cost allocation and recovery policies for natural gas and electricity connections to eliminate discrepancies between how up-front capital contributions are assessed and how they can be collected between the two sources of energy.
For example, the review should include, but not be limited to, examining the differences in the economic evaluation period (known as the revenue horizon) to determine capital contributions as well as the ability to collect the capital as a surcharge on rates versus an upfront contribution.
b. How natural gas utility infrastructure and Demand Side Management investments are evaluated to ensure new infrastructure is right sized for forecasted time horizons.
At the same time, the EETP report notes the mounting concern at the cost and pacing that would be required to meet increasing electricity demand while keeping energy services affordable, and that Ontario's Independent Electricity System Operator (IESO) will play a key advisory role in this respect. The EETP concludes:
It is clear natural gas will continue to play a critical role as a source of energy in the province for the short and medium-term. The medium to long-term future of the cost-effective use of natural gas is less certain.
The EETP suggests that "the Ministry of Energy should provide policy direction on the role of natural gas in Ontario's future energy system as part of its next integrated energy plan" and that "[t]he outcome should be to manage the system optimization and fuel switching necessary to achieve a clean energy economy at a pace that maintains affordable, reliable and resilient energy service.
Among the key areas listed for consideration in this respect are "[o]pportunities, options for, and consequences of strategic decommissioning or right-sizing of natural gas infrastructure in the long term."
3. Indigenous participation is front and centre
Permeating the EETP report is emphasis on, and discussion of, the opportunities through energy transition to advance reconciliation, and build meaningful partnerships, with Ontario's indigenous communities.
One of the three EETP members was Chief Emerita Emily Whetung-MacInnes, Chief of the Curve Lake First Nation from 2019-2022, who, the Chief's two co-panelists acknowledged, "brought a critical and essential perspective regarding collaboration, partnership-building and reconciliation with Indigenous communities to the Panel's engagements and final report." While Chief Whetung-MacInnes was unable to remain on the Panel for its concluding deliberations due to conflicting professional obligations, her influence is strongly reflected throughout the report.
The report includes an extensive section entitled "True Partnerships with Indigenous Partners," which provides a comprehensive historical and contextual discussion, and concludes with four recommendations focussed on the important role of Indigenous people and organizations in our provincial energy transition. The balance of the report further reflects consideration of Indigenous involvement and leadership through Ontario's energy transition, weaving discussion of such opportunities into multiple facets of the Panel's conclusions and recommendations.
Much can and will be written about these integral features of the EETP report and its view of Ontario's energy future. Suffice it for the moment to note that the optimism expressed by the Panel for Ontario's future role in a clean energy economy includes, as a central feature, the opportunity for Ontario's Indigenous communities to help lead the way with full partnership and investment in a successful and prosperous energy transition.
4. Government must lead – with clarity
Reflecting what it says it heard from many stakeholders, the Panel urges the government to lead the way into the energy future with clarity, and through high-level co-ordination across government departments and as between sector agencies. According to the EETP:
Government has an opportunity to make key directional decisions to coalesce social and economic forces and avoid working at cross purposes.
In considering planning for the future, the Panel starts with the observation that:
High-level strategic policy direction is the strongest and most critical contribution government can make to energy planning.
The EETP's recommendation #1 asserts the importance of clear, economy wide, energy policy direction from government:
To provide clear direction for Ontario's energy and economic future, the provincial government should develop and communicate a commitment and associated policy principles for achieving a clean energy economy for 2050.
This commitment, and policy principles that would define the parameters by which decisions will be made, should be embedded and integrated across all ministries in a manner that ensures policy consistency, alignment of decision-making, and accountability mechanisms.
In addition to co-ordination among government departments, the EETP sees a role for government to bridge policy across energy sector agencies by clearly addressing what it sees as inherently political trade-offs in longer-term energy planning:
… the Panel believes that at the current moment, strengthening cross-sector coordination and preparing for electrification and the energy transition is best achieved by carefully modifying the existing institutional framework in which the Ministry of Energy continues to lead energy planning. The OEB and IESO are not equipped, nor should they be expected to undertake, the development of a plan linking all sectors of the economy or to make key directional decisions on broad public policy matters, such as the use of public financing, the future role of the natural gas network in Ontario's energy mix, land use planning, or future building and construction standards.
Government has both the mandate and the responsibility to build public trust in energy policy and balance the vast array of inherently political trade-offs required in developing long-term energy plans.
The report also considers funding mechanisms for the energy transition, suggesting that utility ratepayers cannot and should not be expected to be the sole funders of the transition, and that social and economic benefits may justify shifting some costs from the rate base to the tax base. The EETP suggests that, within "[t]he key guiding principle ..that the beneficiary pays":
A comprehensive range of funding options and mechanisms should be considered and used, including taxpayer funding, ratepayer funding, investment subsidies, investment tax credits, as well as leveraging and/or requiring private funding whenever possible.
5. No agency restructuring required (but perhaps some mandate tweaking)
The EETP specifically considers, and rejects, need for a new planning entity, which would only add to the complexity and time needed to undertake energy planning for Ontario. Instead, the Panel endorses the continuing roles of the agencies currently mandated in their respective areas of expertise:
The Panel believes that the OEB and IESO have crucial roles to play in enabling electrification and the energy transition. However, the OEB's core focus should remain on its economic regulation and consumer protection responsibilities, and the IESO's primary focus should remain on effective management, coordination, technical planning and oversight of Ontario's bulk electricity system and wholesale markets.
Within the broad direction established by the government, the EETP maintains that the IESO should continue to independently procure electricity resources and lead bulk system and regional electricity planning.
The EETP also recommends that the OEB be legislatively empowered to provide regular, ex post facto, procedural review of the IESO led planning and procurement activities, in order to provide guidance on future planning and procurement to ensure alignment with the government's stated policy objectives and guiding principles. The Panel concludes that by undertaking retrospective reviews and providing recommendations for the future, such oversight would preclude second guessing of individual procurements and avoid any related uncertainty for project proponents and investors.
In response to suggestions from some stakeholders that the OEB's mandate should be broadened to specifically include emissions reduction or net-zero objectives, the Panel responded that (our emphasis) it "feels strongly that the OEB's existing objectives and associated mandate are sufficient, for the moment."
While recommending that "the OEB should employ all tools within its existing mandate to implement activities consistent with the Province's goals for a clean energy economy and the requirements of the energy transition for Ontario", the EETP recommendations do leave the door open for a review of the OEB's activities and objectives later, once the government releases its "energy transition policy vision", and in light of that policy vision.
6. Policy stability through de-politicization
Given the EETP's acknowledgement of the directional and co-ordinating role for Ontario government policy in Ontario's energy transition, what of the "political risk" associated with the change of governments? These are long-term assets with long-term investment cycles and, in many cases extensive up front planning requirements.
To address this concern, the EETP proposed an Energy Transition Advisory Council (ETAC – our new acronym for an acronym laden sector). The ETAC would be external to government and would provide strategic energy transition advice to government, in public , on key energy transition questions. The ETAC would pursue research and engage with stakeholders, maintaining a "multi-decade focus" and composed of members "whose background and experience enable them to see gaps and emerging challenges in the energy system and governance as a whole."
Key to the value of this advisory body would be transparent and open discussion and engagement, and the ability to authoritatively "navigate the necessary tension between shorter-term political considerations and longer-term policy objectives". The intention expressed by the EETP is for this body to be constituted, resourced, and empowered so as "to keep momentum and overall stability beyond electoral cycles, mitigate policy uncertainty, and ensure energy policy and planning are informed by high quality advice."
7. New business models and opportunities for Local Distribution Companies (LDCs)
A sub-sector that garnered particular interest from the EETP is the electricity distribution sub-sector. The EETP report dedicates a chapter to enabling that sub-sector to achieve its full potential.
The report discusses the emergence of distributed energy resources (DERs) and the resulting need to evolve the market models and regulatory frameworks by which the distribution sector is managed. The EETP emphasizes the need to rethink the traditional LDC business model, and how LDCs can be empowered to "step into the breach" where private sector participation lags and markets fail to adopt or proliferate valuable innovations.
Concluding that it is time to move beyond pilot projects and move towards full-scale implementation of new ways of creating and consuming energy, the EETP recommends that (our emphasis):
… the OEB should work with utilities to develop a vision and clear pathway for system-wide application to realize the maximum capability of the distribution system and DERs.
The OEB should support LDC applications in grid modernization, establishing a process and technical threshold to determine which LDCs will be enabled to locally procure and dispatch DERs.
LDCs should be required to enhance their capabilities to procure and actively manage DERs as Non-Wires Alternatives to meet distribution level needs.
Several more detailed recommendations offered in this area reflect a strong belief of the EETP that Ontario's local distribution companies should take a larger role, enabled by progressive regulatory frameworks, in development and deployment at scale of future energy producing and delivery technologies and modalities.
The observations above only scratch the surface on a comprehensive, thoughtful, value-packed report. There is a lot more to unpack. This is an impressive piece of work on a complex and broad subject. The Panel has done a really excellent job providing perspective and a number of thoughtful and actionable recommendations, and should be commended.
We look forward to more commentary in the weeks and months to come and to a bright and sustainable clean energy future for Ontario.