On Oct. 6, 2022, Ontario Minister of Energy, Todd Smith, issued a directive to the Independent Electricity System Operator ("IESO") directing it to procure 4,000 megawatts (MW) of new electricity supply to serve the province's growing electricity needs.
Context
Relying heavily on the IESO's October 2022 Resource Eligibility Interim Report, the October ministerial directive underscores the looming electricity supply shortage risk, which the province now faces after years of power supply contract cancellations and procurement decision delays. The coming power supply gap is indeed driven to some extent by economic growth and population growth but, more fundamentally, it arises due to the expiry of historic power supply contracts and the planned refurbishment requirements of the gigantic Bruce and Darlington nuclear plant facilities – supply factors which were well-understood and long-foreseen by system planners.
As readers may recall, the IESO's 2021 Gas Phase-Out Impact Assessment study had concluded that eliminating natural gas-fired generation from Ontario's electricity system in the near term would result in supply shortages within the province. This conclusion, though questionable, has obviously formed a basis for the procurement mandate given under this latest ministerial directive. As a result, it looks as though Ontario will actually introduce up to 1,500 MW of new natural gas generation into its supply –more than tripling the province's power-sector GHG emissions at a time when competing jurisdictions around the world are working hard to reduce their power grid GHG emissions.
This being said, ever since the closure of its remaining coal fired generating stations in 2014, Ontario has enjoyed a comparatively low-GHG power system. The fact that we are moving backward on power-related GHG emissions could arguably be justified by tremendous progress made early on by the province in years gone by. (Future generations of Ontarians may quibble.)
The directive's key points:
The directive orders the procurement of a total 4,000 MW of new electricity supply, including 1,500 MW of new gas-fired generation to be brought in to commercial operation by May of 2026. More interestingly, it also directs the IESO to procure 1,500 MW of storage capacity – a significant amount which will be highly useful to the province as it continues to explore non-wires solutions to grid congestion and power quality challenges.
Notably, rather than passing management of these procurement processes to the truly world-leading project procurement experts at Infrastructure Ontario, as had been contemplated by the Ontario government previously, the IESO is keeping these procurement processes in-house. Results remain to be seen.
Under the directed procurement, the following investment incentive structures are contemplated:
- The Expedited Long-Term Request for Proposals
Under what is being termed as the "Expedited Long-Term Request for Proposals" or "Expedited LT1," the IESO will enter into long-term power contracts, set to expire in 2047 for resource types other than natural gas, and 2040 for natural gas. These Expedited LT1 procurements aim to facilitate 1,500 MW of generating capacity, they must involve new-build projects or expansion projects which are separately metered, they must achieve commercial operation ("COD") prior to May of 2026, they are required to have in place local municipal and indigenous approval support and they will be required to submit detailed GHG emission abatement plans.
- Same Technology Upgrades Solicitation
In addition to Expedited LT1, Same Technology Upgrades Solicitation ("STUC") aims to encourage cost-effective existing facility upgrades that can deliver a minimum of eight hours of energy duration for the delivery of new/incremental generating capacity of approximately 300 MW utilizing the same fuel type and substantially the same technology as the existing facility. These projects are also required to achieve COD no later than May 1, 2026.
- LT1 continuation
In addition to the Expedited LT1 and the STUC procurement, the ongoing Long-Term Request for Proposals ("LT1 RFP") processes will continue. As readers will recall, the LT1 RFP process targeted the procurement of up to 2,500 MW of new and incremental capacity from both existing and new-build generation and storage facilities with in-service dates of May, 2027, and the subsequent "Expedited LT1 Process" called for an additional 1,000 MW of capacity capable of entering operation by May of 2026 with significant economic incentives for on-time project delivery.
Analysis
The directive's support for battery storage is a good sign for electric vehicles, rail transit, and industrial electrification. Energy storage will enable the more effective integration of the province's renewable generation resources and bolster the development of a new and important industry in the province.
Although it is concerning that Ontario is sliding backwards to carbon-based resources (i.e., natural gas) for energy, the province's transition to net-zero emissions may potentially be addressed holistically by integrating a diverse electricity-supply grid and electrifying other energy-consuming aspects of the economy. The rapid conversion of the province's vehicle fleet to electric now underway, should in theory reduce its over-all carbon footprint despite the advent of new gas generating stations.
The key takeaway is that, after more than five years of delay and uncertainty, the province of Ontario is finally moving forward with a plan. This is good news for rate-payers and power consumers. We are acquiring power generating assets late in the game, and will pay a premium as a result, but, at least we are moving forward. The reintroduction of GHG-emitting gas generating capacity is bad news for environmentalists, but, not unexpected in the current context. The call for new renewables and storage capacity at scale is good news, both for related high-tech industries and for power consumers generally.
Our Energy Team at Gowling WLG will continue to follow Expedited LT1, STUC and continuing LT1 developments closely in the coming months and looks forward to answering reader questions as the processes continue to move forward.