IESO COVID-19 Update: Reduced Demand and Outlook Uncertainty

On April 23, 2020, the Independent Electricity System Operator (“IESO”) held a webinar on the impact of COVID-19 on Ontario’s electricity system. Two key themes that emerged from the presentation and discussion were the impacts on demand for electricity following the implementation of Ontario’s COVID-19 isolation measures and the uncertainty that the COVID-19 crisis and related economic impacts has created in forecasting demand over the coming years.

This energy law update is intended as general guidance only. If you have specific questions or concerns, please contact Stephen Furlan or Seán O’Neill. We would be pleased to assist you.

Impact of the Lockdown on Energy Demand

Top-line numbers show a demand reduction of 800 to 3,000 MW across all hours, equivalent to a reduction of 6% to 18% of typical demand. Peak demand is down 10% to 15%, and overall consumption is down 10% to 12%.

Looking behind these overall declines, small commercial (less than 50 KW) consumption is down 8% to 12%, with peak demand down 14% to 17%. This is driven by the mandatory closure of non-essential businesses, with the IESO noting that 80% of Ontario’s commercial load is impacted by COVID-19-related measures.

For industrial/commercial customers and wholesale customers, demand is down 17% and 16%, respectively. The IESO has visibility into 1,500 MW to 2,000 MW of wholesale consumers directly connected to the transmission system. Within this segment, reductions average 250 MW to 300 MW. The IESO also noted that government efforts to have Ontario manufacturers produce essential goods, such as personal protective equipment, could result in temporary increased load in the near term but this is not anticipated to materially offset these declines.

Residential consumption, on the other hand, is up 4% and peak demand is up 2%. The IESO identified a shift to work from home and province-wide school closures – which on April 26, 2020 were extended until at least May 31, 2020– as the primary drivers of increased demand. The provincial government also provided temporary financial relief to households, farms and small businesses by suspending peak time-of-use rates for 45 days.

Difficulty Forecasting Future Demand

The IESO cautioned that the ongoing pandemic has caused significant uncertainty in forecasting demand. The possibility of multiple waves of infection and business closures exacerbates such uncertainty. The IESO anticipates a global recession. Interestingly, the after effects of a recession are long-term. The IESO noted that demand in Ontario lost in the early 1990s recession did not recover until 1999 and demand in Ontario has never returned to the peaks of pre-2008. The IESO’s optimistic scenario has a return to normal demand trends in as little as 18 months.

The 5-year demand forecast will depend on the length and depth of the downturn and how the economy recovers over time. Due to the current uncertainty, the IESO has suspended the release of a five-year outlook with every other Reliability Outlook and will instead be providing an 18-month outlook to inform systems operations and outage management.

In response to the drop in demand, certain capital projects and the capacity auction scheduled for June 2020 have been delayed. The IESO has also stopped work on Phase 2 of its Capacity Auction plan. This is, consequentially, expected to delay planned increases in supply. Another unknown is future availability of skilled trades to engage in asset maintenance, which adds additional uncertainty to predicting supply and unplanned outages. In addition, supply could decrease due to existing resources closing or curtailing because of supply chain issues or lack of access to capital or debt. In light of all this, the IESO cautioned it is too early to determine what, if any, impact the COVID-19-related measures will have on system cost. However, the vast majority of system costs are fixed costs and are therefore not likely to substantially change in the near future. With reduced demand to cover these costs, further increases in the Global Adjustment are highly likely.

The Bottom Line

As was expected, the provincial response to the COVID-19 pandemic has greatly reduced commercial energy demand and resulted in a small rise in residential demand. Absent an unanticipated rebound in demand, all-in electricity costs in the Province of Ontario are likely set to rise. If and how the government steps in to mitigate these price increases on individual and commercial consumers will be interesting to follow and will need to be weighed by government in the context of the cost of all of its other relief initiatives.

The IESO appears to be preparing for demand to remain below pre-pandemic levels for several years, and significant uncertainty remains regarding both the length and severity of the pandemic and the government’s actions in response.

Our team at McCarthy Tétrault LLP can help. Please contact Stephen Furlan or Seán O’Neill with any questions or for assistance.

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