Canadian Power – Ontario Regional Overview

Introduction

The power sector has faced a challenging year. As a result of the COVID-19 pandemic, the sector has faced financial stresses, a drop in demand, and disruptions to the power supply chain on an international level. In Ontario, the experience has been no different and the uncertainties from the ongoing pandemic have proven to be a challenge to forecast future electricity demand in Ontario.

We are glad to report, however, that not all was doom and gloom. Over the last year, the Ontario power sector achieved important milestones by way of its first successful capacity auction and Ontario Energy Board (“OEB”) governance reform; and while we are saying goodbye to a generation procurement program from a different era, stakeholders of the power industry can look forward to more opportunities in the future to contribute to the development of OEB initiatives, Independent Electricity System Operator (“IESO”) capacity auctions and a new framework for the Long Term Energy Plan.

COVID-19: A Most Uncertain and Cautionary Year

The emergence and unprecedented nature of the COVID-19 pandemic has put significant pressure on Ontario’s power sector. Among other challenges, it needs to determine how to best achieve effective planning for a reliable electricity system given: (i) the pandemic’s impact on electricity demand following the implementation of Ontario’s COVID-19 isolation measures; and (ii) the forecasting uncertainties associated with the unknown duration of the COVID-19 crisis and its related economic impacts.

The impact of the lockdown on energy demand cannot be overstated. As we wrote following an update from the IESO on April 23, 2020, top-line numbers showed a significant demand reduction across all hours, with both peak demand and overall consumption being down. Numbers are down for small commercial consumption, likely due to the mandatory closure of non-essential businesses, and industrial/commercial customers and wholesale customers. These declines were to be expected given Ontario’s response to COVID-19 and the resulting sharp drop in energy consumption.

Counterintuitively, this sharp drop in demand was expected to cause energy prices to rise because the system’s fixed costs were allocated over a smaller base of consumption. As a result, the government of Ontario took steps to assist Ontarians staying home by freezing the price of electricity throughout 2020 under the Emergency Management and Civil Protection Act. Most recently, the government held the January price of electricity at 8.5 ¢/kWh, which price was equal to the off-peak price set by the OEB for January 1, 2021. In addition, the government capped the Global Adjustment charge for Class A and Class B energy customers. As we wrote on May 15, 2020 when these measures were first announced, the government prevented rising energy prices by capping the prices paid by consumers and paying the gap between what the energy costs and what consumers are being charged. It may take many years for consumption to return to pre-pandemic levels and the economy may continue to struggle throughout early 2021. This may result in further deferrals of energy costs and the implementation of new measures to help energy consumers.

This uncertainty is highlighted in the IESO’s 2020 Annual Planning Outlook in which the IESO provided for two different scenarios of economic recovery. Unsurprisingly, both scenarios are predicated on lower demand than forecasted in the IESO’s 2019 Annual Planning Outlook. The first scenario assumes a shallow economic recession in 2020 and early 2021 followed by a rapid economic recovery in 2021 and 2022, with demand expected to reach pre-pandemic levels by the end of 2022. The second scenario assumes a deep economic recession until the end of 2021, followed by a slow multi-year economic recovery starting in 2022, with demand not expected to reach pre-pandemic levels until 2024. What is most noteworthy is that long-term demand in both scenarios will ultimately exceed the IESO’s 2019 forecast. The IESO highlights the resiliency and stability of the industrial sector, an increase in residential usage reflecting work-from-home arrangements, rapid growth in indoor agriculture, robust near-term growth in the mining subsector and new rail transit electrification projects as some of the reasons for such longer-term demand.

Becoming Best in Class: Modernizing the OEB

In December 2017, the previous Ontario government launched a review of the OEB to consider the appropriate mandate, role and structure of a modern energy regulator. Over a year later in October 2018, the OEB Modernization Review Panel (the “Panel”) provided its final report (the “Report”).

On May 9, 2019, the Ontario government passed Bill 87, Fixing the Hydro Mess Act, 2019, which amends various statutes, including the Ontario Energy Board Act, 1998, as part of its comprehensive reform of, among other things, the structure of the OEB. In accordance with the recommendations of the Report, the changes included the creation and appointment of a board of directors with a non-executive Chair as well as a Chief Commissioner who would be responsible for adjudication. The Chief Executive Officer was also granted specific powers to make rules and issue codes.

On October 1, 2020, this new OEB governance structure became official. Accordingly, the OEB welcomed a new leadership that included Richard Dicerni as Chair, Susanna Zagar as Chief Executive Officer, and Lynne Anderson as Chief Commissioner.

That same day, the Ministry of Energy, Northern Development and Mines (the “Ministry”) also delivered its mandate letters setting out the government’s expectations and performance priorities with respect to the OEB. In a letter to the Chair, Minister Greg Rickford set out his vision for a modernized OEB – one which was informed by the work of the Panel, and which includes two broad categories of actions. Some notable examples of actions are excerpted below:

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– Ensure that governance and operational roles and responsibilities are clearly defined

– Reinforce effective operational and communication protocols within the organization that support the independence of adjudication

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– Reform processes for rule and code-setting to include a greater role for stakeholders, including consideration of a cost/benefit approach

– Reduce regulatory burden on licensees, namely the number of reporting requirements and corporate governance requirements for local distribution companies and natural gas utilities

– Build on efforts to move towards online-only filing of OEB applications

– Report publicly through the OEB’s Annual Report on how the OEB has simplified and streamlined practices and procedures

The Ministry also emphasized the importance of providing updates to the government and other stakeholders about the OEB’s progress, particularly with respect to changes brought forward by the Chief Commissioner to improve the efficiency and effectiveness of the adjudication process. To that end, Ministry staff will be tasked with providing quarterly updates on the OEB’s progress. The OEB will be similarly expected to employ tools and develop mechanisms to consistently track and measure such progress.

Building upon these mandate letters, the Chief Executive Officer provided an update on October 30, 2020. In her letter, Ms. Zagar stated that three initiatives were underway to demonstrate the OEB’s near-term priorities as part of a broader and more comprehensive plan to achieve a level of governance and operations befitting a “top-quartile regulator”. The OEB will:

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For now, observers should be relieved to see the government and the OEB adopting the recommendations of the Report. The first steps in modernizing the Province’s energy regulator are underway and it is exciting to see some clear and deliberate actions by the OEB’s new leadership to increase transparency and stakeholder engagement. However, observers would be wise to remember that there remain other challenges – some of which are highlighted in the Report and others that are not.

As we noted last year, there are other processes and policy instruments apart from adjudication decision making for which additional transparency is required. Although the mandate letter is helpful with its reference to cost-benefit analysis, it would be useful if the record for policy decisions was made explicit. In addition, there must be increased regulatory oversight of procurement of capacity in the electricity sector. The current reforms will be of limited benefit to Ontario ratepayers if these challenges are not addressed.

As discussed below, one forum in which these issues can be addressed is the government’s proposed initiative to address increasing “the effectiveness, transparency and accountability of energy decision making in Ontario.” The government will be holding consultations in this regard in 2021 and we are hopeful that this will involve the first enduring fact-based and transparent independent oversight for planning, procurement and market rule amendments.

Going Once, Going Twice…
Sold! (on the IESO’s Capacity Auction)

On December 10, 2020, the IESO announced the results of a province-wide capacity auction, which secured 992.1 megawatts (MW) of capacity from 26 successful market participants. A combination of eligible resource types, including electricity loads, generators, and energy storage participated in the auction.

This much-anticipated round of capacity procurement comes after the IESO delayed the auction (originally scheduled for June 2020) following reduced electricity demand resulting from COVID-19. It is also the IESO’s first capacity auction following the replacement of the IESO’s former Demand Response Auction program.

WHAT ARE THE RESULTS?

The clearing price for the 992.1 MW procured was $197.58/MW-day, representing a significant decrease of approximately 26% from the Demand Response Auction in 2019. Participants have committed to provide capacity for summer 2021, which is intended to assist in managing peak seasonal loads. Capacity commitments ranged from 245.6 MW down to 1.1 MW. Although the IESO did not disclose the total number or identity of unsuccessful bidders, it revealed that more than 1,700 MW worth of resources enrolled in the auction.

WHAT STANDS OUT?

« This was the first time the IESO invited electricity generating resources to compete together with load-side resources. Notably, HQ Energy Marketing Inc. received a capacity commitment for 80 MW as a systembacked import. »

While this represents a significant development, the majority of successful bidders in this round remained electricity loads. This result may alleviate the trepidation felt by load-side participants, some of whom felt that expanding the capacity auction to electricity generators would limit their ability to compete. As described on our blog, this was the subject of an application brought earlier in 2020 by the Association of Major Power Consumers in Ontario before the OEB, which was ultimately denied.

Also of note is the successful participation of one nonaggregated energy storage entity, which is particularly interesting given the increased market focus on this rapidly developing technology and the continuing desire for regulatory certainty for storage. As described on our blog, whether additional administrative mechanisms are required to enable energy storage to efficiently compete will turn in part on the pace of storage technology development in Ontario and the physical and financial characteristics of competing capacity market participants. Although much work remains to facilitate the full deployment of energy storage in Ontario, the results of the first capacity auction may be a reassuring signal for storage advocates.

THE NEXT STAGE

Capacity auctions are an important mechanism for ensuring short-term resource adequacy and are integral to the IESO’s three-part resource adequacy framework (the “Framework”). Under the Framework, the IESO has committed to use capacity auctions for procuring short term capacity in 2021 and 2022. It is anticipated that auctions will be used for medium-term resource adequacy in conjunction with RFPs and contract-based arrangements. To that end, the IESO plans on seeking feedback, improving the capacity auction process and operationalizing the Framework in early 2021.

All plans, however, are subject to COVID-19. As stated above, forecasting future energy demand could be challenging for years to come. Therefore, capacity auctions may become a more attractive mechanism for dealing with short-term fluctuations in demand. This may be true particularly given that, as described below, the government has revoked the last of the IESO’s active electricity generation procurement programs – the hydroelectric contract initiative. With the termination of this program, hydroelectric facilities that are no longer under contract would be eligible to participate in the IESO’s capacity auctions going forward.

For these reasons, the ongoing evolution of the IESO’s capacity market should remain the subject of much attention from stakeholders in the power industry, and the procedural success of the first capacity auction should be seen as a positive signal for both load-side resources (which remained the majority of success bidders) and for new entrants (such as generation side resources and energy storage resources).

 

A Final Farewell to Generation Procurement

In 2009, the then Minister of Energy issued a directive which established the Hydroelectric Contract Initiative (“HCI”) program, which permitted existing hydro facilities without electricity contracts to obtain 20-year contracts, among other things, as part of the Province’s electricity generation procurement program.

Over a decade later, the last of the government’s electricity generation procurement programs comes to an end. On February 14, 2020, the government issued a directive under section 25.32 of the Electricity Act, 1998 (the “Electricity Act”) to terminate the HCI program. Starting on March 1, 2020, the IESO ceased accepting applications and negotiations underway with respect to the program, and all steps necessary to discontinue and wind down the HCI program were initiated. Notably, the directive will not affect the rights and obligations of parties to existing contracts under the HCI program.

The Ever-Evolving Long-Term Energy Plan

In 2016, the Electricity Act was amended to include requirements for developing a provincial long-term energy plan (“LTEP”). Ontario Regulation 355/17 (the “Regulation”) of the Electricity Act, which establishes a 3-year timeframe for issuing the LTEP, required the next LTEP to be issued by February 2021.

On July 27, 2020, the Ontario government issued a proposal to revoke the Regulation and remove the 3-year timing requirement and such removal became effective on January 1, 2021.

According to a letter issued by the Ministry on January 5, 2021, revoking the Regulation is the first step toward the government’s plan to reform Ontario’s long-term energy planning process. Through the design and implementation of an improved framework – which is the reason why an LTEP will not be released in February 2021 – the Ministry intends on clarifying the role of the government, the IESO and the OEB in energy planning. The Ministry also intends to solicit broad-based feedback on the Environmental Registry of Ontario from across the Province through a formal 90-day engagement.

Apart from possibly shifting greater responsibility for the LTEP to the IESO and the OEB, however, the intended changes remain ambiguous. Stakeholder concerns raised in the proposal’s comment period included negative impacts to transparency and accountability, and delays to the planning process, timely responses to climate change impacts, and/or energy transition processes. In response, the Ministry merely pointed to addressing these concerns through the upcoming consultation and design process.

Nevertheless, this engagement is a welcomed departure from the current government’s historically closed-door approach to energy planning. With this engagement, stakeholders have an opportunity to participate in the potential reform of resource planning going forward by influencing the role of the government and its agencies, including potential legislative changes to implement same.

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