To: Power Advisory Clients and Colleagues
From: Travis Lusney, Director of Power Systems
The Independent Electricity System Operator (IESO) has released initial results from the Expedited Long-Term Request for Proposals (E-LT RFP), procuring 318.5 MW of gas-fired generation under the non-storage category and roughly 780 MW under the Category 1 storage category.
Category 2 storage, whose prices exceeded the unknown IESO threshold and were instructed to work with the Canadian Infrastructure Bank (CIB) to seek potential price reductions through lower project financing costs, are expected to be released at a later date.
The IESO also announced results of the Same Technology Upgrades, including contract extensions for some existing gas-fired generation facilities. Average upgrade capacity of 144.9 MW was identified with a further 146.1 MW expected but is currently under negotiation between proponents and IESO.
The IESO did not achieve their non-storage (i.e., gas-fired generation) target of 600 MW in the E-LT RFP, falling short by roughly 280 MW. As per the E-LT RFP design, IESO can procure more storage with the leftover non-storage procurement target, leading to potentially 402 MW of storage projects that could be procured under Category 2.
For the Same Technology Upgrade procurement, IESO published 144.9 MW of upgrade capacity and indicated that the remaining 146.1 MW (i.e., for a total of 291 MW) are still under negotiations.
Additionally, IESO indicated that existing gas-fired generation with upgrade capacity received contract extensions to 2034/2035 depending on the respective facilities.
Power Advisory Commentary
The results of the E-LT RFP and Same Technology Upgrade procurements highlight challenges going forward.
First, the failure to achieve the target for non-storage resources is another example of the challenges of developing gas-fired generation projects in Ontario. The combination of the previous government gas plant scandal [1] and headwinds from net-zero policy objectives, developing gas-fired generation may be viewed as too challenging for many proponents. Power Advisory’s analysis suggests that maintaining reliability and resource adequacy will require continued operation of gas-fired generation. Reducing gas-fired generation reliance will require significant investments in new non-emitting energy resources, as well as continued advancements in new and emerging technologies (e.g., green hydrogen). With a 600 MW target for non-storage in the Long-Term 1 RFP (LT1 RFP), critical questions should be raised to determine how much additional gas-fired generation may participate and what changes to the LT1 RFP and Contract may need to be considered if IESO decides more gas-fired generation is required within Ontario’s power system.
Second, the shortfall in procured gas-fired generation projects and potential additional procurement of energy storage will directly impact the energy adequacy outlook for the province. Energy storage resources are net loads, given cycling losses during withdrawal and injection of energy. A key benefit of gas-fired generation is the ability to provide both firm capacity and energy depending on how often these facilities run. With less gas-fired generation than anticipated, the province will need to speed up the exploration of new energy resources. Corporate environmental, social, governance (ESG) mandates and government policy (e.g., federal Investment Tax Credits (ITCs) for wind, solar, hydrogen, etc. [2]) are currently targeting renewables. Power Advisory’s analysis and experience in other jurisdictions suggests enabling and supporting clean energy corporate Renewable Power Purchase Agreements (PPAs) could speed up the development of non-emitting energy resources and help meet corporate ESG mandates. In addition, enabling Corporate PPAs can allow the IESO to focus on procuring capacity resources through LT1 RFP. Given potential for earlier timelines for energy needs in the province to arise, there is also an option to provide further support for distributed energy resources (DERs) that can be developed faster than large transmission-connected projects and sited within load centers (e.g., urban areas) where energy is needed most.
The inclusion of contract extensions for gas-fired generation under the Same Technology Upgrades helps to resolve some of the long-term energy needs, particularly if the remaining contracts under negotiations also include contract extensions to 2034/2035. The IESO has extended roughly 2,200 MW of gas-fired generation to 2035, with potentially more once the negotiation results are published. This will also reduce the resource adequacy need in the province. The chart below shows the impact on summer resource adequacy need under Annual Planning Outlook (APO) 2022 Case 1 (i.e., without continued operation of existing resources) from existing gas-fired generation contract extensions, same technology efficiency gains and E-LT 1. Even with the contract extensions and procurements, accelerating demand growth will still require new resource development. The gas-fired generation extensions to 2034/2035 aligns with the federal net-zero electricity target by 2035. The forthcoming Canadian Electricity Regulations (CER) will provide greater clarity on the ongoing operating of carbon-intensive resources in the province.
The potential procurement of almost 1,200 MW of energy storage projects through the E-LT RFP represents the largest procurement of energy storage ever within Canada. This is a commendable achievement and will reshape the Ontario electricity grid significantly. From an operational perspective, IESO has very limited experience with this much storage in the system with respect to day-ahead scheduling to real-time dispatch. Establishing schedules, dispatch instructions, and wholesale market settlements may prove to be challenging – especially considering that IESO’s network model will not optimize performance of these storage resources until several years into the future. Further complicating the matter is the continued implementation of IESO’s Market Renewal Program (MRP) which will establish a new schedule, dispatch, pricing and settlement structure within the wholesale market. Since there are no plans to change the network model to fully accommodate these storage projects until post implementation of MRP, this means that energy storage resources will operate as two separate resources (i.e., dispatchable load and dispatchable generator) that will likely prove challenging for storage asset managers to optimize these resources commensurate with power system needs in accordance with wholesale market signals while being compliant with their contracts. Experience in other wholesale markets (e.g., California) suggests integrating energy storage will be complicated, resulting in operational challenges, and will require many market design/rule changes to realize the full benefits of energy storage resources.
Of the expected 1,200 MW of energy storage projects contracted under the E-LT-RFP, roughly two-thirds were considered Category 1 and came in under the IESO price threshold for CIB funding discussions. The remaining one-third are currently negotiating with the CIB to determine options to lower their bid prices. This suggests that many of the energy storage project bids were relatively expensive compared to IESO’s unknown threshold. With over a decade since major procurements have been completed in the province, price discovery is important and must be undertaken to understand the current situation and the opportunities for improvement. In Power Advisory’s view, restricting pricing information does not benefit ratepayers and limits competitiveness of future projects. Markets function properly with open data and competitive tension.
Finally, Power Advisory reminds clients that contract awards are just a process step in the development of resources in Ontario. Now successful proponents must execute their contracts and achieve commercial operation. This will require arranging financing, engaging communities and First Nations, acquiring permits and approvals, undergoing connection impact assessments, and completing construction. There are no guarantees that all contracted projects will successfully be built. How the IESO manages potential attrition of contracted projects not achieving commercial operation through the development process will inform future opportunities in Ontario.
[1] https://www.theglobeandmail.com/news/politics/ontario-liberals-gas-plants-scandal-everything-you-need-to-know/article23668386/
[2] https://www.budget.canada.ca/2023/report-rapport/chap3-en.html