To: Clients and Colleagues
From: Travis Lusney, Director Power Systems, Power Advisory
Background
The conditions facing Ontario’s electricity sector over the next decade are materially different than those from the last ten years. The Independent Electricity System Operator (IESO) is now in the early stages of embarking on administering multiple procurement processes to contract for needed supply.
The reason for multiple procurement processes is that Ontario is rapidly approaching significant supply needs. In the 2021 Annual Planning Outlook (APO), the IESO forecasts a supply need of ~4,000 MW (effective capacity, i.e., the ability of a resource to produce energy during peak demand hours) by 2030 assuming all existing generation resources continue to operate after their contract terms expire. The supply need has increased with each subsequent IESO forecast over the past decade.
In response, the IESO has increased their procurement target from ~1,000 MW of effective capacity. It is now planning to run three separate procurement streams over the next year: the Long-Term 1 Request for Proposals (LT1 RFP) for ~2,500 MW of effective capacity; the Expedited Process RFP for~500 to 1,000 MW of effective capacity, and the Same Technology Expansions procurement for ~500 to 1,000 MW of effective capacity. In total, the approximate 3,500 MW to 4,500 MW of effective capacity could result in 5,000 MW to 8,000 MW (installed capacity) of new supply to be developed by 2030. This would represent one of the largest resource expansions in Ontario’s history.
To qualify for participation within LT1 RFP and/or the Expedited Process RFP, the IESO is running a Request for Qualification (RFQ). While not the objective of this commentary note, Power Advisory continues to believe that an RFQ process provides limited value given the pressing supply need and short lead times to develop needed projects. Any qualification requirements can be incorporated in RFPs.
Locational Consideration for New Resource Document
On June 21, 2022, the IESO released a “Locational Considerations and Circuits to Avoid” document. The document is intended to provide guidance to potential RFP proponents on preferred locations, connection constraints, and other restrictions. For reasons detailed below, the document raises a number of questions regarding the LT1 RFP and Expedited Process RFP processes.
Timing of Release
The RFQ submission deadline is June 30, 2022, just nine days after the release of the locational considerations document. As part of the RFQ, proponents are expected to provide siting information and potential connection locations. For the Expediated Process RFP, proponents must demonstrate site control to qualify. The IESO has been engaging with stakeholders for almost six months, with many stakeholders asking detailed questions related to preferred connection locations and potential restricted development areas. The urgency from proponents is directly related to the cost and complexity of identifying potential project sites and starting site control processes. Yet, the IESO has released the locational consideration document with practically no time for proponents to adjust their RFQ submissions prior to the pending deadline. Further, proponents will now have to spend time and effort (and money) in attempting to anticipate other changes from the IESO. The timing of the release – and the significant impact the changes will have on some projects – may lead some proponents to abandon plans to participate within LT1 RFP or the Expedited Process RFP and seek development opportunities in other jurisdictions. This will reduce competitive pressures and could lead to worst results for Ontario ratepayers.
Lack of Consistent Analysis
The document provides a summary of preferred locations. The reasoning for the preferred locations varies. In addition, the document provides locational considerations that detail potential constraints. The methodology for determining preferred locations has not been provided and the details of the document do not provide any consistency that proponents could leverage to identify potential future preferred areas. The IESO needs to produce a document outlining how preferred locations were selected, a ranking of regions and why certain spots within the preferred locations were chosen.
Locational Constraints within Preferred Locations
The document introduces significant confusion even within the identified preferred locations. For example, the IESO identifies the Kingsville-Leamington pocket as a preferred location, but then details numerous local constraints that would restrict almost all of the connection points in the pocket. Short-circuit limitations may restrict connections at all three Transmission Stations (TSs) in the Kingsville-Leamington Pocket (i.e.,Lakeshore TS, Kingsville TS, and Leamington TS). Further, the six major 230 kV circuits connecting Lakeshore TS to Chatham SS that supply Kingsville-Leamington must consider “balancing generation” that might further restrict connection capability. In other words, while the IESO prefers connections in this pocket, they may not be able to connect specific new resources due to a wide variety of localized constraints.
Time Function of Procured Resources
Restrictions and constraints detailed in the document do not appear to have fully considered the operating lives of the resources the IESO intends to procure. All procurement streams are expected to offer long-term contracts that will support operation for 15-20 years. However, the connection constraints detailed in the locational considerations document discuss short-term constraints that might restrict project connection. For example, the IESO states that projects submitted into the Expedited Process RFP may encounter challenges because of a 7-month overlap with the retirement of the Pickering Nuclear Generation Station (NGS). This is an illogical conclusion and does not appear to recognize that the power system is always organically growing.
Pre-Emptive Restrictions
The IESO details a number of restrictions, including blocking connections to the 500kV bulk network, interties with neighbouring jurisdictions and 230 kV circuits. While Power Advisory agrees that connections to these parts of the power system would impact critical components, we strongly believe that the IESO has acted too soon by focusing only on the negative consequences for the procurement and ratepayers.
For example, blocking connections to 500 kV circuits is due to the bulk transmission network being a critical transfer path. But the IESO is about to embark on multiple procurement processes that will procure potentially 8,000 MW (installed capacity) within seven years. To offer Ontario ratepayers cost-effective resource solutions, large projects may be required – potentially projects in excess of 500 MW. In addition, multiple parties could work together to provide interconnection solutions to enable multiple projects. This would be similar to large generation units that are already connected to the 500 kV network through switching stations. The IESO should have indicated that only large projects would be considered for 500 kV connections and that full switching stations would be required. This would allow proponents to determine the cost and complexity of the connection before deciding whether it was prudent or not.
Further, and much more concerning, is the restriction of 230 kV interface circuits. The IESO has provided no analysis on the impact of new connections to these circuits that would guide proponents on why they are being excluded so early in the process. The IESO has made the decision to exclude the circuits before critical information has been provided regarding the potential benefits of reduced interface limits. These include but are limited to: i) price of proposal bids; ii)community acceptance of projects; iii) connection costs; iv) resource potential; and v) final impact on the interface limit. Ontario’s electricity demand is growing significantly and the power system must adapt to meet the needs. Restricting connections due to existing limits raises serious questions on whether the IESO and the Ontario power system is prepared to manage the electrification and challenges of a net-zero grid. Further, interface constraints in the power system adapt over time due to changing usage patterns, location of supply resources, and new additions. The restricted circuits do not appear to reflect these changes or anticipate how the system might evolve.
Conclusion
In short, the document raises more questions than it provides answers. The timing of the release is not helpful for proponents rushing to complete RFQ submissions. Overall, the document may force some proponents to determine that Ontario is not a priority investment location and shift capital and resources to other jurisdictions. The IESO has already lowered the procurement target for the Medium-Term RFP from 750 MW to 475 MW, therefore a failure to attract projects for the LT1 RFP and the Expedited Process RFP would be a further setback for the Ontario power system and broader economy that relies on safe, reliable, clean and cost-effective electricity to grow and prosper.