On October 21, 2024, the Ministry of Energy and Electrification issued a press release announcing the government was “removing barriers that slow the construction of new homes and businesses by making it easier and more affordable to connect to the province's world-class clean electricity grid.”
The Ontario Energy Board’s (OEB) Report Back To The Minister On System Expansion For Housing Developments was published together with the announcement. The OEB’s report was prepared in response to the Minister of Energy’s 2023 Letter of Direction, which asked the OEB “to review electricity infrastructure unit costs in the electricity sector and potential models for cost recovery that could help to ensure infrastructure costs are kept low and are not a barrier to growth” and “review its electricity distribution system expansion connection horizon and revenue horizon direction to ensure that the balance of growth and ratepayer costs remain appropriate.”
In making the announcement, the Minister asked the OEB to proceed with all the recommendations in its report, which features five items:
The Minister also announced additional actions:
On October 22, 2024 Ontario published Ontario’s Affordable Energy Future: The Pressing Case for More Power, setting out the government’s long-term “pro-growth” vision for the energy sector (see Power Advisory commentary).
On October 23, 2024 the government introduced Bill 214, Affordable Energy Act, 2024, which (among other things) set out two significant new authorities for the government over the OEB’s DSC and Transmission System Code. The proposed new authorities would allow the government to:
Concurrently, the government launched a consultation on Bill 214 with a stakeholder feedback deadline of November 22, 2024 as well as a consultation specifically on potential regulations on the cost responsibility framework related to electricity system connection infrastructure in “high-growth areas” with a feedback deadline of December 7, 2024.
Commentary
The Minister, Bill 214, and OEB Code-making Authority
The Minister’s announcement and the introduction of Bill 214 represent the government’s commitment to a “pro-growth” approach to energy policy and infrastructure expansion, aligning with the Minister’s comments from earlier this year: “We’re not going to be an impediment. We’re going to be part of the solution to enable more investment to create better jobs for the people of Ontario.” (emphasis added)
More specifically, these actions reinforce the government’s goal of building 1.5 million new homes by 2031, but also seek to promote economic development through reducing connections costs and incenting proactive grid expansion more broadly. For example, the regulatory proposal on the cost responsibility framework states the government is considering solutions to address two issues:
Unlike the OEB’s Report, the government’s proposals are not limited to housing developments connecting to the distribution system, but apply to other types of customers as well as customers connecting to the transmission system: “changes may be made at the transmission and/or the distribution level, and where the prospect of load materializing in the future is very likely.” And although the regulatory posting does not reference the connection of new supply (i.e., generation and storage), any action that incents more proactive system capacity expansion by utilities would also increase network capacity to accept supply resources as well (both distributed energy resources located behind-, or in-front-of-the-meter, as well as transmission-connected).
This broader response to capacity and costs aligns with a recent presentation by Invest Ontario, the government agency tasked with attracting new industrial and commercial loads, which identified first mover cost burden related to the transmission connection process and cost allocation as a major issue during a presentation to the IESO’s Strategic Advisory Committee (SAC). The presentation also highlighted investment “hot spots” in the province.
The cost responsibility regulatory proposal posting states that potential changes to connection cost responsibility and grid expansion are needed “Given the expected increase in electricity system demand, driven by economic growth, housing development, electrification and the energy transition, there is a need for timely and cost-effective expansion of the electricity grid. A proposed regulation(s) could help to reduce connection costs for first-mover customers, enable faster implementation of grid connection infrastructure upgrades, and enhance system readiness for industrial and housing development and electrification in certain circumstances, while driving affordability for Ontarians.”
While the government’s intentions are clear, it is not apparent how costs will be allocated and recovered under the proposal (which does not include a draft regulation). However, the government states that it “is not proposing to deviate from the fundamental ‘beneficiary pays’ principle that underlies the province’s current cost responsibility framework.”
There is a tension between these two goals of reducing upfront costs for first movers while avoiding shifting costs to other parties (i.e., ratepayers and/or taxpayers). In fact, the government is seeking input from stakeholders on this very issue through the questions it is seeking feedback on in the regulatory posting:
Ultimately, if and when Bill 214 passes, and the government decides to exercise any new regulation-making powers, it will need to clearly and transparently set out how costs are allocated and recovered from connecting customers, ratepayers, and perhaps taxpayers.
Cost responsibility aside, there is another important aspect of the government’s proposals that needs to be addressed. The proposed legislation and associated regulations giving the Minister the authority to amend the OEB’s DSC and TSC (as well as requirements on the CEO of the OEB to ensure that amendments “are promptly consolidated into the applicable Code”) will be perceived by some stakeholders as (further) compromising the independence of the OEB, especially following the passage of Bill 165 (the Keeping Energy Costs Down Act) earlier this year.
The OEB’s Report
With respect to recommendations in the OEB’s Report, the timing, detailed design and implementation of the recommendations are largely unknown. In particular, the OEB’s Report provides few details on the recommended revisions to the DSC, or the expected financial impact they will have on developer costs (and/or ratepayers and distributors) beyond providing high level statements and illustrative examples that the changes will reduce upfront capital contributions for first movers. For example, the OEB states that the proposed recommendations “aim to reduce the capital contributions needed from a single developer, by distributing costs over an increased number of developers/customers and an extended timeframe, while maintaining an appropriate allocation of risk between new and existing customers.”
In fact, the OEB’s Report states that additional consultations on the proposals need to occur: “Developing any new rules and associated guidance to support greater use of the discretion to extend a connection horizon and the CAM will necessitate consultation and formal DSC amendment processes […] Further consultations, as part of the DSC amendment process, will be essential to refine the proposed changes. These consultations will focus on operationalizing the connection horizon extension, the capacity allocation model, and revenue horizon extension, with particular attention to maintaining fairness and minimizing administrative burdens.”
For example, the OEB Report acknowledges that there will be an impact on electricity distributors, noting the “recommended changes, including the CAM, would lead to decreases in initial capital contributions, thus increasing the upfront amount that distributors are paying towards the expansion projects. As a consequence, these increased upfront costs would need to be financed as part of capital budgets. This may necessitate the OEB addressing changes in distributors' capital needs through existing mechanisms such as the Incremental Capital Module and Advanced Capital Module, particularly in cases where distributors are not planning a Cost of Service application to rebase their rates.”
Additionally, the OEB Report indicates that it will not be taking action on alternative cost recovery options to lower upfront capital contributions at this time as suggested by some stakeholders (e.g., capping expansion connection costs for new developments or redefining “enhancements” in the DSC to facilitate planned new residential developments), “unless the concerns of “first movers” persist following the implementation of changes to the connection and revenue horizons.”
Further, the OEB indicated that in response to developer concerns “regarding the transparency, clarity and consistency of connection processes and requirements, including timelines and customer communication,” the OEB will be “providing guidance or direction to the sector and setting further performance expectations regarding customer connections.”
The final two of the OEB’s recommendations related to Activity and Program-based Benchmarking stem from a supplementary report that the OEB commissioned from PricewaterhouseCoopers (included as Part II of the OEB’s Report) on distribution system unit costs for connecting new subdivision developments that is based on data and survey responses from six electricity distributors and three builders/developers. The report states the APB recommendations “are expected to enhance transparency and consistency, which will help identify opportunities to improve cost efficiency.”
Conclusion
Ontario has clearly and repeatedly signalled its commitment to building new energy infrastructure quickly to meet housing, population, economic and electrification goals. The proposed actions are targeted towards ensuring upfront connection costs and grid capacity are not a barrier to achieving these goals. The regulatory proposal states: “Action is required to ensure that Ontario can continue to harness its clean energy advantage. The proposal could help to reduce connection costs for first mover connection customers, enhance site readiness and investment attraction at strategically significant locations, and accelerate economic growth, housing development, and electrification.”
How much the government (and/or the OEB) can reasonably reduce connection costs while simultaneously maintaining the principle of beneficiary pays is not clear. However, at the very least, it appears certain that the government will act to reduce costs for “first movers” and incent transmitters and distributers to proactively expand grid capacity in certain specific strategic locations and/or circumstances that advance economic development and competitiveness objectives.
The government is demonstrating (as it did forcefully with the Keeping Energy Costs Down Act) that when regulatory processes and/or cost responsibility policies of the
OEB are perceived as conflicting with broader provincial policy and development goals, that they are willing to intervene through exercising their legislative, regulatory, and/or directive powers. These interventions highlight the emerging tension between building infrastructure quickly, reducing costs, and providing an appropriate level of regulatory independence and oversight of costs. This challenge will be a primary feature of the large-scale (and expensive) infrastructure challenge posed to the energy sector (and other sectors of the economy) as part of the energy transition.
At present, it remains to be seen how and when the OEB will commence consultations on its recommended DSC amendments. Further. the OEB has not indicated (1) how it will consider the Minister’s request to explore amending the DSC to extend the connection horizon for new electricity lines to housing development projects to 15 years; or, (2) how it will respond (if at all) to the government’s much broader goal of enabling “more timely development of infrastructure to enhance system readiness for industrial and housing development and electrification” as stated in the regulatory proposal on cost responsibility.
Last, the Housing Electricity Growth Forum has yet to be established. How its deliberations will inform future OEB regulatory policy, government policy, and/or energy planning decisions is not known.
Power Advisory strongly recommends that clients and interested parties with comments, concerns or questions on the two consultation proposals provide feedback by the November 22, 2024 (Bill 214) and December 7, 2024 (Cost responsibility regulations associated with Bill 214) deadlines.
Please contact Power Advisory if you have any questions or would like any additional information.