Overview
After a long period of limited activity, Ontario has entered an era where we can expect significant ongoing procurements for the supply of new electricity generation. Following years of surplus electricity, the Independent Electricity System Operator (“IESO”), responsible for overseeing Ontario's electricity sector, is now focused on meeting growing demand. The IESO recently forecasted a 60 percent increase in Ontario's total electricity demand over the next 25 years, with an expected annual growth of two percent for the next couple of decades. 1
The IESO attributes this anticipated growth to a variety of factors including (i) electrification of key sectors of the economy, (ii) population growth and (iii) increased economic activity. The IESO has also noted the need for new procurements to address the retirement and refurbishment of existing facilities. We anticipate the IESO may decide to expand on future procurements to address the rapid rise of power-intensive generative AI tools. Earlier forecasts do not take into account the generative AI trend and the associated need for more advanced data centers. This trend can be expected to further increase the future demand for electricity generation in Ontario.
To meet the anticipated demand for additional electricity generation in Ontario, the IESO has initiated ambitious procurement initiatives.
This update provides a brief summary of recent procurement processes undertaken in Ontario, outlines future procurement timelines, and discusses key considerations for energy developers, investors, Indigenous groups and other market participants interested in electricity generation opportunities in the province.
Recently Completed Procurements
The recently concluded procurements are an important milestone, representing a resurgence in large-scale energy acquisition to support Ontario's growing demands. In 2023, through its Expedited Long-Term 1 Request for Proposal process (“ELT1”), the IESO procured 882 MW of new energy storage capacity. In the same year, the IESO also procured 872 MW through expansions and upgrades to natural gas generation facilities as part of the ELT1 process and its Same Technology Upgrades Solicitation. 2 Earlier this year, the IESO completed its Long-Term 1 Request for Proposal process (“LT1”) procuring 1,784 MW of new battery storage facilities and 411 MW from natural gas and biogas generation. All additional electricity supply is expected to be in service by 2028. 3
Long-Term 2 Procurement Plans
The IESO is currently engaged in the next phase of its process, the Long-Term 2 Request for Proposal (“LT2”) procurement, aimed at securing reliable electricity supply for Ontario's future energy needs through the next decade. Under LT2, the IESO aims to procure approximately 2,500 to 3,000 MW, split between an energy stream (~2,000 MW) and a capacity stream (~500-1,000 MW).
For the energy stream, the IESO is seeking new and refurbished or expanded non-emitting energy producing resources, primarily wind, solar and hydro, to be in service by 2030. Under the capacity stream, the IESO is looking for new non-emitting capacity resources, particularly storage, bioenergy and hydrogen, to be in service by 2031. The LT2 procurement plan underscores IESO's commitment to securing a stable and reliable energy future in a timely, cost effective, and flexible manner.
Stakeholder Engagement Insights
The LT2 RFP procurement process commenced in December 2023, with ongoing stakeholder engagement sessions that are expected to continue into the fall of 2024. The IESO has actively sought and received robust feedback, making materials from past engagement sessions and feedback available on its website. 4 Further stakeholder engagement activities are expected in the coming months.
Recent engagement sessions covered various aspects of the planned procurement. Key considerations for proponents interested in participating in the LT2 procurement process include:
- Anticipated Contract Design and Terms:
- The term for contracts awarded under both the energy stream and the capacity stream will be 20 years.
- The contract design for the LT2 energy stream is expected to be based on an “alternative enhanced power purchase agreement” model (“E-PPA”) developed by the IESO, which remains in draft. The E-PPA is intended to function like a contract-for-differences model with a market revenue deeming structure. The goal of the IESO with the E-PPA design is to “introduce a commercial model that provides revenue certainty for energy resources while enabling and encouraging more price responsive and market-focused behaviour from energy producing resources” as compared to historic contracting models. The IESO has published a helpful guide 5 and has been responding to feedback provided to date. We anticipate further refinements following additional feedback. Very recently, the IESO published an initial draft of the form of E-PPA for the energy stream 6 setting out the formulas and calculations that proponents and investors will want to assess in detail.
- Careful consideration will be required by proponents and financing sources in addressing the additional risks associated with the E-PPA model. For example, some stakeholders have raised concerns about whether the model appropriately mitigates curtailment risk and shape risk. Other stakeholders have raised concerns about uncertainties between the proposed “Day-Ahead Market” and proposed “Real-Time Market” operations.
- The contract for the LT2 capacity stream is expected to largely mirror the terms for the LT1 procurement, with selected modifications to remove materials cost indexing and earlier operation payment incentives.
- Bid Process and Model: Unlike the previous ELT1 and LT1 procurements, LT2 will not include a request for qualifications stage. Furthermore, proponents for LT2 will be expected to make a fixed price bid with a deposit at risk and commit to a fixed target commercial operation date, with risk of damages if late.
- Indigenous Community Participation: For the LT2 procurement process, Indigenous participation will again be an important rated criteria. For context, nine of the ten successful projects under LT1 have 50 percent or more Indigenous ownership. Both the IESO and the Government of Ontario provide funding and support for Indigenous energy planning and infrastructure development. 7
- Connection Guidance and Deliverability Testing: Proponents will be expected to submit proposals based on preliminary connection guidance to be published by the IESO, which is still in draft form and subject to further consideration based on feedback received. Second stage deliverability testing will be conducted post RFP submission, based on a methodology to be published by the IESO. The IESO is encouraging pre-submission consultations from interested parties.
- Agricultural Land Use: In a joint letter dated June 6, 2024, the Ministry of Energy and the Ministry of Agriculture, Food and Rural Affairs 8 requested the IESO to (i) consider awarding rated criteria points for projects that avoid prime agricultural land; (ii) ensure no projects are built in speciality crop areas; and (iii) prohibit ground mounted solar projects in prime agricultural areas. Many stakeholders have expressed concerns over these recommendations, as it may invariably lead to development of solar projects in certain areas with limited transmission capacity. The IESO is currently evaluating these suggestions, and more clarity is expected in the coming months.
- Agricultural Impact Assessment: The same ministerial letter also suggests that the IESO require all resource types to obtain an Agricultural Impact Assessment to the satisfaction of the municipality in order to locate on land classified as prime agricultural areas. The IESO is currently determining criteria for a satisfactorily completed assessment and the appropriate timelines for fulfilling this requirement.
- Municipal Support: Similar to the LT1 procurement, the IESO is considering adding a requirement for proponents to obtain municipal support confirmation as part of the LT2 procurement. However, unlike LT1, for LT2, the IESO is contemplating requiring proponents to submit municipal support confirmation prior to the proposal submission deadline.
Next Steps
Looking ahead, the IESO has outlined the following projected timelines for the LT2 procurement:
- Release of request for proposal terms and draft contract for the capacity stream: Third Quarter 2024.
- Issue of final request for proposal, including final contract terms: Fourth Quarter 2024.
- Proponent proposal submissions deadline: Third Quarter 2025.
- Contract execution: First Quarter 2026.
Additionally, the IESO has further procurement processes under development, including its announced Long-Lead Time procurement for energy and capacity resources with anticipated 40-year contracts, and future planned Long-Term 3 and Long-Term 4 procurements expected in future years.
Footnotes
1. IESO 2024 Annual Planning Outlook (available here: https://www.ieso.ca/Sector-Participants/Planning-and-Forecasting/Annual-Planning-Outlook)
2. IESO June 2023 Resource Adequacy Report (available here: https://www.ieso.ca/-/media/Files/IESO/Document-Library/resource-adequacy/ieso-resource-adequacy-update-june2023.pdf)
3. IESO LT1 RFP Update (available here: https://www.ieso.ca/en/Sector-Participants/Resource-Acquisition-and-Contracts/Long-Term-RFP-and-Expedited-Process)
4. IESO Engagement Initiatives (available here: https://www.ieso.ca/Sector-Participants/Engagement-Initiatives/Engagements)
5. IESO Revenue Model Update (available here: https://www.ieso.ca/-/media/Files/IESO/Document-Library/engage/long-term-rfp/lt2-rfp-20240328-revenue-model-update.pdf)
6. Initial draft form of E-PPA for the energy stream (available here: https://www.ieso.ca/-/media/Files/IESO/Document-Library/engage/long-term-rfp/lt2-rfp-Energy-Contract-draft-July-2024.pdf)
7. Details for the IESO Indigenous Energy Support Program are available here: https://www.ieso.ca/en/Get-Involved/Indigenous-Relations/Indigenous-Energy-Support-Program/IESP-Overview.
8. Available in IESO documents library (see here: https://www.ieso.ca/-/media/Files/IESO/Document-Library/engage/long-term-rfp/Letter-from-the-Minister-of-Energy-20240606-LT2-protections-for-agricultural-land.pdf)
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