Canada: Ontario Government Directs IESO To Expedite Procurement Of 4,000 MW Of Capacity From Natural Gas, Storage And Other Supply Resources

On October 6, 2022, Ontario's Minister of Energy (the "Minister") issued order 1348/2022 (the "Directive") requiring the Independent Electricity System Operator ("IESO") to procure approximately 4,000 MW of capacity from a range of electricity storage and generation resources. The Directive is extraordinary in several respects:

• It is a clarion call for an accelerated procurement of new capacity - enough to power a city the size of Toronto - to meet a looming capacity gap that the IESO forecasts by 2025 due to nuclear retirements/refurbishments and the substantial increase in electricity demand being forecast in Ontario and worldwide to meet electrification and other imperatives of Government decarbonization policies and objectives. The Government has mandated that the IESO "expedite" procurement processes and include contract terms that "incents commercial operation as soon as possible".
• The Directive is also notable for the resources it mandates the IESO to procure. It directs the IESO to procure at least 1,500 MW of storage, the largest ever storage procurement in Canada and an amount that dwarfs Ontario's current storage capacity of approximately 100 MW. More remarkable is the Government's change of course on phasing-out natural gas, with the Directive mandating the IESO to procure up to 1,500 MW of new natural gas capacity as soon as possible with a commercial operation date of not later than May 2026, notably aided by the Government's direction that the IESO include contractual protections to insure suppliers against the risks of future restrictions on greenhouse gas emissionsthat may make contractual performance commercially infeasible.

The rationale for the Directive and the processes and timelines that the IESO and proponents will be required to meet to enable the procurement of the specific resources are explained in further detail below.

BACKGROUND

The Directive introduces an additional mechanism to fill the looming capacity gap that the IESO identified in its Annual Planning Outlook, which forecasts a need for the IESO to bring on additional electricity supply resources as of 2025 to satisfy energy demand which is expected to grow at an average rate of 1.7% per year between 2023-2042. The capacity gap comes after over a decade of operating with an electricity surplus. This change of course is primarily caused by the electrification and investment in industry, including in respect of electric vehicles, battery manufacturing, steelmaking, rail transit and hydrogen.

The Directive represents one of the many actions that the Government and the IESO are implementing to meet the emerging demand, including:

• Enhancements to the IESO's Capacity Auction;
• Provincially funded energy efficiency programs;
• Efforts to extend the Pickering Nuclear Generation Station until 2026;
• Completion of a Medium-Term Request for Proposals to contract 750 MW of capacity from natural gas and wind;
• Development of Canada's first grid-scale Small Nuclear Reactor at OPG's Darlington site; and
• Various supply contract extensions for biomass, hydroelectric, and gas facilities.

DISCUSSION

The Directive

The Directive primarily consists of the following three procurement initiatives to be undertaken by the IESO:

• The Expedited Long-Term Request for Proposals (the "Expedited Process");
• the Same Technology Upgrade Solicitation (the "Upgrade Solicitation"); and
• the Long-Term Request for Proposals (the "LT1 RFP").

The above procurement initiatives will be open to all resource types that meet the mandatory criteria provided by the IESO's procurement materials, which may include renewable energy, energy storage, hybrid renewable energy with storage, biofuels, and natural gas-fired generation. The Directive requires these procurement initiatives to procure

• a minimum combined target capacity of 1,500 MW from standalone energy storage projects; and
• a maximum combined target capacity of 1,500 MW from natural gas-fired generation.

More information on these procurement initiatives is discussed in the subsections that follow.

The Expedited Process

The Expedited Process is intended to establish longer-term certainty to invest in building new resources or expanding existing facilities by competitively procuring a target capacity of 1,500 MW. Highlights of the Directive's requirement in respect of the Expedited Process are set out below:

• Capacity must be procured from (a) new build resources, or (b) expansions at existing facilities that are separately metered and registered, and that consist of the same technology type and shares a connection point with the existing facility;
• Projects will be incentivized to achieve commercial operation as soon as possible, but no later than May 2026 (subject to appropriate contractual adjustments);
• Contract terms must expire no later than April 30, 2047 (subject to extension mechanisms in the contract), except for natural gas-fired generation projects which must expire by April 30, 2040;
• Proposed projects located in municipalities must obtain all necessary municipal permits or other support from the municipality;
• Proposed projects on Indigenous lands must obtain support from the Indigenous community with authority over the applicable lands;
• Proposals will have to include Indigenous and community engagement plans; and
• The contract will include provisions that, where laws or regulations are passed restricting GHG emissions from a project:
  • Such projects will be required to submit GHG emissions abatement plans, prior to the new emissions standards coming into force, and
  • If a project is unable to comply with such laws or regulations, in order to continue meeting its obligations under the contract, despite commercially reasonable efforts, allow such projects to suspend operations for the balance of the contract term while retaining payments under the contract.

The Upgrades Solicitation

The Upgrades Solicitation is intended to incentivize cost effective uprates or upgrades at existing facilities, by competitively procuring a target capacity of 300 MW. Highlights of the Directive's requirement in respect of the Upgrades Solicitation are set out below:

• Capacity must be procured by increasing the capacity of existing electricity facilities, which can deliver a minimum of eight hours of energy duration, with a contract in good standing with the IESO, by means of
  • Equipment upgrades or uprates using the same fuel type and substantially the same technology as the existing facility, or
  • The addition of auxiliary balance of plant equipment;
• Projects are expected to have an in-service date no later than May 1, 2026; and
• Successful projects with contracts that expired on or before December 31, 2032 will have the opportunity to extend their contract term to April 30, 2035.

LT1 RFP

Further to the Minister's previous directive to the IESO on January 27, 2022 to design the LT1 RFP and carry out a Request for Qualifications by June 30, 2022, the Directive directs the IESO to continue to develop the design of the LT1 RFP. While the Directive does not explicitly state the quantity of target capacity for the LT1 RFP, it states that the Expedited Process, Upgrades Solicitation and LT1 RFP are expected to procure approximately 4,000 MW in total (i.e. 1,500 MW + 300 MW + 2,200 MW). This is consistent with the IESO's Resource Eligibility Interim Report which indicates a procurement target of 2,200 MW for the LT1 RFP, which is to be confirmed.¹ Highlights of the Directive's requirement in respect of the LT1 RFP's continued design are set out below:

• Capacity must be procured from new-build resources;
• Projects must commit to achieving commercial operation by May 1, 2027 (subject to appropriate contractual adjustments);

• The contract will include mechanisms to deal with the risk of laws or regulations being passed restricting GHG emissions from a project, as described in the Expedited Process section; and

• The IESO is required to incorporate lessons learned, if any, from its experience with the Expedited Process, in designing the LT1 RFP.

Important Dates for Procurement Initiatives

Prospective proponents should take note of the expected timelines for the procurement initiatives, as set out in the IESO's Resource Eligibility Interim Report:²

CONCLUSION

The ability of the IESO and proponents to contract for and construct 4,000 MW of new and incremental supply within the accelerated timelines directed by the Province will be challenging. There will be significant regulatory, commercial and resource integration challenges to navigate. That said, the stakes are important and the Directive presents tremendous opportunities for experienced and innovative proponents. Stikeman Elliott's Energy Group will continue to provide further updates on these developments and, of course, has the experience and expertise to assist clients in navigating the regulatory, commercial and other issues involved in responding to the IESO's forthcoming procurement processes.

Footnotes

1 Independent Electricity System Operator, Resource Eligibility Interim Report, October 7, 2022, p. 8.

2 Independent Electricity System Operator, Resource Eligibility Interim Report, October 7, 2022, p. 6.

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