ONTARIO NEWS

On March 10, 2016, the Independent Electricity System Operator (IESO) announced the award group for the first Large Renewable Procurement I Request for Proposals (LRP I RFP)^[2]. The IESO awarded 16 contracts totaling approximately 455 MW of new renewable generation capacity. The results of the LRP I RFP reveal some critical conclusions on the procurement and proposal evaluation process. The assessment of the LRP I RFP results should also be considered regarding the forthcoming IESO consultation and development of LRP II.

LRP I RFP Contract Award Assessment

Assessment of the LRP I RFP results reveals some key considerations for organizations looking to participate in the forthcoming LRP II. Almost 25% of proposals were rejected for failing to satisfy the stage 1 (completeness requirements) and stage 2 (mandatory requirements) evaluation. The high failure rate indicates that the completeness requirements and mandatory requirements were likely overly complex and lacked clarity for many proponents.

          Prior to the LRP I RFP contract award announcement, the initial expectation was that successful proponents would need a near perfect rated criteria score since full rated criteria points could reduce the bid price by 40%. The LRP I RFP results did not support the assumption that rated criteria points would be a requirement for successful proposals. For example, almost 40% of the successful projects did not need abutting landowner support in order to be awarded LRP I Contracts.

          The low end of wind generation bid price range aligns with recent competitive procurements held in other provinces.^[3] The large difference between the low bid price and high bid price for wind generation appears to indicate that other aspects, such as connection capability, were influential in determining successful proposals. The solar generation bid prices appeared to be highly competitive based on a smaller difference between the low bid price and high bid price. Hydroelectric generation bid prices can be ignored since LRP I was undersubscribed and therefore there was less incentive for proponents to price aggressively compared to wind generation and solar generation.

  One explanation for the large bid price difference of wind generation and the lower than expected success of proposals with rated criteria points for community engagement is difficulties with the connection assessment process in LRP I. The connection assessment process was the primary constraint for many proposed projects. Successful proposals were primarily located in the East and West of London areas (see chart above). Notably absent are any contract awards in the Northeast area, which received 20% of the proposed capacity. Many projects proposed in the Northeast area were located on crown lands and would be advantaged in securing community engagement rated criteria points compared to projects proposed in other areas (e.g., across southern Ontario). Further, it is not unreasonable to assume that land costs in the Northeast area are likely less expensive compared to land in the more populated areas across southern Ontario, suggesting potential for less expensive projects. It is therefore surprising that none of the over 700 MW of projects proposed in the Northeast area were awarded contracts. The absence of successful projects in the Northeast area in one of many examples of the lack of clarity or clear understanding of the technical issues that proponents had with the connection assessment process in the LRP I RFP.

          It is clear that the current connection assessment process represented the primary uncontrollable risk for proponents, which limited the ability to successfully participate. The results of the LRP I RFP supports the criticism that many proponents were not provided with adequate information from the IESO in order to assess the connection capability of their projects. Further, the connection assessment process did not provide proponents with an opportunity to assess and possibly assume the cost of transmission system upgrades that would allow their proposed project to connect.

Background of the LRP I connection assessment process

The origins of the LRP I connection assessment process, the Transmission Availability Test and Distribution Availability Test (TAT/DAT), are important in understanding the original intent of the testing procedure along with the TAT/DAT drawbacks. The Feed-in Tariff (FIT) Program and accompanying processes, such as the TAT/DAT, were developed with the expectation of thousands of applicant projects being submitted to the Ontario Power Authority (OPA)^[4] for evaluation and then being processed towards FIT Contract offers. Under the FIT Program, the assessment of a significantly large volume of applicant projects needed to be completed quickly and therefore it was originally envisioned that the TAT/DAT process may occur as often as every six months. Further, the FIT Program had established relatively low barriers of entry in order to incentivize maximum participation of applicant projects.

          The TAT/DAT process does not allocate connection capacity to projects that are approved and instead only indicates an expectation that connection capacity exists for these projects moving forward to complete Impact Assessments.^[5] The inability to allocate capacity means that although the TAT/DAT may reject or accept a project for connection capability it does not provide certainty for either the IESO or proponents in securing connection capability and being able to successfully develop the project.

The TAT/DAT process development was also completed at a time when the OPA and IESO were separate organizations that could not easily combine resources to perform connection assessments. The TAT/DAT process was therefore conceived based on the limited resources being available to perform detailed analysis. This limited the ability of the OPA at the time to perform assessments of alternative arrangements.

          In summary, there are significant flaws with the TAT/DAT process being utilized in a competitive procurement such as LRP I and LRP II compared to an open, low-barrier standard offer procurement such as the FIT Program. The LRP I received a finite number of proposed projects and LRP II will as well. The use of a connection capability test other than TAT/DAT is justified for a finite set of proposals, especially when considering the cost savings benefits to Ontario rate-payers of providing further optimization opportunities for proponents.

Recommended LRP II Connection Assessment Approach

Proponents developing renewable generation projects for participation in LRP II aim to optimize the size of their proposed projects by balancing three separate and interdependent attributes. The first of these attributes is the capability of the generation technology to utilize the available resource (e.g., wind speed) at the project site. The second is the availability of land on which to develop the project. The third is the ability of the grid to absorb energy from the newly developed generation. One of the primary benefits of competitive procurements is incentivizing participants to optimize their projects in order to be successful in the procurement process. Therefore, the cost of each of the above attributes must be optimized by proponents towards the most cost effective proposals. The IESO should continually strive to support proponents in minimizing risk of connection capability assessment within a competitive procurement for the long term benefit of rate payers.

          The connection assessment process in LRP II should include the following elements to address the shortfalls of the LRP I connection assessment process:

• The IESO should provide the ability for proponents to request and pay for a technical feasibility study based on the power system assumptions from the IESO for proposed projects and associated connection points;

• The feasibility study should identify an approximation of connection capability at the applicable connection points and a high-level estimate of the transmission system upgrades needed to allow proposed projects to connect (if required). The feasibility study should not be binding on the IESO but should provide important information regarding power system capabilities at proposed connection points;

• The IESO should consider allowing proponents to include minor transmission system upgrades to allow projects to connect to the power system. The cost of the transmission system upgrades would be borne by these proponents. The definition of ‘minor’ can be based on an estimated timeline for completion of these transmission system upgrades; and

• The IESO should consider various curtailment exposure (i.e., number of hours of curtailment before compensation is provided for within the LRP II Contract) for projects located in different transmission areas across Ontario. Different amounts of curtailment exposure would indicate the level of risk for curtailment within each transmission area and should be combined with certainty that the IESO will consider contracting a pre-determined transmission area capacity that are not fully constrained.

          During the LRP I RFP development, proponents requested changes and clarification to the connection assessment process. The IESO made some adjustments to the existing process but failed to make adequate changes. The IESO responded to proponents that resource constraints, timelines and uncertainty related to the newly formed merged entity limited its ability to address many issues. For LRP II, enough time has passed since the IESO and OPA merger that the new entity should be expected to demonstrate the benefits of the combined resources and expertise. Therefore, the IESO should be able to commit the resources need to assist proponents through a new connection assessment process in LRP II to ensure the most cost-effective proposals are submitted for the benefit of Ontario rate-payers.

          The proposed alternative connection assessment process does not intend to remove risk for proponents related to connection capability. Instead, the objective of the alternative connection process is to ensure proponents have a significantly better understanding of the power system capabilities to connect their proposed project and to provide some flexibility in project design through the funding of minor transmission system upgrades to allow more competitive projects to participate in LRP II.

          Travis Lusney, Senior Consultant, is an accomplished power system planner with deep experience in power system modelling and resource adequacy. Mr. Lusney has provided advice and analysis on project economics and system performance as it relates to future energy investments. Prior to joining Power Advisory, Mr. Lusney worked as a Transmission Planner at the Ontario Power Authority (OPA) where he was involved in developing regional integrated system plans with ten to twenty year planning horizons. In addition to regional planning, Mr. Lusney was involved in assessing bulk system requirements and planning appropriate measures to resolve short-term and long-term issues facing the Ontario power system. During his tenure as a Transmission Planner, Mr. Lusney was a lead for connection assessment development as part of the Feed-In Tariff program, reviewing both transmission and distribution impacts of new renewable connections. Power Advisory LLC is a leading North American management consulting firm that specializes in electricity sector matters and solutions.