Although initiatives to improve and renew the Ontario electricity market generally spark a good deal of interest amongst existing generators, it appears that there are significant concerns about how the upcoming market renewal process will be approached in Ontario. Generators collaborating under the APPrO banner have highlighted issues with some of the initial parameters being used by the IESO in its Market Renewal Process. In a letter to the IESO on March 31, APPrO President Dave Butters cautioned that there are significant unknowns and great care must be taken to avoid undue damage to the market or to individual participants. Responding to an analysis of potential benefits by the Brattle Group, APPrO warned that “there may likely be other impacts that are not necessarily fully understood or examined within this report.”
A major initiative to update and improve Ontario’s electricity market, the IESO’s Market Renewal process aims to design new scheduling, dispatch and procurement processes. It will take several years to be fully developed and the resulting changes could entail major impacts for large numbers of electricity market participants.
Although the goals of the market renewal process may be widely shared, there is much less concurrence on the proposed approaches for meeting the goals. The IESO has identified the following high level priorities:
• Amend the Market Rules to more efficiently schedule and dispatch energy
• Increase competition and reduce barriers to entry in the IESO administered markets
• Provide improved market incentives to make better use of existing assets
Work projects anticipated by the IESO include development of a single schedule system, a day ahead market, an incremental capacity auction, and more frequent intertie scheduling. (See chart.) APPrO’s letter highlighted potential impacts on “the economics and investments made by incumbent contracted suppliers.” It is generally acknowledged that market renewal should be designed to avoid any significant adverse impacts on existing market participants. However APPrO seeks to firm up these assurances so that the market renewal process will be more widely supportable.
A key concern for the IESO in the Market Renewal process is identifying ways to “unlock value from existing contracts.” This could mean developing opportunities to increase flexibility and secure incremental capacity from existing generation. At the same time the IESO has clearly acknowledged that the Market Renewal process is not designed to simply extract value from existing generation contracts. They emphasize that new arrangements are possible with generators that will enhance the value of the existing contracts while benefitting other players on the system. An IESO representative explained that, “If we can squeeze out more capacity from existing generators at lower cost than new capacity, then generators, ratepayers and everyone wins.” As part of the same discussion, IESO staff advised APPrO members to bear in mind that in all likelihood, “flexibility is going to be more valuable in the future.”
A good deal of concern about market renewal has arisen from experience with similar initiatives in other jurisdictions. Results have been mixed in the US for example. APPrO members have asked that the IESO analyze a range of initiatives and outcomes, with a view to extracting lessons for Ontario. The IESO could usefully “highlight some of the problems seen in US markets and how we can avoid them,” one APPrO member observed. In the process of designing mechanisms for market renewal in Ontario, it will be important to recognize Ontario’s uniqueness. The province has a relatively diverse supply mix, substantial baseload supply, a significant amount of renewables, and a very wide service area. The methods chosen for recognizing these characteristics could have a significant impact on the approach to market renewal.
Reviewing the history of market improvement initiatives has not been highly reassuring. APPrO and others have noted that in recent years, market-based initiatives from the industry have often been overshadowed by public policy initiatives that have much greater impact on the market, often outweighing the market improvements. With this in mind, many have noted that in order for market renewal to be successful, it will be important that governance principles be firmly established, or market improvements may be sidelined or undercut. APPrO noted that “market renewal will require important improvements in sector and IESO governance. …IESO’s market rule amendment process has relatively weaker governance compared to the oversight of the US Federal Energy Regulatory Commission (FERC) over ISO wholesale markets (except ERCOT), along with more robust stakeholder participation regarding ISO market design and rule changes.”
Commenting on the specifics of the Brattle analysis, APPrO said it believed that, “benefits calculated by Brattle may be significantly overstated, partially because of the approach and methodology used to calculate benefits, and partly because the unique characteristics of the Ontario supply situation.” Noting that Ontario’s system is significantly different from the theoretical standard, APPrO expressed concern that attempts to institute economic efficiencies may not produce the desired results: “[B]ecause of the strong interrelationship between market energy prices and the Global Adjustment, there is a strong potential to mute the forecasted efficiency benefits from energy market reform in the near to medium term until the terms of contracted assets have fully expired beyond what has been forecasted.”
APPrO’s most direct comments apply to the risk that changes may have adverse impacts on the existing market and business plans. “Potential changes to implement LMP, DAM, Capacity Market, etc., all have far reaching impacts to future wholesale market operations and revenues, along with triggering contract amendments that could adversely affect supplier economics if not fairly treated. Without a clear understanding of what these are, their timing, and a commitment to impact mitigation and a strategy from the IESO to keep suppliers economics whole in any transition, it may be challenging for all suppliers to support such a broad market renewal effort.”
The structure of the market renewal development and stakeholdering processes will be critical to the success of the initiative. APPrO said “[T]he Market Renewal Benefits Case should be both carefully reviewed and if it is to move forward to the design stage, it be carefully managed through a well-developed and robust project management process in order to achieve measurable goals within a carefully considered timeline and project management cost envelope, and to minimize contracted supplier impacts. Off-ramps and options must form part of this project management approach. From APPrO’s perspective this will, together with a reasonable and balanced approach to contract amendments, be an essential condition for success in the initiative.”
APPrO noted that it supports exploring the implementation of new flexible products and the expansion of the ancillary market. It also stressed that “these products need to be procured competitively.”
With respect to the introduction of an incremental capacity auction for maintaining resource adequacy, APPrO said the case “is less clear and the benefits case for it should be the focus of more investigation.”
In a key statement, APPrO observed that, “If it is to be sustainable over the long term, and deliver the results anticipated, a renewed market must be able – and importantly, left able – to operate to deliver the most efficient outcomes within a clearly defined policy framework. A more effective governance framework than currently exists must therefore be adopted to better ensure the accountability, transparency, and workability of the IESO-administered wholesale electricity market going forward. The framework must include consideration of how rules should be made. It is instructive to note that the subject of governance was an entire chapter (Chapter 5) in the final report of the original Market Design Committee in 1999, so a refresh of IESO rule-making processes and consideration of best practices after almost 20 years ought to be undertaken for the same reasons as a market design renewal.”
As an organization, APPrO is active in the Market Renewal process, collecting input from its members and the broader power industry, assessing options and providing input to the IESO. It expects to gear up for more intensive engagement in the months ahead. APPrO President Dave Butters sits on the IESO Market Renewal Working Group and has invited members to share their views and develop input on all aspects of the IESO’s proposals. “We encourage members to bring forward any specific concerns they may have with the market renewal endeavor,” Mr. Butters said.
For more information on the Market Renewal process, readers may visit the IESO website www.ieso.ca (see “Sector participants” and “active engagements” and select one or more options under “market renewal.”)
For the Brattle benefits paper, see “The Future of Ontario’s Electricity Market A Benefits Case Assessment of the Market Renewal Project” here.