The IESO has announced that it will be taking steps designed to amend thousands of existing supply contracts in Ontario, to ensure they are consistent with the changes resulting from the Market Renewal process. The amendment process could be quite challenging not only because of the sheer number of contracts but because there are a number of different types of contract. For example, in many cases, under the terms of financing arrangements lenders who provided debt financing for projects must consent to any amendments to the provisions of the related power contracts. APPrO President Dave Butters says, “Those contracts support many billion dollars of financing from major banks and financial institutions and the certainty of the revenue flows under those contracts must be preserved.”
Generators have been clear about their interest in maintaining a close working relationship with the IESO to ensure that contracts can be amended in ways that support Market Renewal while mitigating potential harm to contract-holders. APPrO wrote to the IESO in December expressing its intention to work collaboratively and in good faith with the IESO throughout the MRP process to ensure that contract issues are addressed in an appropriate fashion and that market renewal can succeed.
The IESO anticipates two distinct components of the discussions. “Contract Implications General Discussions” are expected to start first and establish general principles. “Contract Amendments Specific Discussions” are expected to take place after the design is more evolved. The IESO says the second set of discussions “are meant to address specific contractual matters for individual contracts and groups of contracts similar in nature.” They will be conducted on a confidential basis.
A January 22 presentation by the IESO acknowledged that the MRP (Market Renewal Project) may have implications on a wide range of electricity supply contracts, including those procured through FIT, RES, LRP, and HCI contracting initiatives. It stressed that: “The MRP is focused on improving the efficiency of Ontario’s electricity markets, and is not targeting to extract value from contracts.” Dave Butters noted that while this is the IESO’s stated goal, it will be vital that there be a full two-way exchange of information during the discussion period. “We look to the IESO to provide generators with its studies as to the impact of changes resulting from MRP, both operational and financial, and to generators to provide information as to their assessments of the impacts, both operational and financial, from MRP. Such information exchange should occur throughout the design process for MR. The generators’ goal is to preserve the economics of the contracts in terms of revenue certainty and also to not be forced to spend non-recoverable costs in order to conform to the changes required by the MRP.”
An initial webinar on contract implications was held on October 31, 2017 and follow-up discussions are taking place with subsets of contract holders and their representatives. The IESO noted that as the market design progresses, it “will continuously work with our contract counterparties to understand contract implications, and eventually address the changes through contract amendments.”
In the near term the general discussions will be organized to take place in parallel with MRP design work. The IESO is mostly targeting to hold these discussions in smaller groups based on types of contracts. The focus during this stage will be on general contract implications, and the IESO says the discussions will be “Collaborative and general in nature ... [they will] address common aspects and not specific contract matters.” The structure is expected to be primarily “Open Forum” where “discussions are removed from any contract negotiations.” The process is designed to be “Transparent and not confidential,” with summaries of discussions “shared in a transparent manner with all stakeholders.”
APPrO recently convened a Working Group of its members to provide input to the IESO Market Renewal process specifically on contract implications. On the IESO side, the Contract Management group, which is entirely separate from the IESO team managing the Market Renewal process, will be responsible for working with contract holders to identify appropriate principles for groups of contracts and specific amendments for individual contracts. The IESO notes that this group will continue to participate in Market Renewal stakeholder engagements and will look after the following:
•Engage contract holders that are market participants in smaller groups based on specific types of contracts
•Monitor design progress to identify, track and analyze contract implications
•Work through specific implications with contract holders as detailed market design elements evolve.
The IESO notes that the Contract Amendments Specific Discussions will have to recognize significant differences between the contracts. It explains that, “Each type of contract (and in some circumstances each contract) can differ in many ways,” and that “Our experience has shown that applying identical amending language does not work for all contract counterparties.” Confidentiality provisions in contracts will have to be respected.
In terms of timelines, amending agreements will likely be developed in parallel with the MRP implementation phases, but may not be finalized until market changes take effect. General discussions have already begun. Contract-specific discussions are expected to get underway in April 2018, and the IESO plans to move to the contract amendment phase in April 2019, potentially completing the amendment process by October 2020. (See the proposed timeline chart from the IESO.)
Further information on the IESO discussions to date is available online by accessing the IESO’s January 22, 2018 presentation on non-emitting resources, and the recorded webinar and presentation from the October 31, 2017 IESO meeting on “Market Renewal Contracts” at ieso.ca > Sector Participants > Market Renewal > Additional Market Renewal Resources, or this location:
http://www.ieso.ca/en/sector-participants/market-renewal/additional-market-renewal-resources.
Contracted power suppliers who have not already joined the APPrO Contracts Working Group are invited to contact Dave Butters at APPrO.