By Leonard Kula, P.Eng., Vice President, Planning, Acquisition and Operations and Chief Operating Officer, IESO
Ontario’s electricity system is constantly in motion. It’s a complex system that reacts to the ever changing electricity needs of the province. As we prepare for a potential need for new electricity supply in the coming years, fundamental changes are underway that will see new resources acquired at the lowest cost to Ontario consumers.
A new, long-term forecast released by the IESO last fall showed that Ontario is emerging from a capacity surplus. A need for additional resources is appearing at a time when long-term contracts with generation facilities begin to expire, and nuclear units are refurbished and retired.
To prepare for this new future, fundamental changes to the electricity market are underway, through the Market Renewal Program, that will lead to more affordable outcomes for Ontario consumers. These changes will improve and strengthen the structure of the market, as seen through the high-level design documents released on a Single Schedule Market, a Day-Ahead Market and the Enhanced Real-Time Unit Commitment. This is the largest suite of reforms that has taken place since the turn of the century and will deliver approximately $3.4 billion in savings over a 10-year period.
Key to these changes is the evolution to more competitive means of securing Ontario`s capacity needs. We are currently engaging with stakeholders on the design of an incremental capacity auction (ICA) that is set to be introduced by 2023. While certain resources such as nuclear require longer-term commitments, other resources will compete in auctions, enhancing the system’s ability to adjust to changing supply and demand requirements as needed. It’s a new approach to how the system can meet the changing electricity needs of the province with more flexibility.
These auctions allow many different forms of electricity suppliers and other resources like demand response to compete, including imports from other jurisdictions. For the electricity providers, these auctions provide enduring and transparent mechanisms to compete to provide capacity in the future. For consumers, these auctions ensure that a reliable supply of electricity is secured at the lowest price over the longer term.
In the near term, our goal is to build on the features of the current Demand Response Auction by allowing more resource types, including generation resources, to compete. This will provide generators whose contracts have expired or are expiring over the next few years an opportunity to continue to participate in our electricity market and help meet emerging capacity needs.
This transition to a more competitive marketplace will culminate in the implementation of the Incremental Capacity Auction design that is currently being discussed with stakeholders. In March, the IESO will be releasing the high-level design document for the ICA. The IESO did extensive stakeholder engagement on various options to get to the high-level design that explains what the features of an ICA are and why they are needed. Some of the key elements include:
• The auction will seek to secure a uniform capacity product and not any other products or services needed by the electricity system. Put simply, capacity is a measure of a resource’s ability to either produce energy or reduce consumption.
• To foster fair and transparent competition, there will be a capacity qualification process that ensures each megawatt of capacity offered into the auction provides the same level of expected contribution towards meeting resource adequacy needs regardless of the resource type.
• Once a base auction occurs, an enduring forward period of approximately three and a half years begins. During this period, new resources will have to develop their projects and ensure they are ready to deliver on their obligations by their commitment period.
• Each auction will have a predetermined quantity of target capacity it is seeking to secure that reflects the total forecasted need during the commitment period, on top of the expected contributions of contracted and rate regulated resources.
• The auction will recognize the seasonal nature of Ontario’s demand profile and reflect the variation in some resources’ ability to support resource adequacy needs. The auction will commit resources in both a summer (May 1 to October 31) and a winter (November 1 to April 30) season, each of which will have a separate clearing price. Recognizing seasonality in this way will allow for the closest match between a committed resource’s capabilities and resource adequacy requirements throughout the year, while promoting competition between all resource types.
• Resources cleared through the auction will have certain performance obligations during the commitment period. These will include a requirement to offer/bid into the day-ahead and real-time energy markets during certain hours based on the resource’s real-time capability. These hours will be consistent with the amount of capacity the resource was qualified to offer.
Once the high-level design is released in March, stakeholders are encouraged to provide input as the IESO proceeds to finalize the design. Later this year the IESO will start work on the detailed design phase where stakeholders will continue to have the opportunity to have a seat at the table and give us feedback on how the high level design will be implemented.
The Market Renewal Program moves Ontario toward a more innovative and competitive market that meets the needs of tomorrow. Implementing new mechanisms like competitive electricity auctions ensure that the electricity system not only stays resilient and reliable, but that it becomes more competitive and affordable for the consumers of Ontario.