APPrO suggests improvements for Market Renewal Business Case
As part of a formal consultation process during May 2019, the IESO invited stakeholder comment on its recently refreshed business case for the Market Renewal Program. On behalf of Ontario power producers, APPrO responded with a number of suggestions that were based on extensive consultations with its members and people active in the Ontario power industry. APPrO noted that it was “encouraged by the IESO’s recognition that a new business case is needed and is a pre-requisite for further work investment in MRP as a whole. Stakeholder input into the process is integral to the success of the overall initiative.” Significantly, APPrO noted that “Absent a compelling business case based on a properly undertaken cost-benefit analysis (CBA), APPrO concludes the ICA may not be the most economically efficient means to procure capacity – especially for new investment.”
Summarizing key advice collected from market participants and experts in the field, the APPrO submission provided the following recommendations:
• Clearly describe the status quo
• Don’t assume the procurement status quo will remain static prospectively
• Use market-specific (i.e., Ontario) data for modeling
• Provide calculation transparency, replicable by stakeholders
• Include applicable transitional costs for all participants
• Distinguish between scenarios and sensitivities
• Stress test the various scenarios
• Be clear on the limitations of the analysis
• Avoid skewing Requests for Proposal (“RFP”) assumptions
• Do not assume energy reforms and capacity are integrated in all scenarios
• Don’t overshoot reserve margins
• Acknowledge that policy drives market design
• A rigorous evaluation is merited
• Recognize ICA may not deliver the same asset at a lower cost
• Be realistic on cost of capital.
The APPrO commentary recommended devoting attention to alternative procurement options. “Although an ICA is one potential mechanism for procuring capacity, there are other options that have yet to be considered and evaluated by the IESO.” APPrO recommended that the CBA compare the following scenarios:
1) Baseline or “Status Quo” scenario
a) Energy stream reforms are not implemented.
b) Centralized procurement continues for new assets and existing assets but recognizes economically useful life/depreciated value of assets at end of contracts.
i) Recontracting of existing assets through bilateral negotiation. Terms should be shorter than original term (i.e., 5-10 years; based on updated planning needs).
ii) New build contracts supported by long term tenor of minimum 20 years or longer based on asset class.
2) Status Quo “Plus”
a) As above but with energy stream reforms and the proposed Transitional Capacity Auction (TCA) for DR, imports, uncontracted generation.
3) IESO’s current proposed ICA as per the HLD, with proposed energy workstream reforms, and,
4) Hybrid portfolio alternative
a) Common in most jurisdictions and will necessarily be the case in Ontario since the majority of Ontario capacity will remain rate regulated or under long term contracts for some time.
b) Longer Term
i) Competitive procurement through RFP
ii) Term 20 to 40 years
iii) Bilateral negotiation or rate regulated for Hydro and Nuclear
iv) Target capacity is a function of long term gaps less reasonable reliance on short term markets for supply
c) Medium Term
i) RFP process for existing assets that are eligible for this category
ii) 5-10 years
iii) Potentially options to extend, and off-ramps to meet planning needs
iv) Option for supplier to participate in RFP process or the TCA / ICA
v) Target capacity for this group is the same as “Existing contracts” coming off of contract
d) Shorter Term
i) Year by year
ii) TCA/ICA for shorter term needs, rebalancing:
• Uncontracted capacity (assets between contracts and competitive procurement)
iii) Target capacity is incremental to secure reliable supply based on best estimate of real time needs.
Finally, APPrO identified a set of assumptions that will need to be verified to ensure uniformity across all scenarios compared, and suggested that some additional time be added to the timeline to allow for more complete consideration.
For further information, readers may download the complete APPrO submission from the IESO website or the APPrO website.