It has been a busy and exciting year. While we will have our regular quarterly update in the new year, it is time for our 2022 Year in Review edition of the Shepherd Rubenstein Energy Regulatory Update. An opportunity to explore some of the most important themes and regulatory developments in the Ontario energy sector over the past year. Stick around at the end for some thoughts as we enter 2023.
1. Meeting the Forecast Capacity Shortfall
In December, the IESO released its 2022 Annual Planning Outlook (“APO”), which accurately notes that this is a “pivotal point for the electricity system”, in part because of the need for new supply to meet a forecast capacity shortfall. This supply gap was the focus of much of the energy regulatory policy changes and actions over the past year, and will be again in 2023.
The year began with work continuing on design of various IESO procurement initiatives to meet the capacity needs, as identified in the previous year’s 2021 APO. The Minister of Energy directed the IESO, among other things, to undertake a Mid-Term RFP, and design a Long-Term RFP for at least 1000 MW.
In April, the IESO released its 2022 Annual Acquisition Report (AAR). The AAR highlighted the
need for additional supply to meet capacity needs in 2025 and 2026. As a result, on the same day, the Minister of Energy wrote the IESO requesting that it initiate an engagement on potential design to acquire further capacity, and examine options for cost-effective additional CDM, and report back by mid-July.
During the year, the IESO concluded the Medium-Term RFP and offered new contracts for five-year commitments to 6 existing facilities. As well, procurement directives were issued for the IESO to enter into contracts for the Lennox GS, Oneida Energy Storage LP project, Chapleau GS, as well as for increased funding for conservation program expansion.
The biggest procurement that the IESO worked on this year is the Long-Term RFP (LT-RFP). Due to the upcoming capacity need, the IESO decided to undertake not just the first LT-RFP, but also a separate Expedited LT-RFP (E-LT1 RFP) with contracts to be awarded by May 1, 2023, and project in-service dates beginning in 2025. An RFQ Process for this procurement was held, and 55 entities qualified to participate in the RFP. The IESO also created a Same Technology Upgrade Solicitation, with submissions due before the end of the year.
In recognition of the on-going work the IESO was doing on the feasibility of a moratorium on the procurement of new natural gas-fired generation, in late August the Minister of Energy asked the IESO to provide recommendations on eligibility of new natural gas generation projects. In October, the IESO issued its Interim Resource Eligibility Report, recommending that the 4,000 MW of new capacity targeted in the up-coming procurements, be made up of up to 1,500 MW of new natural gas generation, which its analysis said is required, and up to 2,500 MW of storage and other non-emitting resources. On the same day, the Minister of Energy issued a directive authorizing the E-LT1 RFP and Same Technology Upgrades Solicitation with resource eligibility requirements in line with the IESO recommendations.
In late September, the Minister of Energy announced that Ontario Power Generation (OPG) will extend the operations of the Pickering Nuclear Generation Station from the end of 2025 to September 2026, subject to regulatory approvals. Additionally, the company will undertake a feasibility assessment of the full refurbishment of the Pickering “B” units.
Also in the fall, the Minister of Energy asked the IESO to report back by the end of the year on a proposal to re-contract small hydroelectric facilities (<10 MW) with a target launch date of the end of July 2023.
2. Energy Transition and Pathway to Net Zero
The question of the energy transition and finding a path to net zero infused almost every energy regulatory discussion and decision this past year.
The Government for Ontario announced the formation of an Electrification and Energy Transition Panel. The panel is tasked with advising government on opportunities for energy sector to help prepare the economy for electrification and the energy transition, and to strengthen the province’s long-term energy planning process. To support the panel, the Ministry of Energy has commissioned an independent Cost-Effective Energy Pathways Study.
As previously requested by the Minister of Energy, the IESO issued its Pathways to Decarbonization Report in mid-December. The Report concludes that a moratorium on new natural gas generation is feasible beginning in 2027. The Report also modelled a full decarbonized electricity system by 2050.
Over the past year, there have been countless reports released regarding the role of the electricity sector in reaching net-zero, including from the Canadian Climate Institute, Electrifying Canada, Electricity Canada and Canadian Gas Association, and the David Suzuki Foundation. The Toronto Atmospheric Fund (Power Advisory) and Enbridge Gas (Guidehouse) also released their own pathways to net zero studies.
To help support many businesses and other organizations own GHG reduction commitments, earlier in the year, the IESO was asked by the Minister of Energy to engage stakeholders and assess options for the design and introduction of a voluntary Clean Energy Credit market in Ontario. The Government also undertook its own separate consultation. In late fall, as part of Bill 36, the Government introduced, and later passed, various legislative amendments that establish a framework for the IESO to create a Clean Energy Credit Registry. The Minister of Energy has asked the IESO to undertake necessary activities to launch the registry as early as possible in 2023.
At the Federal level, the Government of Canada launched a consultation on a planned Clean Electricity Regulation (initially called the Clean Electricity Standard). In the summer, it provided more information through the release of its Frame Document. A draft regulation is expected to be published in the new year.
The Government of Canada also provided details in its Fall Economic Statement of its planned Investment Tax Credit for Clean Technologies that will provide a refundable tax credit equal to 30% of the capital costs of zero-carbon electricity generation systems (e.g. solar, SMRs, wind, hydroelectric), stationary electricity storage systems that do not use fossil fuels in their operations (e.g. batteries, flywheels, compressed air storage, pumped hydro), low-carbon heat equipment, and industrial zero emission vehicle and related charging equipment. The Federal Government also announced a Tax Credit for Clean Hydrogen.
3. Distributed Energy Resources, Non-Wires and Non-Pipe Alternatives
There was a continued focus this year on the use and integration of Distributed Energy Resources (DERs), and the use of Non-Wires and Non-Pipe Alternatives (NWAs and NPAs).
As part of its DER Market Vision Project, the IESO developed recommendations and received feedback on foundational models of DER participation in the wholesale market. The IESO also released the results of its DER Potential Study which identified achievable DER potential sufficient to satisfy 1.3 to 3.4 GW of peak summer demand by 2032.
The OEB made a number of amendments to its Distribution System Code (DSC) to facilitate connection of DERs. The amendments included the establishment of new standardized DER Connection Procedures for connection of DERs to the distribution system. The Framework for Energy Innovation (FEI) Working Group, whose priority workstreams were DER usage and integration, issued its report. The FEI Working Group Report included three subgroup reports, on Benefit Cost Analysis, Utility Incentives, and DER Integration. The OEB also approved the Settlement Proposal in Hydro One’s 2023-2027 Joint Rate Application, which included a number of specific DER reporting requirements, and conditions regarding the company’s plans for battery storage investments for reliability purposes.
The Government of Ontario amended regulations to clarify and allow third-party ownership and operation of net-metered renewable energy generation, and to provide consumer protection requirements related to those agreements. The OEB made consequential amendments to a number of its codes and issued consumer-facing materials.
The IESO has been working on implementing process improvements for the consideration of NWAs in the regional planning process, and seeking feedback on proposed methodologies to do so. The OEB issued its response to the report from its Regional Planning Process Advisory Group, and agreed to move forward implementing those that require it to action. A number of those recommendations relate to improving the regional planning processes consideration of NWAs.
As it relates to NPAs, the OEB’s Integrated Resource Planning (IRP) Technical Working Group issued its first annual report (for the 2021 year) in May, and has subsequently ramped up its work. It is considering Enbridge’s proposals for pilot projects, which will be delayed beyond the OEB-imposed end of 2022 deadline. The OEB also denied Enbridge’s application for leave to construct a replacement of its St. Laurent Ottawa North Pipeline in the face of evidence that major customers are actively planning to reduce their GHG emissions. The OEB concluded that the need for the project and the alternatives had not been appropriately assessed, and it strongly urged the company to pursue IRP alternatives going forward.
Maybe this was really the year of transmission.
The Government of Ontario issued an Order-in-Council declaring three electricity transmission projects in Southwest Ontario (a new 230kv line between Lambton TS and Chatham SS, a new 500kv line between the Longwood TS and Lakeshore TS, and a new 230kv line between the existing Chatham SS to the new Lakeshore TS) as priority projects under section 96.1 of the Ontario Energy Board Act. The latter project, the OEB granted Hydro One leave to construct. The Minister of Energy issued a directive to the OEB requiring it to amend Hydro One’s transmission license to require the company to develop and seek all necessary approvals to construct the two other priority projects in the Order-in-Council, as well as a second new 500kv line between the Longwood TS and Lakeshore TS, and a new 230kv line to connect the Windsor area to the Lakeshore TS.
Hydro One announced that that on all new transmission lines projects that cost over $100M, it will offer First Nations communities a 50 per cent equity stake in the project.
As part of its bulk system planning, the IESO issued a report identifying needs in the northeast and eastern Ontario. The Need for Northeast Bulk System Reinforcement report identified 3 new transmission lines and other work that will need to be in-service in 2029 and 2030. The Gatineau End-of-Life Study identified the need for a new double circuit 230kV line, to be in-service in 2029, as well other work that will need to be undertaken over the long-term. The IESO also updated its needs assessment for the proposed Waasigan Transmission Line.
With all this need for new transmission lines, surprisingly, it was revealed that the IESO has recommended to the Ministry of Energy not to proceed with plans for competitive transmission procurement.
On the rate regulation front, the OEB approved a settlement of Hydro One’s Joint Rate Application for 2023-2027, which includes its transmission business. As part of its generic proceeding reviewing various aspects of Uniformed Transmission Rates, the OEB issued a decision setting the Export Transmission Service (ETS) rate.
While there may be differing views on what exactly is considered innovation, it cannot be denied that 2022 saw a number of regulatory and policy initiatives under way to promote innovation within the energy sector.
The OEB launched its Innovation Sandbox 2.0 and announced, jointly with the IESO, funding of 4 projects through the IESO’s Grid Innovation Fund. The OEB’s Innovation Task Force (a committee of its Board of Directors) released a report that it commissioned entitled Innovation Challenges and Opportunities in Ontario (and whose recommendations it adopted). As discussed above, the OEB’s Framework for Energy Innovation Working Group issued its report.
A number of proposals regarding new rate structure changes were also proposed during the year. In addition to the new ultra-low overnight price plan (see below), the OEB has been working on development of a non-RPP class B pricing pilot program, responding to a Minister of Energy directive to the IESO providing the funding.
At the request of the Minister of Energy, the IESO also consulted and prepared a proposal on an interruptible rate pilot program for large customers.
6. Conservation (CDM and DSM)
There were significant regulatory developments for both electricity and natural gas conservation this year.
On the natural gas front, the OEB issued its decision on Enbridge’s 2023-2027 demand-side management (DSM) plan. Among various changes to the proposed plan, the OEB approved only a three-year term (2023-2025) to allow greater flexibility to respond to the changing energy landscape, removed conditions prohibiting customers from switching from natural gas if they want to participate in DSM programs, and eliminated customer incentives for new gas-fired equipment. The decision also introduced a new incentive component, which for the first time incents a reduction in absolute total natural gas volume sales.
On the electricity front, in April, as a result of the capacity needs addressed in the AAR, the Minister of Energy wrote the IESO and asked it to report back with options and analysis on cost-effective additional or expanded conservation and demand management (CDM) programs. Based on that report, in late September the Minister issued a directive increasing the existing 2021-2024 CDM Framework budget by $342M for new or enhanced conservation programs that seek to deliver an additional 285 MW and 1.1 TWh of savings by 2025.
In mid-December, the IESO issued its 2021-2024 CDM Framework Mid-Term Review, which concludes that the framework is on track to achieve its original energy and demand savings targets. The Mid-Term Review included a number of recommendations for the remainder of the current framework, including new programs and enhancements to existing ones, as well as continued engagement with LDCs regarding leveraging the OEB’s CDM Guidelines to build on IESO programs that provide local system benefits. The Mid-Term Review also provided a number of new recommendations for a post-2024 framework.
7. Electric Vehicles
A number of new initiatives were undertaken this year related to increased adoption of electric vehicle (EVs).
At the end of March, the OEB delivered its section 35 report to the Minister of Energy on the design of an optional enhanced time-of-use price, which recommended a new ultra-low overnight price plan. The Government of Ontario endorsed the design and amended the necessary regulations to implement it, with a start date of no later than November, 2023.
The OEB launched its Electric Vehicle Integration (EVI) initiative, which outlined plans to consider various issues related to the efficient integration of electric vehicles (EVs) within the transmission and distribution systems. In his latest Letter of Direction to the OEB, the Minister of Energy endorsed those plans. The OEB also updated the filing requirements for electricity distributor rate applications, which now require a distributor’s planning process for future capacity needs to include consideration of increased EV adoption.
The Government of Ontario also sought feedback on building new public electric vehicle charging infrastructure.
In April, the Government of Ontario released its long awaited Hydrogen Strategy. On the same day, the Minister of Energy wrote the IESO to ask it to investigate and propose program options to integrate low-carbon hydrogen technologies by the end of October. In response, the IESO carried out a consultation, although little has been made public about what input it received and what was reported back to the Minister.
The Ministry of Energy also sought comment on three proposed options to promote the use of hydrogen, including i) allowing certain hydrogen producers to be eligible to qualify for the Industrial Conservation Initiative (ICI), ii) co-locating hydrogen electrolysis at electricity generation facilities, and iii) creating a dedicated stream for hydrogen producers as part of its interruptible rate pilot currently under development.
The Government also made regulatory amendments to exempt OPG from paying the Gross Revenue Charge for its Sir Adam Beck 2 Generation Station between 2024 and 2031 when it is producing electricity for the purpose of hydrogen production, although only when it is providing regulation services.
9. Market Renewal Program Delayed to 2025
The IESO announced that its signature Market Renewal Project (MRP), aimed at modernizing the Ontario electricity energy market with the introduction of a single schedule and day-ahead market, would be delayed from November, 2023 to May, 2025, at a revised budget of $233 million ($55 million higher than the previously approved budget). The IESO still expects the project to deliver significant net financial benefits to consumers.
In light of the emerging delays with the MRP project, as part of the OEB approved Settlement Proposal in its 2022 Fees application, the IESO agreed to enhanced public quarterly reporting on project status.
Even though the completion of MRP will be delayed, the IESO continued the regulatory and market implementation work on the project. This includes working on changes to the Market Rules and Market Manuals. In March, a majority of the Technical Panel voted to recommend a number of provisional market rule amendments related to the market power mitigation framework, which were subsequently provisionally adopted by the IESO Board of Directors.
10. LDC Billing Errors
In what may have been the least talked about story of the year, the OEB compliance department was busy entering into Assurances of Voluntary Compliance (“AVC”) with 9 electricity local distribution companies (“LDCs”) (as of time of writing), regarding billing errors which generated significant overcollection from customers.
This story started in March, when the OEB accepted a AVC filed by Greater Sudbury Hydro after the company self-reported a billing error. That error resulted in the LDC overcharging its customers on its fixed monthly service charge. The company’s billing system translated the monthly charge into a daily rate, but in making the calculation, it did so on the basis that there were 30 days in every month of the year (360 days a year). Since customers where actually charged based on the actual days in the month (365 days in a year), they were overcharged. While the error was believed to have occurred since at least 2005, the AVC only required Greater Sudbury Hydro to refund to customers 4 years of over-billing ($919,000), while paying a small penalty ($5,000).
At the same time as the Greater Hydro Sudbury AVC was made public, the OEB sent a letter to all LDCs alerting them of the issue. So far 8 other LDCs (Halton Hills Hydro, Chapleau PUC, ERTH Power, Oshawa PUC, Orangeville Hydro, Elexicon, Oakville Hydro, Tillsonburgh Hydro, Wasaga Distribution) have self-reported and entered into AVCs with the OEB. In total, these 9 LDCs have agreed to repay a total of $5.4 million back to customers, and a penalty of $45,000.
All of this was in addition to AVCs filed by LDCs regarding disconnection practices, and lack of maintenance records, as well as an AVC from Enbridge Gas with respect to non-compliance with customer service quality requirements under the Gas Distribution Access Rule.
Thoughts For 2023
We may look back on 2023 as the pivotal year in mapping the next 20 years of energy regulation and policy in Ontario.
The Electrification and Energy Transition Panel will kick into high gear, providing advice to the government on developing a pathway to improved energy planning in a world of increasing electrification. The OEB has been asked to contribute its advice to that panel, including potential changes to its mandate and any necessary legislative amendments. The OEB has also been told by the Minister of Energy to undertake workshops that explore how to enable electrification related investments, while protecting customers interests. In parallel, the IESO will undertake its E-LT1 RFP, which will be the largest single procurement of new electricity resources in Ontario history.
This is all in addition to the continued work and policy that comes out of the OEB’s FEI consultation, IESO’s DER Roadmap, and other procurement and policy processes that are being undertaken across the sector. As well, in 2023 the OEB will consider the application filed by Enbridge Gas for approval of a 5-year rate framework beginning in 2024, where front and centre will be the issue of the future role of natural gas in the energy transition.
Those in decision-making roles will be forced to ensure that the energy transition moves forward at an accelerated pace, but in a way that does not lead to a backlash. The IESO’s Pathways to Decarbonization Report moratorium scenario forecasts the need for additional $26 billion (in 2022 dollars) of new electricity infrastructure by 2035, and this does not include what are almost certainly going to be significant upgrades to distribution systems. The costs associated with reaching a path to net zero in 2050 will be even more staggering. As the Report recognizes, increasing energy costs may be a significant risk and “[r]apidly rising electricity costs could discourage electrification, stifle economic growth or hurt consumers with low incomes.”
The task of the Electrification and Energy Transition Panel, and many of the initiatives that are being undertaken by the OEB and the IESO, do not lend themselves to easy answers. They are complex and involve hard trade-offs. Those making recommendations and decisions will need to consult widely and in a comprehensive fashion. To meet our net zero commitments, public and customer acceptance will be critical, but also difficult to achieve. Great care will need to be taken to ensure that any short or medium-term successes do not lead to long-term failures because of the harm that may be caused to the very people the energy sector is here to serve. To avoid this, policy makers must ensure there is broad oversight, transparent decision-making, and meaningful input from all of those affected by the decisions which will define the future of energy policy in Ontario. –MR
As always, if you have any questions, or think we can be of assistance to you or your organization, please do not hesitate to reach out to Mark Rubenstein at email@example.com.
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