Electricity Markets in Ontario – Report

An Examination of Mismatched Conditions and Options for Future Competitive Procurements

Electricity Markets in Ontario – An Examination

December 2020

Executive Summary
Ontario has been preparing long term procurement strategies to address the electricity capacity shortfall that will emerge over the next 5 to 10 years. Due to aging facilities and the expiration of contracted supply agreements, the province must renew or replace 50% of its existing capacity. This presents Ontario with an opportunity to review its: high-cost supply mix; approach to procuring new supply; and the social imperative for achieving a low-emission electricity system.

Ontario’s Independent Electricity System Operator (IESO) is responsible for planning and procuring electricity supply and is actively advancing new approaches to managing these obligations through its Market Renewal and Capacity Auction initiatives. These approaches prioritize greater deregulation and competitive markets as the drivers of change. The IESO forecasts that these approaches will result in the capacity shortfall being addressed by natural gas-fired generation procurements. The consequence of which will include increased emissions and unquantified cost implications in the future that may arise from the increasing demand for natural gas and the potential advent of carbon pricing in North America. Ontario must determine whether this market approach best meets the province’s needs.

This report examines two important considerations: the effectiveness of the IESO’s planned competitive market mechanisms for meeting Ontario’s electricity system needs; and better suited alternative procurement approaches. The four-part examination considers:

1. The theory and effectiveness of electricity markets for achieving efficiencies, managing and sharing risks, and accommodating other public policy objectives;
2. A historical look at how the electricity markets in Ontario have fared against these criteria;
3. The nature of demand that the electricity system in Ontario must supply and the characteristics of the foreseeable low emission options available to supply it; and,
4. Simulations of how market mechanisms would accommodate these low-emitting supply options.

The analysis shows that Ontario’s “lessons learned” are indicative of global electricity market challenges, especially with respect to reducing emissions. These lessons reflect the consequences of Ontario’s pursuit of electricity markets that are predicated on fossil-fuel dominated U.S. market models. Specifically, this study finds that:

1. Capacity and energy markets pioneered in the U.S. are unable to meet Ontario needs;
2. Ontario’s previous attempt at deregulated markets resulted in high costs and, eventual failure;
3. Electricity demand in Ontario occurs in three distinct forms, each requiring a separate procurement solution, which the planned capacity and energy markets cannot provide; and,
4. Procurements targeted at Ontario’s specific policy and energy system needs will yield better results.

In conclusion, this report recommends that Ontario adopt a targeted and competitive Request for Proposal (RFP) process to achieve the objectives of fostering competition, providing broader options that best meet Ontario’s needs, and avoiding long term commitments to high emission natural gas-fired generation.

This report was produced by Strapolec