Minister’s Directive

To: The Independent Electricity System Operator

I, Todd Smith, Minister of Energy ("Minister"), hereby direct the Independent Electricity System Operator ("IESO") pursuant to section 25.32 of the Electricity Act, 1998 (the "Act") in regards to procurement of electricity resources to ensure the reliable operation of Ontario’s electricity system in response to ongoing and growing electricity needs expected in the future and require IESO to report back on certain questions respecting electricity as set out in this Directive pursuant to section 25.4 of the Act, as follows:

Background

After more than a decade of stable electricity supply, and at times, a surplus, IESO has forecasted an emerging supply need that grows through the latter part of the decade. This is a result of the upcoming closure of the Pickering Nuclear Generating Station, refurbishment schedules of other nuclear facilities, expanding electrification and increasing business investment in the province. Fulfilling this forecasted supply need will require IESO to procure electricity products and services from both existing and new resources.

The government is committed to a procurement framework that ensures Ontario has an affordable, reliable and clean electricity system. This is achieved when resources are procured largely through competitive processes and in a transparent and cost-effective manner.

IESO’s Resource Adequacy Framework proposes a multi-pronged approach to acquire products and services from electricity resources to meet reliability needs. This approach includes complementary competitive procurement mechanisms, including the Capacity Auction, the Medium-Term Request for Proposals (MT RFP), and the Long-Term Request for Proposals (LT RFP). The framework also recognizes the role of policy and programs to meet Ontario’s system needs and broader government objectives.

The government recognizes IESO ran its second annual Capacity Auction in December 2021 and is proposing enhancements that would enable an increasing mix of resources to participate. With a predictable, fixed schedule and a short forward period, the Capacity Auction offers flexibility to adapt to changing system needs and mitigate uncertainty associated with over- or under-supply.

The first MT RFP is designed to competitively acquire capacity from existing electricity generators and storage facilities. Following the release of the first MT RFP, future MT RFPs will be scheduled and undertaken by IESO to acquire the electricity products and services that IESO forecasts to be required in order to meet Ontario’s electricity needs and balance risk appropriately between ratepayers and suppliers.

In moving to a new procurement framework, the government recognizes that providing a degree of flexibility will assist in managing the transition to regular competitive procurements. As such, IESO has designed the first MT RFP to allow for flexible start dates. Moreover, the government is supportive of an approach where successful proponents in the MT RFPs are offered contract extensions as a transitional measure, up to the earlier of the start of the next Capacity Auction Obligation Period or the next MT RFP commitment period.

The LT RFP is designed to competitively procure new capacity by providing longer-term certainty to incent capital investment into building new resources, or major uprates, upgrades or expansions for existing resources while continuing to balance risk between ratepayers and electricity suppliers. The government understands that the length of contracts and the amount of capacity, electricity products and services procured will be key factors in ensuring long-term procurements attract private sector investment in a way that benefits ratepayers.

The government recognizes that community support is vital to new-build energy projects and therefore expects IESO to engage local communities as part of the design of the LT RFP. Moreover, the government believes that fully enabling resources like energy storage for the LT RFP will expand competition and therefore is vital to ensuring affordability for ratepayers. A focus on affordability also means IESO should consider the current trajectory of significant increases to the federal carbon tax over the LT RFP commitment period, which will impact the long-term cost of procuring carbon-emitting resources.

The government also recognizes the importance of the forestry sector in northern Ontario and supports a longer-term transition plan to find alternative uses for waste biomass, however, this transition plan will take time to implement. Ontario’s draft Forest Biomass Action Plan commits to ensuring that existing facilities that consume biomass for electricity generation and are approaching the end of their contract are provided with the opportunity to negotiate a new contract for a 5-year term with IESO, balancing the benefits to the forestry sector with the value for the ratepayer and taxpayer.

The Calstock Generating Station (GS) is a biomass-based electricity generation facility whose biomass fuel primarily comes from local lumber mills. Calstock GS’ current PPA is set to expire on March 31, 2022. In the absence of this facility, there would be a substantial economic impact on the local community and mills that supply the facility and wood waste may be diverted to landfills that are near their capacity.

The Ministry of Energy (energy) and IESO have also received several unsolicited energy project proposals from proponents prior to the development of IESO’s Resource Adequacy Framework. In response, energy and IESO have developed a project assessment framework to determine if the unsolicited proposals could provide ratepayer and system benefits that are unique or innovative and which did not at the time have a clear pathway to be acquired through a competitive process.

The Oneida Energy Storage Project is a proposed 250 megawatt (MW), 1,000 megawatt-hour (MWh) Lithium-Ion based energy storage project that aims to provide capacity, frequency regulation, energy and operating reserve services to Ontario’s power grid.

Based on the potential system benefits, as well as recognizing the potential to enhance the integration of storage technologies into Ontario’s electricity market, I had requested IESO to prepare a draft contract for the Oneida Energy Storage Project that would ensure with a reasonable degree of certainty that the Project would bring a net benefit to electricity consumers.

IESO’s Resource Adequacy Framework also contemplates the development of programs as a mechanism to sustain investments in assets, resources and businesses that can help meet electricity and non-electricity objectives.

Hydroelectric facilities of all sizes play an important role in meeting Ontario’s electricity needs, as well as providing benefits such as recreational opportunities, flood control, irrigation, tourism and facilitating local employment and economic development. The government recognizes that some small hydroelectric facilities are municipally owned and, given investment horizons and asset lifespans, may require a customized program for these existing facilities.

While IESO takes the next steps in designing a small hydroelectric program for facilities with a capacity under 10 MW, the government expects that this program will be designed in a way that provides value for ratepayers while sustaining these important assets.

Moreover, the government recognizes that larger hydroelectric facilities (i.e., greater than 10 MW) require more consideration to find the role that they may play in future competitive procurements. In evaluating this question, the government expects IESO to engage with hydroelectric facility owners and other interested stakeholders.

The government also recognizes that further actions may be required beyond those outlined in this Directive including future MT and LT RFPs. IESO and energy will continue to work together to ensure Ontario’s electricity system continues to be ready to meet the needs of Ontario’s residents and businesses.

Directive

Therefore, in accordance with the authority under sections 25.32 and 25.4 of the Act, IESO is hereby directed as follows:

  1. Medium-Term Request for Proposals
    1. IESO shall undertake a procurement initiative, known as the first Medium-Term Request for Proposals (MT RFP I), to procure capacity from electricity generation or storage facilities that are existing as of the date of their MT RFP proposal submission. MT RFP I should be launched upon receipt of this Directive and conclude in 2022 and capacity procured in MT RFP I shall be determined on an Unforced Capacity (UCAP) basis, calculated in accordance with IESO’s published methodology for calculating such value for different electricity resources.
    2. Following the release of MT RFP I, IESO shall continue to update its schedule for, and undertake, such future MT RFPs as are necessary to acquire the electricity products and services that IESO forecasts to be needed in order to meet Ontario’s future electricity needs.
    3. MT RFP I and future MT RFPs shall comply with the following principles:
      1. IESO shall procure electricity products and services only when such products or services are deemed to be required for ensuring the reliability of Ontario’s electricity system, and have accordingly been identified in IESO’s publicly available electricity system planning documents.
      2. IESO shall procure electricity products and services at a price that minimizes the impact on ratepayers’ electricity bills and balances risk appropriately between ratepayers and electricity resource suppliers. Furthermore, IESO shall set a maximum price at which IESO procures products and services through the MT RFP, with a maximum capacity price which shall be less than the net cost of new entry for a new-build electricity resource.
      3. IESO shall determine eligibility criteria of MT RFPs after taking into account environmental policy objectives and initiatives of the government.
      4. IESO shall continue to refine the design of future MT RFPs by incorporating lessons learned from previous MT RFPs.
      5. IESO shall offer contract extensions to contract counterparties whose facilities are successful in the MT RFPs, and whose existing contracts with IESO have expiry dates that occur before the start date of the respective facility’s MT RFP Commitment Period.
      6. For the purposes of paragraph 3(e), the contract extensions shall only be for the period of time that is after the expiry date of the contract counterparty’s existing contract and before the earlier of (i) the start date of the MT RFP Commitment Period; and (ii) the start date of the next Capacity Auction Obligation Period, provided that no such extensions shall exceed a period of six months. All other terms in the contract counterparties’ existing contract shall remain substantively the same.
  1. Long-Term Request for Proposals
    1. IESO shall design a procurement initiative, known as the Long-Term Request for Proposals (LT RFP), to procure at least 1,000 MW of capacity, determined primarily on a UCAP basis.
    2. In advance of the LT RFP, IESO shall initiate a Request for Qualifications (RFQ) on or before June 30, 2022 (i.e., end of Q2 2022) including the stakeholdering of a draft RFQ on or before March 31, 2022 (i.e., end of Q1 2022) to ensure that potential LT RFP participants have sufficient financial capacity and experience to participate in the LT RFP.
    3. IESO shall provide a report containing the draft LT RFP, a summary of feedback received from stakeholders during consultation, IESO’s plans to address the feedback received, and the results of the RFQ, if concluded, to energy by November 30, 2022.
  1. Calstock Generating Station (GS)
    1. I hereby direct IESO to enter into a procurement contract with Atlantic Power Corporation for Calstock GS, on terms that are consistent with the following:
      1. A contract term that begins on April 1, 2022 and ends on March 31, 2027;
      2. A requirement that the annual electricity output of the facility covered under the contract would not exceed a level that would require the consumption of more than 158,000 Green Metric Tonnes (GMTs) of biomass waste;
      3. A contract price that would be payable for electricity injected into the grid only during specific time periods set out under the contract. The contract price shall be determined using a methodology that is consistent with the pricing methodology used by IESO in preparing the draft term sheet submitted to me on December 17, 2021 and the methodology adopted in IESO’s report back entitled “Assessment of Potential Options for Continued Operation” dated June 24, 2021. Furthermore, the specific time periods to be included under the contract shall be designed to provide the greatest benefit to the electricity system, while accounting for facility requirements and the annual volume of biomass waste consumption at the facility; and
      4. All other business terms consistent with the draft term sheet submitted to me on December 17, 2021.
  1. Oneida Energy Storage Project
    1. I hereby direct IESO to enter into a procurement contract with Oneida Energy Storage LP for the Oneida Energy Storage Project, substantially in the form of the draft contract submitted by IESO to me on November 30, 2021, that includes the following:
      1. A term of no more than ten years.
      2. Provision of contracted capacity and regulation services to the grid through the Project.
      3. A requirement that 80% of the net funding received from Natural Resources Canada (NRCan) is passed through to ratepayers.
  1. Programs for Re-Contracting Existing Hydroelectric Facilities
    1. IESO shall design a program to provide new contracts to existing small hydroelectric facilities, whose installed capacity, as determined on a facility basis, is equal to or below 10 megawatts, and whose existing contracts with IESO or the Ontario Electricity Financial Corporation (OEFC) have expired (or will expire) on or before December 31, 2030. The program shall be designed to provide value for ratepayers while providing a reasonable revenue stream for these facilities to continue operating. Contract details, including term and price, shall be determined in consultation with key stakeholders.
    2. IESO shall provide a report containing the final design and timelines of the program for re-contracting small hydroelectric facilities, a summary of the feedback received from stakeholders during consultations and steps taken by IESO to address the feedback, to energy by no later than July 1, 2022.
    3. IESO shall conduct an assessment, in consultation with key stakeholders, of a program for existing hydroelectric facilities whose installed capacity is greater than 10 megawatts and whose existing contracts with IESO or OEFC have expired (or will expire) on or before December 31, 2030. IESO’s analysis should consider: the value that can be generated for ratepayers by contracting larger hydroelectric facilities either through a program or bilaterally, compared to other competitive mechanisms; any benefits and/or social value that may be provided in addition to the electricity system benefits (e.g., water management); and capital investments needed to maintain, operate and finance hydroelectric facilities.
    4. IESO shall provide a report containing its assessment to energy by no later than October 1, 2022.
    5. In preparing the report back, IESO shall engage in individual discussions with relevant hydroelectric facility owners and other interested stakeholders, where appropriate.

General

This Directive takes effect on the date it is issued.

Order in Council 137/2022