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 regard to the 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 that Ontario will see a capacity need emerging in 2025 and growing through the latter part of the decade. This is as a result of increased demand due to expanding electrification and increasing business investment in the province, refurbishment schedules at the Bruce and Darlington nuclear facilities and expiring electricity supply and capacity contracts.

Fulfilling this forecasted supply need requires IESO to procure electricity products and services from both existing and new electricity resources.

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

The IESO’s Resource Adequacy Framework sets out a long-term strategy to acquire products and services from resources while balancing ratepayer and supplier risks and recognizing the unique characteristics and contributions of different electricity resource types.

The framework consists of competitive procurement mechanisms, as well as special programs and bilateral negotiations with resource providers that are essential to meeting reliability needs while also meeting broader government objectives.

Following the issuance of a directive to IESO in October 2022, as approved by the Lieutenant Governor in Council pursuant to Order-in-Council No. 1348/2022 (“October 2022 Directive”), IESO launched two acquisition mechanisms designed to focus on meeting electricity needs that are forecasted to emerge in 2025-2026, by seeking to acquire incremental capacity that can come online as soon as possible and no later than May 2026:

  • The Expedited Long-Term Request for Proposals (“E-LT1”): to competitively procure new capacity by providing longer-term certainty to incent capital investment into building new resources or same technology expansions at a facility’s existing location; and
  • The Same Technology Upgrades Solicitation (“Upgrades”): to incentivize cost- effective uprates or upgrades at existing contracted resources, for the delivery of new incremental capacity.

The October 2022 Directive also directed IESO to finalize the design for the First Long- Term Request for Proposals (“LT1 RFP”), a mechanism to acquire new capacity that can come online no later than May 2028 with incentives to encourage early operation.

Ontario must have a reliable supply of affordable and clean energy to ensure that we can meet the needs of an electrifying economy, including transportation, steel and other industries.

The IESO’s “Pathways to Decarbonization” study conducted in 2022 is consistent with this approach and concluded that, while most of the province’s increasing electricity demand by 2035 can be met by non-emitting resources, eliminating natural gas generation in the near term would pose serious reliability challenges. These could include rotating blackouts but would also hamper efforts to electrify the province’s transportation infrastructure and to reduce emissions in the province by making electrification significantly more costly.

Therefore, in line with the direction in the October 2022 Directive, the LT1 RFP will procure capacity in a way that the total capacity procured under E-LT1, Upgrades, and LT1 RFP is, when taken together, approximately 4,000 MW, while targeting 1,500 MW of capacity being accounted for by natural gas generation.

The Green Energy Repeal Act, 2018 returned certain powers and decision-making to municipalities regarding how land use for renewable energy and renewable energy projects are regulated and approved in Ontario, including restoring municipal siting authority under the Planning Act over new proposed renewable energy projects.

Therefore, in line with the underlying principles of that legislation, where an expansion of an existing facility or new facility is proposed in a municipality, IESO will require proponents to obtain a council resolution of support. This criteria will be separate and apart from evidence of the fulfilment by the potential proponent of such municipality’s permitting and regulatory requirements. This requirement also applied to expansions and new build projects submitted to IESO under E-LT1.

The government recognizes that support from local and Indigenous communities is vital to building successful energy projects and continues to expect proponents to meaningfully engage local and Indigenous communities on proposed projects.

Moreover, the government acknowledges that projects procured under the LT1 RFP may have the potential to impact Aboriginal or treaty rights protected under section 35 of the Constitution Act, 1982. Early engagement and consultation with Indigenous communities is important for understanding any potential impacts of the proposed projects and, where appropriate, how those impacts can be appropriately mitigated or accommodated. The Ministry of Energy is working with IESO to fulfill the Crown’s Duty to Consult and, where appropriate, accommodate Indigenous communities.

The government recognizes that creating opportunities for Indigenous leadership and participation in the procurement of new electricity capacity is a way to support economic development in Indigenous communities and take meaningful steps towards reconciliation with Indigenous peoples. Similar to the E-LT1 process, the LT1 RFP will incent the economic participation of Indigenous communities in proposed projects, including additional incentives to further encourage meaningful opportunities for Indigenous participation and partnerships.

In conjunction with competitive procurements, 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 Ontario’s 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 flood control, irrigation, tourism and facilitating local employment and economic development. The government recognizes that most small hydroelectric facilities are municipally-owned or owned by conservation authorities and, given investment horizons and asset lifespans, may require a customized program to re-contract these existing facilities.

The IESO’s Small Hydro Program would provide an opportunity for existing hydroelectric facilities with capacities of up to 10 MW to obtain new contracts. This program has been designed in a way that provides value for ratepayers while sustaining these important assets.

Lastly, in 1998, Ontario Hydro was reorganized into five successor companies, one of which was the Ontario Hydro Financial Corporation, later renamed the Ontario Electricity Financial Corporation (“OEFC"). As part of its mandate, the OEFC was given the responsibility to manage the debt of the former Ontario Hydro, including the management of contracts with Non-Utility Generators (“NUGs”).

OEFC currently holds NUG contracts with 12 hydroelectric facilities, some of which are expected to move to the Small Hydro Program following the near-term expiry of their NUG contracts. The government is interested in exploring the possibility of moving the remaining contracts to IESO. This is expected to help reduce administrative burden by having one counterparty hold all electricity generation contracts in the province.

The government recognizes that further actions will be required beyond those outlined in this Directive. The IESO and the Ministry of 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. Long-Term Request for Proposals
    1. The IESO shall undertake a procurement initiative, known as the First Long-Term Request for Proposals (“LT1 RFP”), and shall enter into procurement contracts with successful proponents for the acquisition of incremental capacity from new build capacity resources and eligible expansions of existing resources, that are able to commit to commercial operation as soon as possible, while ensuring that the contract provides for a target commercial operation date of no later than May 1, 2028, subject to the appropriate contractual provisions and adjustments.
    2. LT1 RFP shall be launched in 2023 and IESO shall endeavour to conclude the procurement process on or before June 30, 2024.
    3. The final LT1 RFP and associated procurement contracts (“Contract”) shall comply with the following requirements:
      1. LT1 RFP shall be open to all resource types that can provide capacity and meet the mandatory criteria established by IESO.
      2. Despite paragraph 12 of the October 2022 Directive, IESO shall determine the total amount of capacity to be procured under LT1 RFP such that:
        1. The total capacity procured from E-LT1, Upgrades, and LT1 RFP is, when taken together, approximately 4,000 megawatts (MW);
        2. The respective target capacity for standalone energy storage and natural gas generation, as set out under paragraph 12 of the October 2022 Directive, continues to apply; and
        3. While proceeding with the target capacity for natural gas generation set out in paragraph 12 of the October 2022 Directive, to ensure cost effectiveness, the IESO may select a marginal proposal that would result in the total amount of natural gas generation procured under the procurement initiatives described in that paragraph being within 100 MW of the target.
      3. For all resource types except natural gas generation, IESO shall offer a contract that incents commercial operation as soon as possible and that expires no later than April 30, 2048, subject to extension as outlined in the Contract.
      4. For natural gas generation projects, IESO shall offer a contract that incents commercial operation as soon as possible and has a term that expires no later than April 30, 2040, to align with the expiry date of the latest expiring IESO-held natural gas generation contracts.
      5. Where a proposed project, including a new facility or an eligible expansion of an existing facility, is located in a municipality, IESO shall require the proponent or contract counterparty to obtain a council resolution of support from the municipality where the project is planned to be located, in addition to all necessary municipal permits and regulatory approvals.
      6. Where a proposed project is located on Indigenous Lands, as defined in the Contract, IESO shall require the proponent to demonstrate support for the proposed project from the Indigenous Community, as defined in the Contract, with authority over the applicable lands.
      7. The evaluation provisions of the LT1 RFP shall include rated criteria points to recognize proponents that have certain levels of economic participation by an Indigenous Community or Indigenous Communities, as defined in the LT1 RFP, and to recognize proponents that propose to site their project on lands within the treaty area, or the established or asserted traditional territory or homeland of the participating Indigenous Community or Indigenous Communities, and the proposal includes an attestation from a natural person with authority to bind each respective Indigenous Community in this regard.
      8. For technology types that are not subject to a provincial environmental approvals framework that the Crown may rely on to fulfill its duty to consult (such as certain standalone battery storage projects), the Ministry of Energy will determine whether the duty to consult and, where appropriate, accommodate Indigenous communities (“Duty to Consult”) may arise and the LT 1 RFP Contract shall require that:
        1. Where the Ministry of Energy has determined that the province may have a Duty to Consult, the proponent provide confirmation to IESO that any procedural aspects of consultation delegated to the proponent have been undertaken to the satisfaction of the Ministry of Energy, or
        2. Where the Ministry of Energy has determined that the province does not have a Duty to Consult, the proponent provide confirmation as such to IESO.
      9. The IESO shall procure capacity from LT1 RFP in a manner that takes into account the impact on ratepayers and balances risk appropriately between ratepayers and electricity resource suppliers while supporting reliability through the prioritization of energy producing resources.
      10. The IESO shall, to the extent possible, endeavour to allow for any federal financing, subsidies and/or tax credits that are available at the time of the submission of the project proposal to IESO to be accounted for by the proponents in their submissions, so that the electricity ratepayers can benefit in the form of lower electricity bills.
      11. The IESO shall endeavour to recover 50% of any direct financial support from government subsidies, grants, or payments that were not available for the project prior to the submission of the project proposal to IESO. The IESO shall ensure that any recovered amounts are utilized for the reduction of electricity costs for ratepayers.
  2. Small Hydro Program
    1. The IESO shall launch a procurement initiative, known as the Small Hydro Program, to provide new or amended contracts to existing small hydroelectric facilities, whose installed capacity, as determined on a facility-specific basis, is equal to or below 10 megawatts, and who either: (i) do not have any existing contracts with IESO or the Ontario Electricity Financial Corporation (OEFC); or
      (ii) have existing contracts with IESO or the OEFC that will expire on or before April 30, 2043.
    2. The IESO shall launch the Small Hydro Program by the end of 2023, and shall ensure that all procurement contracts entered into by IESO under the Small Hydro Program shall expire on April 30, 2043.
    3. The Small Hydro Program is subject to the following requirements:
      1. Facilities whose existing contracts with IESO aggregates multiple other facilities shall not be eligible to participate in the Small Hydro Program;
      2. Facilities that have existing contracts with the OEFC are only eligible to participate in the Small Hydro Program if their existing contracts with the OEFC will expire or will be terminated before they enter into a new contract under the Small Hydro Program;
      3. The Small Hydro Program shall offer a payment structure which compensates facilities on the basis of megawatt-hours (MWh) of electricity generated; and
      4. The program rules for the Small Hydro Program shall be substantially similar to the terms described in IESO’s addendum report back dated July 6, 2023.
  3. Moving OEFC contracts to IESO
    1. 7. The IESO shall, working with the Ministry of Energy and the Ontario Financing Authority (OFA), report back by March 31, 2024, on the feasibility of transferring the NUG contracts to IESO by terminating all of OEFC’s remaining NUG contracts for hydroelectric facilities, and allowing IESO to enter into contracts with these facilities on financial terms that are materially consistent with their existing NUG contracts, provided that the contract entered into by IESO expires at the same time that the NUG contract would have expired. The IESO’s report back should also include an analysis of the treatment of outstanding debt owed by the NUG generators to OEFC.

General

This Directive takes effect on the date it is issued.

Order in Council 1257/2023