IESO’s 2020 Annual Planning Outlook Illustrates Ontario’s Conundrum

On January 22, 2021, Ontario’s Independent Electricity System Operator (IESO) released its 2020 Annual Planning Outlook, providing the IESO’s long-term demand forecast over the 2022 to 2040 period, and an assessment of whether resources will be ready and sufficient to meet that demand.

There are a few key highlights from the 2020 Annual Planning Outlook.

• The Outlook distinguishes between effective installed capacity and gross installed capacity and it is essential to note the material difference between the two. Gross installed capacity is the stated maximum rated capacity of the generator and total gross installed capacity system-wide significantly exceeds summer peak demand throughout the forecast period.  However, effective installed capacity is more relevant and is a measure of the productive capacity or energy density of the generation technology.  For example, there are 2700 megawatts of installed solar in Ontario, however only 33% of this capacity is counted for summer capacity reserve purposes and while there are approximately 5500 megawatts of wind capacity installed in Ontario, only 12.7% of this capacity can be relied upon for capacity reserve purposes in summer months.  The effective installed capacity for nuclear and gas/oil in the summer months is 94.7% and 80.4% of gross installed capacity, respectively.  In the winter months, 3.7% of solar capacity is counted, as is 38.2% of wind capacity.  Nuclear and gas/oil capacities increase marginally due to the decline in ambient temperatures which increases unit efficiencies.
• Throughout the forecast period, existing effective installed resources in MW are sufficient to meet anticipated peak demand, which will occur in the summer months.  However, in 2025, due to the planned, staged retirement of the 3100 MW Pickering Generating Station and various refurbishment outages at Bruce and Darlington, the effective capacity reserve margin of 10% is below the targeted level of 18%.  Although not addressed in the Outlook, the anticipated 2026 summer peak capacity reserve margin will decline to approximately 1% in demand Scenario #1 and to approximately 4.5% in demand Scenario #2. Effective average capacity reserve margins decline to approximately 1% and 5% in demand Scenarios #1 and #2, respectively, over 2026 to 2040.
• The adequacy of effective installed capacity to meet anticipated peak demand is dependent upon the successful re-contracting of existing resources that are subject to contract maturities over the outlook period.  In particular, natural gas fired generators, which represent high quality capacity.
• Assuming that existing resources continue to be available, energy production is expected to meet Net Level Demand (gross Ontario demand less conservation) throughout the forecast period.
• Ontario is expected to continue to have surplus baseload generation throughout the forecast period, provided that existing resources continue to be available.

There are a few key Takeaways from the Outlook that illustrate the conundrum faced by the IESO and the Government of Ontario:

1. Ontario has excess energy but is short capacity.  However, the current financial structure of Ontario’s electricity supply is such that all energy production must be paid for even if it is surplus to requirements.  Expensive and inflexible Feed-In Tariff Contracts will remain a burden until at least 2030.  Operating maneuvers by the IESO to curtail production to balance the system and optimize production also have a significant cost.  Actions to “steam off” nuclear generators and spill water from hydro electric facilities are subject to compensation agreements/or regulatory recovery and add to the costs recovered via the Global Adjustment Mechanism.  These actions are costly, but not fully disclosed by the IESO.
2. Adequate reserve margins are a mandatory feature of the integrated reliability framework in Ontario and North America. As such, Ontario will likely need to procure additional capacity and recontract existing fossil capacity, assuming that the 2020 Annual Planning Outlook is accurate from an installed capacity requirement perspective and if peak summer demand meets expectations.  Hence the continued focus by the IESO on capacity market development. 
3. The energy and capacity limitations of wind and solar generation are not well understood by Ontario’s electorate, and the costs associated with the entirety of the Green Energy and Green Economy Act are similarly under reported by the IESO.  This lack of understanding and transparency will likely hamper efforts to acquire new capacity to meet planning and adequacy requirements, particularly as incremental capacity additions are likely to create further costs to be borne by Ontario customers.
4. Assuming an 18% summer reserve margin requirement and the continued availability of existing resources, Ontario will likely require approximately 4000 MW of capacity beginning in 2026 to meet mandated requirements pursuant to demand Scenario #1 and approximately 3000 MW pursuant to demand Scenario #2.  Incremental targeted demand response on peak, additional system-wide conservation initiatives to reduce summer/winter peak demand, and new effective installed generation capacity may together be utilized to meet this requirement.
5. Longer term capacity solutions will likely be dominated by the public’s continued expectation that Ontario’s energy production be non-emitting from a GHG perspective and fuel choice/contracts will likely be constrained by cost considerations and lack of public trust.  Fossil fuel energy production is expected to increase over the forecast period due to the retirement of Pickering GS and system balancing requirements, likely creating additional political issues for government.