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 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 a capacity need that emerges in 2025 and grows through the latter part of the decade. This is 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 contracts.

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 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 competitive strategy to acquire products and services from resources while balancing ratepayer and supplier risks and recognizing the unique characteristics and contributions of different resource types. The framework consists of competitive procurement mechanisms, as well as special programs and bilateral negotiations with resources that are essential to meeting reliability needs or broader government objectives.

Following the issuance of a directive to IESO in January 2022, as approved by the Lieutenant Governor in Council pursuant to Order-in-Council No. 137/2022 (“January Directive”), IESO launched a competitive procurement to enter into new contracts with 5-year terms with certain existing resources. This procurement – the first Medium-Term Request for Proposals (“MT I RFP”) – concluded in August 2022 and contracted 750 megawatts (MW) of nameplate capacity at a cost about 30% lower than the average price under their existing or most recent contracts, providing savings to ratepayers.

Future Medium-Term Requests for Proposals will provide IESO the flexibility to acquire electricity products and services in response to changes in system needs, while allowing an opportunity for resources with expiring contracts to compete for new contracts in order to continue contributing to Ontario’s reliability.

Following the conclusion of the MT I RFP, two acquisition mechanisms are currently being designed to focus on meeting electricity needs that are forecasted to appear in 2025, 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 (“Expedited Process”), which would competitively procure new capacity by providing longer-term certainty to incent capital investment into building new resources or separately metered expansions of the same technology type at a facility’s existing location; and
  • The Same Technology Upgrades Solicitation (“Upgrades Solicitation”), which would incentivize cost-effective uprates or upgrades at existing contracted resources, for the delivery of new incremental capacity.

The government recognizes that support from local and Indigenous communities is vital to new-build energy projects and expects proponents to engage local and Indigenous communities to seek their support for the proposed projects.

Moreover, the government believes that maintaining broad eligibility for different resource types to participate in the Expedited Process, including newer technology types such as standalone and paired energy storage, alongside more traditional capacity resources such as biofuels and natural gas generation is vital to ensuring reliability and affordability for ratepayers.

The government recognizes that Ontario’s electricity system is evolving and must continue to move towards flexible and non-emitting sources of supply. In keeping with the goals of the “Made-in-Ontario Environment Plan”, it is important that the government and stakeholders continue to explore opportunities for emission reductions in the electricity sector.

At the same time, IESO’s “Gas Phase-Out Impact Assessment” study conducted in 2021 concluded that eliminating natural gas-fired generation in the near term from Ontario’s electricity system would not only result in rotating blackouts but would also hamper efforts to further decarbonize the province by making electrification significantly more costly.

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.

Therefore, in line with IESO’s analysis submitted as part of the interim report on the “Pathways to Decarbonization” study, the government has decided that natural gas-fired electricity resources be permitted to submit project proposals for the Expedited Process.

The government is cognizant of the development of the federal government’s proposed Clean Electricity Regulation, which could have implications for natural gas-fired generation in all provinces and territories, including allowing operation in special circumstances such as emergency events. New build gas facilities will be required to submit emissions abatement plans to IESO as part of their future contractual obligations, including considerations for operating in special circumstances such as emergency events, if applicable.

It is intended that the Expedited Process and Same Technology Upgrades be closely followed by the first Long-Term Request for Proposals, which is being designed to competitively procure new capacity that can come online no later than May 2027.

The Expedited Process, Same Technology Upgrades and Long-Term Request for Proposals are expected to procure about 4,000 MW of capacity in total. Through these procurements, no more than 1,500 MW of natural-gas fired electricity resources should be procured.

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 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 new contracts with IESO for 5-year terms, balancing the benefits to the forestry sector with the value for electricity ratepayers and taxpayers.

In line with the January Directive, IESO negotiated and signed a new contract for Calstock Generation Station (GS) in March 2022.

Chapleau GS is a biomass-based electricity generation facility whose biomass fuel consists primarily of by-products from the Chapleau sawmill. Chapleau GS’s current Biomass Non-Utility Generator (“NUG”) Contract with IESO is set to expire on December 31, 2022. In the absence of this facility, the required electricity supply would have to be procured from other sources, and there would be a substantial economic impact on the local community since wood waste would likely have to be diverted to landfills.

In addition, the government recognizes that further actions may be required beyond those outlined in this Directive. The 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. Expedited Process
    1. The IESO shall undertake a procurement initiative, known as the Expedited Long-Term Request for Proposals (“Expedited Process”), and shall enter into procurement contracts with successful proponents for the acquisition of new, incremental capacity from:
      1. new build capacity resources; and
      2. same technology expansions of existing capacity resources, where the expansion is separately metered and registered, and shares a connection point with the existing capacity resource,

      that are able to commit to achieving commercial operation as soon as possible, while ensuring that the contract provides for a target for commercial operation date (COD) of no later than May 2026, subject to appropriate contractual adjustments.

    2. The Expedited Process should be launched in 2022 by issuing final procurement documents and conclude in early 2023. The final Expedited Process RFP and associated procurement contract (“Contract”) shall comply with the following requirements:
      1. The Expedited Process shall have a target capacity of 1,500 megawatts (MW).
      2. For all resource types except natural gas-fired generation, IESO shall offer a contract term that incents commercial operation as soon as possible and that expires no later than April 30, 2047, subject to extension as outlined in the Contract.
      3. For natural gas-fired generation projects, the IESO shall offer a contract that incents commercial operation as soon as possible and has a term that expires by April 30, 2040, to align with the date of the latest expiring IESO-held natural gas generation contracts.
      4. Where a proposed project is located in a municipality, counterparties shall obtain all necessary municipal permits or other support for the proposed project from the municipality where the project is planned to be located.
      5. Where a proposed project is located on Indigenous Lands, as defined in the Contract, proponents shall obtain support for the proposed project from the Indigenous Community, as defined in the Contract, with authority over the applicable lands.
      6. As part of their proposal submission, IESO shall require proponents to submit community and Indigenous engagement plans in relation to their proposed projects.
      7. The IESO shall include provisions in the Contract that, where laws or regulations are introduced and passed restricting GHG emissions from a project:
        1. Require such projects to submit GHG emissions abatement plans, showing how the project will bring its operations into compliance with the laws or regulations, prior to the new emissions standards coming into force; and
        2. If a project is unable to comply with such laws or regulations in order to continue meeting its obligations under the Contract, despite commercially reasonable efforts, allow such project to suspend operations for the balance of the contract term while retaining payments under the Contract.
      8. The IESO shall endeavor to recover 50% of any direct financial funding from government subsidies, grants, or payments, that were not available to the project prior to the submission of the project proposal to the IESO. The IESO shall ensure that recovered amounts are utilized for the reduction of electricity costs for ratepayers.
      9. The IESO shall procure capacity from the Expedited Process 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.
  2. Upgrades Solicitation
    1. The IESO shall undertake a solicitation process, known as Same Technology Upgrades Solicitation (“Upgrades Solicitation”), to invite submissions to increase the capacity of existing electricity facilities, which can deliver a minimum of 8 hours of energy duration, with a contract in good standing with IESO by means of:
      1. equipment upgrades or uprates using the same fuel type and substantially the same technology as the existing facility; or
      2. the addition of auxiliary balance of plant equipment,

      that are expected to have an in-service date by no later than May 1, 2026.

    2. The Upgrades Solicitation should conclude in 2023.
    3. Where a facility that is successful in the Upgrades Solicitation has an existing contract with the IESO that expires on or before December 31, 2032, the IESO may extend the applicable contract term to April 30, 2035.
    4. The Upgrades Solicitation shall target an aggregate increase in capacity of approximately 300 MW, which is acquired in a manner that takes into account the impact on ratepayers and balances risk appropriately between ratepayers and electricity resource suppliers.
  3. Long-Term Request for Proposals
    1. The IESO shall continue to develop the design of a procurement initiative, known as the first Long-Term Request for Proposals (“LT1 RFP”), for the acquisition of incremental capacity from new build capacity resources that are able to commit to commercial operation by May 1, 2027.
    2. In developing the design of LT1 RFP, IESO shall incorporate lessons learned, if any, from IESO’s experience in the Expedited Process to date, including in the evaluation of submitted proposals.
    3. In developing the design of LT1 RFP, IESO shall include provisions in the draft LT1 Contract that, where laws or regulations are introduced and passed restricting GHG emissions from a project:
      1. Require such projects to submit GHG emissions abatement plans, showing how the project will bring its operations into compliance with the laws or regulations, prior to the emissions standards coming into force; and
      2. Where a project is unable to comply with such laws or regulations in order to continue meeting its obligations under the Contract, despite commercially reasonable efforts, allow such project to suspend operations for the balance of the contract term while retaining payments under the Contract.
    4. In lieu of the report required in Section 6 of the January Directive, IESO shall provide a report to me by December 15, 2022, containing the draft LT1 RFP and draft LT1 Contract, a summary of feedback received from stakeholders during consultations to date, and IESO’s plans to update the design of the LT1 RFP and LT1 Contract based on feedback received and the IESO’s experience to date from the Expedited Process.
  4. Procurement Eligibility and Target Capacity
    1. The Expedited Process, Upgrades Solicitation, and LT1 RFP shall be open to all resource types that meet the mandatory criteria established by the IESO, which may include renewable energy, energy storage, hybrid renewable energy with storage, biofuels and natural gas-fired generation.
    2. The Expedited Process, Upgrades Solicitation, and LT1 RFP shall have a combined target capacity of approximately 4,000 MW, out of which the target capacity for i) standalone energy storage projects shall be a minimum of 1,500 MW and ii) natural gas-fired generation shall be no more than 1,500 MW.
  5. Chapleau Generating Station (GS)
    1. IESO shall enter into a procurement contract by way of an extension of the existing contract with GreenFirst Forest Products (QC) Inc. (“GreenFirst”) for Chapleau GS, on terms that are consistent with the following:
      1. A contract term that begins on January 1, 2023 and ends on December 31, 2027;
      2. 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 adopted in IESO’s report back entitled “Chapleau Co-Generation Facility - Assessment of Potential Options for Continued Operation” dated June 30, 2022; and
      3. All other terms shall be materially consistent with the existing contract.

General

This Directive takes effect on the date it is issued.

Order in Council 1348/2022