Ontario proposes to permit renewable energy virtual net metering arrangements for ICI participants

On November 2, 2023, the Ontario government opened a consultation regarding amendments to O. Reg. 429/04 (Adjustments Under Section 25.33 of the Electricity Act, 1998) (the GA Regulation). The GA Regulation establishes the global adjustment (GA) fees Ontario’s large commercial electricity consumers must pay to fund the cost of non-wholesale market electricity contracts. The GA fees currently represent a substantial portion of the electricity commodity cost in Ontario. Major consumers of electricity will want to follow this consultation closely.

The consultation webpage notes that, if adopted, the proposed amendments to the GA Regulation will enable participants in the Independent Electricity System Operator’s (IESO) Industrial Conservation Initiative (ICI) (also referred to as “Class A customers”) to reduce their GA fees by entering into virtual power purchase agreements with renewable generation facilities that are not connected “behind” the Class A customer’s electricity meter (corporate PPAs) — similar to a virtual net metering arrangement.

The notice indicates that eligible technologies for such corporate PPAs may include wind, solar, small hydroelectric (i.e., less than 10 megawatts), biofuels and battery storage (presumably coupled or integrated with renewable energy generation). However, as we discuss below, the request for consultation does not identify specific mechanics or scope of the proposed amendments and stakeholders should consider whether this may be an opportunity to address a number of structural challenges that have been a barrier to Ontario corporate PPAs to date. For the proposed amendments to achieve the Ontario government’s stated goal of supporting the growth of new clean energy generation, complementary legislative amendments are likely required.

Background

GA fees are designed to recover the cost of non-wholesale market electricity contracts (e.g., contracts entered into by the IESO for renewable generation, conservation, nuclear generation refurbishment, etc.) used to deliver government objectives connected to the electricity grid. Under the GA Regulation, GA fees are established for Class A customers on the basis of the customer’s contribution to the Ontario electricity grid’s five highest hourly peak demands during a base period from May 1 in a given year to April 30 in the following year (the Five Critical Peaks). The lower a Class A customer’s demand during the Five Critical Peaks (based on its proportional contribution to the aggregate peak demand in the province), the less GA fees the Class A customer will be required to pay during the adjustment period from July 1 to June 30 of the following year.

Industry considerations

This latest consultation related to electricity legislation represents the Ontario government’s third significant initiative in recent years to promote the development of clean generation via a form of net metering. For a discussion of the Ontario government’s other recent net metering initiatives, please refer to our earlier blog posts on third-party ownership of net metered generators and community net metering regulation. However, a number of other challenges would also need to be addressed in order to enable a robust corporate PPA market in Ontario.

Uncertainty of GA fees

For a Class A customer, GA fees currently represent a significant portion of their electricity commodity cost (and have been growing significantly over the past several years). Yet, past government actions have raised questions for Class A customers regarding the certainty of future GA fees (and associated opportunities for savings). For example, following the onset of COVID-19, the Ontario government deferred GA fees for three months and, prior to the conclusion of the deferral period, established a peak demand factor hiatus that set GA fees based on the peak demand factors from the prior base period (effectively deferring a year’s worth of benefits for investments made to reduce a Class A customer’s peak during the 2020–2021 base period).

Most significantly, effective January 1, 2021, the Ontario government reduced GA fees by shifting approximately 85% of the costs of non-hydro renewable generation from electricity ratepayers (via their inclusion in GA fees) to the Ontario government’s budget. Such significant, and unpredictable, changes make investments in net-metered projects challenging to evaluate (as long-term revenue forecasting is tied to anticipated GA fees savings). In many instances, developers and Class A customers have struggled to allocate the risk associated with this uncertainty in their contractual arrangements. If corporate PPAs in Ontario can be structured in a manner where any GA fees savings are not part of the financial settlement of the agreement, greater investment certainty can be achieved for renewable energy development. 

Lack of hybrid project market model

The variable output of renewable generation technologies means that their ability to enable Class A customers to reduce their demand during the Five Critical Peaks (and resulting GA fees) is too uncertain to support investments in renewable generation without complementary battery storage (assuming GA fees avoidance is the primary financial motivation). However, even if the proposed amendments permit battery storage as the consultation webpage suggests, current IESO market models have not been optimized to dispatch hybrid facilities.

For hybrid facilities — involving both generation and storage (which can have numerous different configuration and technology options) — to optimally participate in the Ontario electricity market, the IESO plans to implement enhanced models for hybrid facilities following the completion of its Market Renewal Program (circa 2026). Until such changes to the Ontario market are implemented, the ability of the proposed amendments to foster utility-scale corporate PPAs for hybrid projects may remain elusive.

Renewable generation siting and permitting

Assuming revenue streams for new clean generation contracted under corporate PPAs enabled by the proposed amendments can be made sufficiently certain to satisfy investors, project developers will still need to be comfortable with their ability to comply with land-use restrictions under the Planning Act (Ontario) (the legislative override of which for renewable energy projects was repealed in 2018) as well as the environmental permitting requirements of O. Reg. 359/09 Renewable Energy Approvals (the REA Regulation), which have been largely unused for utility-scale renewables developments in Ontario since the Green Energy Repeal Act, 2018 (Ontario).

Notably, the REA Regulation now requires any renewable energy project seeking a renewable energy approval to demonstrate the “need” for the electricity it would be delivering. Although Ontario is now procuring new electricity resources for a general forecasted need for energy and capacity resources in the coming years, the question of how “need” for delivered electricity in the context of corporate PPAs financed by savings of GA fees will be perceived or determined remains a significant unknown.

Uncertainty regarding availability of benefit stacking

Although the opening of opportunities for corporate PPAs based on the proposed amendments is a welcome development in the Ontario energy transition sector, this opportunity must be analyzed in the context of the myriad of other support mechanisms for clean generation resources that are being developed and implemented at both the federal and provincial levels of government.

To enhance viability of such projects, developers may wish to contract for or pursue additional value streams from their facilities with the IESO (e.g., via capacity auctions or resource adequacy procurements) or to obtain benefits and financing through other government agencies and programs. The extent to which projects subject to corporate PPAs operating under the proposed amendments could be restricted from accessing such other value streams will be a material focus for stakeholders (and their financiers) in these projects.

Conclusion

If adopted, the proposed amendments to the GA Regulation will take effect May 1, 2024 (which aligns with the start of a base period) and enable Class A customers to reduce their GA fees beginning at the start of the adjustment period beginning on July 1, 2025.

Although the proposal to enable corporate PPAs is a welcome development for Ontario, significant further details are needed to assess its potential. We strongly encourage our clients and other interested stakeholders to submit comments on the proposal to the Ontario government to help ensure that the various structural challenges (such as those discussed above) can be addressed in a manner that will support investment certainty and reasonably balance the benefits and costs of these arrangements among project developers, Class A customers and other Ontario ratepayers more broadly.

The consultation regarding the proposed amendments to the GA Regulation will remain open for comments until December 17, 2023.