Ontario's Strategic Response to the Emerging Capacity Gap: Ensuring a Reliable, Sustainable, and Cost-Effective Electricity Future

As Ontario continues to experience rapid economic growth and a shift toward electrification, the province's electricity system faces a critical challenge: ensuring that we have enough capacity to meet the increasing demand while maintaining reliability, sustainability, and affordability.

Understanding the Capacity Gap

For years, Ontario benefited from a surplus in electricity capacity, thanks to a combination of strong infrastructure investments and a diversified energy mix. However, this period of surplus is coming to an end. By the mid-2020s, a significant capacity gap is expected to emerge, driven by several factors:

1. Retirement of Aging Infrastructure: Ontario's fleet of nuclear and natural gas power plants, which have long served as the backbone of the province's electricity system, is aging. Some facilities are being refurbished, but others are scheduled for retirement, leading to a reduction in available capacity.
2. Growing Electricity Demand: Ontario’s population is growing, and with it, the demand for electricity. The push for electrification in sectors like transportation and industry is further accelerating this demand. According to the IESO’s 2024 Annual Planning Outlook, Ontario's total electricity demand is projected to increase by 60% over the next 25 years.
3. Integration of Renewable Energy: While Ontario has made significant strides in integrating renewable energy sources such as wind and solar, these sources are variable by nature. Their intermittency creates challenges for grid reliability, especially during periods of peak demand when renewable generation might not be sufficient.
4. Climate Change and Extreme Weather: The increasing frequency of extreme weather events due to climate change is putting additional stress on the grid. Hotter summers and colder winters are leading to spikes in electricity demand, further widening the capacity gap.

What Was Used Before the Resource Adequacy Framework?

Before the introduction of the Resource Adequacy Framework, Ontario relied on a more traditional approach to ensure grid reliability:

1. Vertically Integrated Utilities: Ontario’s electricity system was largely managed by vertically integrated utilities that controlled generation, transmission, and distribution. These utilities were responsible for ensuring that they had enough capacity to meet demand, often through central planning and regulated investments in large-scale generation plants.
2. Centralized Planning and Reserve Margins: The Ontario government and its agencies played a significant role in long-term electricity planning. This approach often involved maintaining a reserve margin—extra capacity above the expected peak demand—to ensure reliability. However, this method could lead to inefficiencies, including over investment in capacity.
3. Government and Regulatory Oversight: The electricity system was heavily regulated, with the government approving new generation projects and ensuring that utilities could recover their costs through regulated electricity rates. While this approach provided stability, it lacked the flexibility needed to respond to rapid changes in demand or technological advancements.
4. Reliance on Large, Centralized Power Plants: The system was dominated by large, centralized power plants (e.g., nuclear, coal, and natural gas). These plants provided the bulk of Ontario’s electricity, but the shift away from coal and the aging of other plants highlighted the need for a more dynamic and flexible approach to capacity planning.

Introducing the Resource Adequacy Framework

To address the limitations of the traditional approach and the emerging challenges, Ontario implemented the Resource Adequacy Framework. This strategic initiative is designed to ensure that the province’s electricity system remains reliable, resilient, and capable of meeting future demand. The framework represents a shift toward a more structured, market-based approach to resource planning and procurement.

Key Components of the Resource Adequacy Framework

The Resource Adequacy Framework is built around three core timeframes—short, medium, and long-term—each addressing different aspects of Ontario’s electricity needs:

1. Short-Term Needs-Capacity Auctions: To address immediate capacity needs, the IESO has enhanced its annual Capacity Auction. This mechanism allows Ontario to secure capacity on a short-term basis, typically less than 12 months in advance, providing the flexibility to respond to sudden changes in demand. The auctions are designed to be competitive, ensuring that the most cost-effective resources are selected.
2. Medium-Term Needs-Requests for Proposals (RFPs): The IESO conducts medium-term RFPs, targeting resources that can be brought online within a three- to five-year timeframe. These RFPs provide the stability needed to meet ongoing demand while allowing the system to adapt to evolving market conditions and technological advancements.
3. Long-Term NeedsLong-Term 1 and 2 RFPs (LT1 and LT2 RFPs): These initiatives are focused on securing new capacity that will be critical from the late 2020s into the 2030s. The LT1 RFP has already resulted in significant new capacity, including 1,784 MW of battery storage and 411 MW of natural gas and biogas generation. The LT2 RFP will further address capacity needs emerging in 2029 and beyond, with a strong emphasis on non-emitting resources such as solar, wind, hydroelectric, and long-duration storage.

The Role of Data Centers in the Resource Adequacy Framework

Data centers, as significant consumers of electricity, play a critical role within the Resource Adequacy Framework:

1. Demand Management and Response: Data centers can participate in demand response programs, reducing their electricity usage during peak periods to help balance the grid. This capability is crucial for managing peak demand and ensuring grid reliability.
2. Energy Efficiency and Load Shifting: By implementing energy-efficient technologies and shifting non-essential computing tasks to off-peak hours, data centers can reduce their impact on peak demand, contributing to a more balanced and stable grid.
3. Renewable Energy Integration and Grid Support: Many data centers are increasingly powered by renewable energy sources, aligning their operations with Ontario’s sustainability goals. Additionally, data centers with on-site generation capabilities can provide backup power and ancillary services to the grid, enhancing overall reliability.

The Role of Long-Duration Energy Storage in the Resource Adequacy Framework

Long-duration energy storage (LDES) is a pivotal component of Ontario’s Resource Adequacy Framework, particularly as the province integrates more renewable energy:

1. Balancing Supply and Demand: LDES systems store excess energy generated during low-demand periods or high renewable production and discharge it during peak demand periods, helping to maintain a consistent and reliable electricity supply.
2. Enhancing Grid Reliability: LDES provides firm capacity, ensuring electricity is available even when renewable sources are not generating. This capability is essential for meeting peak demand and maintaining grid stability, particularly during extended periods of low renewable output.
3. Supporting Renewable Integration: By smoothing out the variability of renewable energy sources like wind and solar, LDES enables a higher penetration of renewables in Ontario’s energy mix, supporting the province’s decarbonization goals.

Other Jurisdictions Using Resource Adequacy Frameworks

Ontario is not alone in implementing a Resource Adequacy Framework. Similar approaches are being used in various jurisdictions around the world to ensure grid reliability:

1. United States-California (CAISO): California’s Independent System Operator (CAISO) uses a resource adequacy framework to ensure that load-serving entities have enough capacity to meet demand, especially during peak periods. The framework is essential for managing the state’s high penetration of renewable energy.
2. United States-Texas (ERCOT): Texas operates an energy-only market under the Electric Reliability Council of Texas (ERCOT). While it does not have a traditional capacity market, Texas relies on price signals to incentivize generation during times of scarcity. This approach requires a careful balance to ensure enough capacity is available, particularly during extreme weather events like those experienced in recent years.
3. Europe-United Kingdom: The UK’s Capacity Market is a key component of its resource adequacy framework, ensuring that enough reliable electricity capacity is available to meet peak demand as the country transitions to a low-carbon energy system.
4. Europe-France: France’s capacity mechanism requires electricity suppliers to secure sufficient capacity to meet demand, supporting the integration of nuclear, hydro, and renewable energy
5. Australia-National Electricity Market (NEM): In Australia, the NEM includes mechanisms to ensure resource adequacy, such as the Reliability and Emergency Reserve Trader (RERT) mechanism, which allows the market operator to contract for reserves to maintain reliability.

Why the Resource Adequacy Framework is Essential

The Resource Adequacy Framework is more than just a response to the anticipated capacity gap; it represents a fundamental shift in how Ontario plans and procures electricity resources. Here’s why it’s crucial:

• Balancing Supply and Demand: By strategically aligning resource acquisitions with evolving system needs, the framework ensures that Ontario has the right mix of resources available at the right time. This prevents both over-commitment (which can drive up costs) and under-commitment (which can lead to reliability issues).
• Cost-Effectiveness: The competitive nature of the framework’s procurement processes helps to keep costs down for consumers. For example, the LT1 RFP resulted in a 24% decrease in the weighted average price for storage compared to previous procurements, highlighting the benefits of a predictable and transparent process.
• Supporting Decarbonization: While natural gas will continue to play a role as a transitional resource, the framework places a strong emphasis on integrating non-emitting resources, thereby supporting Ontario’s broader goals of reducing greenhouse gas emissions and transitioning to a cleaner energy system.
• Encouraging Innovation and Community Partnerships: The framework fosters innovation by supporting the growth of energy storage, hybrid facilities, and other emerging technologies. It also prioritizes community and Indigenous partnerships, ensuring that new projects have strong local support and contribute to economic development.

Looking Ahead: A Sustainable Future

Ontario’s proactive approach to addressing the capacity gap demonstrates a commitment to building a reliable, sustainable, and cost-effective electricity system. Through strategic planning, innovative procurement, and strong partnerships, Ontario is ensuring that its electricity infrastructure will support economic growth and decarbonization for decades to come.

As we move forward, the continued focus on integrating new technologies, enhancing grid flexibility, and reducing emissions will be key to securing Ontario’s energy future. This comprehensive strategy positions Ontario as a leader in navigating the complex challenges of the modern energy landscape.