Ontario’s nascent capacity market could take advantage of lessons from the U.S., experts said Wednesday.

The panel during the Association of Power Producers of Ontario’s (APPrO) annual energy and networking conference was coincidentally the same day as the Ontario Independent Electricity System Operator’s (IESO) first ever capacity auction for summer 2021. The auction marks the first time the province will allow non-demand response resources the opportunity to supply capacity.

Borden Ladner Gervais partner and panel host John Vellone said it was only fitting that APPrO host the discussion as offers from Ontario suppliers rolled in.

“Where we’ve been in the U.S. is we’ve had a surplus for quite some time,” said Potomac Economics President David Patton, who was on hand to offer the American perspective on capacity market formation.

Patton said U.S. markets typically maintain 15 to 17% in additional reserves beyond a peak-day forecast to achieve the U.S.’ one-day-in-10-year loss-of-load risk standard. American capacity markets are covering for existing generation’s going-forward costs but not generating signals for new investment, Patton said.

Complicating matters, Patton said policy-driven investments in renewable generation are growing existing surpluses.

“So there’s a bit of a challenge, because the markets don’t look in the near term like they’re going to be moving towards a long-run equilibrium,” he said.

Patton said market design must balance out-of-market investments in renewable generation to meet public policy goals with the need for the market to facilitate good decisions by market participants. He also said most renewables do not contribute meaningfully to capacity reserves and said capacity credits should reflect that.

Incorporating carbon pricing into markets would be beneficial because it would reduce out-of-market distortions, he said.  “If you have out-of-market actions, it’s always detrimental to the market.”

“Out-of-market interventions aren’t going to stop; they’re just going to grow,” said Jason Chee-Aloy, managing director at Ontario-based energy consulting firm Power Advisory. “I think we have to admit that’s going to happen.”

Patton said forgoing a capacity market is an option, provided that a market’s shortage pricing is strong enough.

“Pricing is king in any market, and I would argue that’s something that we got wrong in Ontario from the get-go with uniform pricing,” Chee-Aloy said.

Ontario has a chance to recast its pricing, he said, suggesting the province use offer guarantee payments and make-whole payments. He said the re-evaluation would come at an opportune time, as Ontario is predicted to need capacity by the late 2020s.

Chee-Aloy pointed out that local distribution companies in Ontario do not have obligations to serve load, leading to a lack of a “robust buy-side” in the market. He said generators and resource adequacy providers have to finance projects and could bolster investments with market hedges.

“We’re still double-downing on out-of-market payments,” he said. “We’re going to need a multipronged approach to resource adequacy. And sometimes I think Ontario looks to the Northeast when I think we should look to the Midwest. When you look at the characteristics of Ontario, we’re much more like [MISO]. We’ve got a mixture of different types of players; we’ve got rate-regulated generation, and pretty much all of the independent power producers are under contract with the IESO.”

He also pointed out that the government-owned Ontario Power Generation owns about 50% of the capacity in the province, much of it rate-regulated, reminiscent of MISO’s vertically integrated utilities.

“But we could rely less on resource adequacy mechanisms … if we get the shortage pricing right for energy and operating reserves,” Chee-Aloy said.

Risk is currently high in Ontario, he said, evidenced by the 759 renewable energy contracts terminated within the past year-and-a-half by the Progressive Conservative provincial government as a cost-cutting measure. He said he did not know of any other market except Spain that has reversed so many already-executed contracts.

DeMarco Allan senior partner Elisabeth DeMarco said it is no longer simply a matter of working out energy market pricing, but electricity and emissions market pricing.

“We are very much behind the ball of emissions market and electricity market integration,” she said of Ontario. “It’s not some distant, foreign aspect of markets, but now an integral portion of it.”