TORONTO — Facing many of the same challenges as its counterparts in the U.S., Ontario’s Independent Electricity System Operator (IESO) is reshaping its markets to handle an influx of renewable and distributed energy resources.

That transformation was a key topic of discussion at the IESO’s annual Electricity Summit held June 18-19. Billed as the “Electricity Market of the Future,” the event drew nearly 1,000 attendees. Here’s some of what we heard.

Market Benefits

In his opening remarks kicking off the summit, IESO CEO Peter Gregg said his staff will spend the next six to 12 months focused on finalizing the “Energy Stream” initiative within the grid operator’s broader Market Renewal Project (MRP), an ambitious multiyear effort to overhaul its markets.

The initiative will close the timing gap between IESO’s pricing and dispatch runs by introducing a single-schedule market to ensure prices better reflect actual system conditions at the point of dispatch. The effort will also refine real-time processes while introducing a new day-ahead market and an incremental capacity auction intended to replace the existing demand response auction. (See Stressed in US, Capacity Markets Come to Ontario, Alberta.)

Gregg said IESO is working to address concerns among DR providers about the upcoming capacity auction changes that will enable competition between additional resource types.

“We will also be focused on running the next two auctions in December of this year and June of next year and making ineligible [for participation] additional resources such as generators who are without a contract — and also including imports,” said Gregg, who is also on NERC’s Member Representatives Committee.

Brattle Group principal Kathleen Spees said MRP’s main benefit will be to give customers choices on energy prices and services. It will also provide “much more efficient pricing, at every time scale, in the energy and ancillary services markets so that the supply side of the market knows how to react.”

“These markets allow us to achieve reliability in an efficient manner … they don’t exist for the sake of having markets,” IESO COO Leonard Kula said.

Kula noted that when IESO opened its wholesale electricity market in 2002, it moved from an Ontario Hydro command-and-control structure to a system based on a five-minute, financially binding price.

“And we were able to make that transition because we provided a whole lot of information and data in support of it, so we had daily security inadequacy assessments, 18-month outlooks and a whole variety of products,” Kula said. “That data supports a distributed decision-making model that allows different people to go in, read that information and respond accordingly.”

MRP represents a greater opportunity for participation in Ontario’s electricity markets, IESO Board Chair Joe Oliver said.

“What started as a small club has now grown to almost 600 market participants,” Oliver said. “Last year, nuclear and hydro met 86% of the province’s electricity needs, but other resources were important, too, including non-hydro renewables and demand response resources, with wind at 7%, gas at 6%, and solar and biomass at 0.7%.”

The result is that Ontario’s electricity system was more than 93% carbon-free in 2018, compared to 56% in New York, 49% in New England, 40% in PJM and 24% in MISO, he said.

But creating such an exceptionally green system “has exacted a financial toll on ratepayers,” Oliver said. “The so-called Fair Hydro Plan artificially lowered costs for residential customers by about a quarter by pushing costs to taxpayers now, and potentially to ratepayers in the future. Still, affordability remains a problem for too many families of lesser means.”

The federal government authorized the bill-reduction plan in 2017 through the Ministry of Energy, Northern Development and Mines, but the reduced rates do not apply to industrial users.

Oliver cited a study by Hydro-Québec that found industrial customers in Toronto paid an average 10.66 cents/kWh (about 8.1 cents U.S.), higher than in other Canadian cities and 20 to 25% more than companies in U.S. cities.

Nuclear and hydro in Ontario cost 7.5 cents/kWh, while new resources in the province cost an average 40 cents/kWh, which is why residents pay on average 12 cents/kWh, he said.

“Happily, wind and solar prices will decline … and that’s relevant because the IESO is now agnostic about the sources of power and it values the competition,” Oliver said.

Why Stay Connected?

In his opening comments, Gregg also highlighted a report issued this month by the Energy Transformation Network of Ontario (ETNO) on the structure of the grid with increasing penetration of DERs.

The report acknowledges “strong differences of opinion” among stakeholders as to what market model will work best for both consumers and private industry, and that IESO will have to balance between a “natural monopoly” in areas such as grid operations and local distribution, and open competition in new, value-added services.

During a panel on the subject, ETNO Vice Chair David McFadden, president of Generation Four Capital, noted that while consumers value reliability ahead of price, they are still sensitive to price. If new products and services “generate customer benefit in terms of price, then we’ve delivered what customers are interested in,” he said.

Independent consultant Lorenzo Kristov, a former CAISO market designer, posed a basic question that he said industrial customers will be asking themselves: Why stay connected to the grid?

“If the costs of being part of the grid outweigh the benefits, then we’ll have real equity problems,” Kristov said. “It will be the more financially capable and larger customers that are going to leave the grid first, and leave the cost of that to everyone else.”

He pointed to one reason to stay connected: market opportunities.

“In particular, if you can install equipment behind the meter, and then be a participant in the market, providing grid services, getting compensated for non-wires alternatives, engaging in energy transactions — creating that marketplace is also a way to realize customer value and reduce rates,” Kristov said.

Role for Storage

Christy Walsh, director of FERC’s Office of Energy Policy and Innovation, discussed the commission’s efforts to overcome market barriers for energy storage. She said storage posed a challenge for policymakers because it blurs the lines between transmission and generation, and between market-based energy and ancillary services.

FERC Order 841 directed U.S. RTOs and ISOs to remove barriers to the participation of electric storage resources in their capacity, energy and ancillary services markets, and set a Dec. 3, 2019, deadline for them to comply.

One major issue that “we issued an order on last month was jurisdiction, which essentially means that any storage resource that met our definition … can participate in the wholesale markets, and it didn’t matter whether that storage resource was connected at transmission, at distribution or behind the meter,” Walsh said. (See FERC Upholds Electric Storage Order.)

Industry stakeholders had protested that FERC lacked jurisdiction to make rules on distribution-level or BTM storage.

“What we essentially said was, ‘We disagree with you,’” Walsh said. “All we’re saying is, if they participate at retail, they can participate in our markets. We’re not saying how or whether they can participate in retail markets.”

Increased penetration of inverter-based technologies presents a special challenge to IESO because inverters represent a different system impact in terms of inertia, Kula said.

“Many technologies can provide multiple services,” Kula said. “The question is, who should decide what services those resources should provide? From our perspective, we favor a model that says, here are the reliability services that we need. We can’t anticipate all the different ways that people can use those technologies, so we would prefer that the people who own the assets and do know those technologies can go ahead and target their operations to meet what the system needs.”

“We really do need to be more creative in performance,” said Annette Verschuren, CEO of storage company NRStor. “We have a little flywheel facility with the IESO … and it can produce frequency regulation two-and-a-third times faster than a traditional generation facility.”

“We have too much surplus energy in our system,” Verschuren said. “And energy storage is not the [only] answer; it’s also demand-side, all kinds of energy efficiencies. Look, we invented basketball in Canada, and we also had the first NBA game with the Huskies here in Toronto in 1946 … and I think we should own innovation.”

– Michael Kuser