Ontario Explores Moratorium on New Natural Gas Generating Stations and Potential Shift to Non-Emitting Electricity System

Yesterday, the Independent Electricity System Operator (IESO) released a report entitled Decarbonization and Ontario’s Electricity Sector: Assessing the Impacts of Phasing Out Natural Gas Generation by 2030. Amid growing interest in the feasibility for deeper decarbonization, the IESO undertook to analyze the technical, operational, and financial considerations of a hypothetical implementation.

In summary, the IESO report concludes that a phasing out of natural gas generation by 2030 would lead to a 60% increase in residential electricity bills, a critical increase in system reliability and operability concerns including periodic blackouts, and would represent a carbon abatement cost of at least $464/tonne. Noting such an initiative’s disproportionate increase in electricity prices relative to the amount of carbon emissions avoided, the IESO further concludes that “the proposed deadline of 2030 could have negative long-term impacts on cost, reliability and the advancement of electrification.” In fact, it is estimated that notwithstanding the reliability concerns associated with such an initiative, operationalizing it would require an incremental investment of at least $27 billion, which in turn would on its own increase residential electricity bills by approximately $100/month.

The 2030 scenario examined looked at and simulated a replacement supply mix for approximately 11,000 MW of existing natural gas generating capacity comprised of a combination of new nuclear, wind, solar, imports, energy efficiency, demand response and storage. Drawing upon the province’s experience undertaking coal phase-out over more than a decade, modelling the constraints on the degree to which storage and demand response can satisfy reliability requirements, and coupled with the longer-term deployment timelines for resources such as larger nuclear and hydroelectric facilities, the simulations indicated that operationally the IESO would need to frequently rely on emergency actions to maintain overall system reliability.

The report puts forward a compelling rationale as to why the province should consider alternative, lower-cost options for carbon abatement in the near-term by leveraging Ontario’s already low-emission power system to economically induce electrification in far more efficient ways. For example, the study assumes that completely removing natural gas generation from the electricity supply mix would cut carbon emissions in Ontario by 12.2 megatonnes/year by 2030, at a unit cost of $464/tonne. By comparison, recent decarbonization announcements and efforts targeted at reducing emissions in Ontario’s steel industry range between $7-14/tonne, or 97% less costly, and coincidentally rely on the clean footprint of the province’s electricity system to displace fossil fuels in that industrial process.

In response to the report, The Honourable Todd Smith, Minister of Energy, issued a letter to the IESO instructing it to consider two new undertakings. First, the IESO is to evaluate a moratorium on new natural gas generating stations in Ontario and to consider whether alternative sources of electricity can meet Ontario’s objectives of affordability, reliability, and environmental stewardship. Second, the Minister asked the IESO to develop an achievable pathway to phase out natural gas generation and ultimately achieve zero-emissions in the electricity system.

To that end, the Minister has requested that the IESO develop an achievable pathway considering certain explicit elements, including:

• The reliability of the electricity system.
• The cost to electricity ratepayers.
• The timeline on which this objective would be achievable.
• The positive or negative effect this objective would have on electrification of the broader Ontario economy (i.e. industry, transportation, etc.).
• Reaching the province’s overall climate goals.
• The possibility of maintaining existing generating facilities but replacing natural gas with green fuels such as hydrogen and renewable natural gas, or the development of utility-scale carbon capture and storage.
• The role of technologies like pumped storage, battery storage combined with non-emitting resources, hydro, nuclear, and demand response to eliminate emissions in the electricity system.

The IESO’s report back to the Minister is required by November 2022.  

This report and the government’s response letter represent a clear signal to the IESO, the electricity market, and broader stakeholders, that greenhouse gas (GHG) emissions are indeed an important factor in electricity planning. The timing is critical, as the IESO embarks on the design of a procurement plan to maintain existing generating facilities and secure an additional 1,000 MW within the next 18 months. The IESO has indicated that an arbitrarily proposed deadline, such as 2030, could have negative, long-term impacts on the cost of electricity to Ontarians, the reliability of the power system Ontario homes and businesses rely upon, and the advancement of electrification as a means for the province to best achieve overall climate targets.

As indicated in the IESO’s July 2021 Annual Acquisition Report (AAR), capacity needs in Ontario begin to emerge in 2022 and continue to grow through to 2026 as demand increases while available capacity decreases, largely as a result of nuclear refurbishments and the retirement of the Pickering Nuclear Generating Station (NGS). A notable change occurs post-2028, when the province will be confronted with an unprecedented amount of contractually secured resources expiring in a relatively short period of time. These needs continue to grow into the 2030s and are dramatically compounded should the availability of existing natural gas resources be withdrawn as an option to maintain reliability by 2030.

Happy to help.

Over the coming year the IESO will undertake further work, pursuant to the Minister’s letter, to both evaluate a moratorium on new natural gas generating stations and to develop an achievable pathway to phase-out natural gas generation in the interest of achieving zero-emissions in the province’s electricity system. The outcome of that work and subsequent decisions based on it may have repercussions for other initiatives related to resource adequacy, procurement, and system planning. Sussex would be pleased to discuss this report, the guidance provided to the IESO by the Minister of Energy, and their implications for Ontario’s electricity sector, in more detail upon request.

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Chris Benedetti, Managing Partner
cbenedetti@sussex-strategy.com

Robyn Gray, Principal and Environment Practice Group Lead
rgray@sussex-strategy.com

Bonnie Hiltz, Vice President and Energy Practice Group Lead
bhiltz@sussex-strategy.com

‍Mark Olsheski, Vice President
molsheski@sussex-strategy.com

Christina Marciano, Senior Associate
cmarciano@sussex-strategy.com

Alex Simakov, Associate
asimakov@sussex-strategy.com

Paula Conboy, Senior Counsel
pconboy@sussex-strategy.com

Kim Warren, Senior Counsel
kwarren@sussex-strategy.com

Jim Burpee, Senior Counsel
jburpee@sussex-strategy.com

Ken Cain, Senior Counsel
kcain@sussex-strategy.com