Ontario Electricity Consumers Can Win from Market Reform:Report

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Ontario electricity consumers will benefit from less risk and lower prices if the province moves to a capacity market for obtaining generation, according to a report from the C.D. Howe Institute. In “Rethinking Ontario’s Electricity System with Consumers in Mind,” author Michael Wyman calls for the province of Ontario to adopt a capacity market, in which generators would receive payments for being available to produce energy, if needed, at some point in the future.

“After a decade of relying on the centrally managed Ontario Power Authority (OPA) to procure capacity, Ontario consumers are on the hook for a substantial amount of project-development risk,” states Wyman. He draws attention to when Ontario ratepayers had to cover over $900 million in charges relating to the relocation of the Oakville and Mississauga OPA-gas contracts.

Capacity markets allocate project development risks to the most logical risk bearer: the generation developer. A capacity market in Ontario would also have the benefit of de-politicizing the power acquisition process. Further, relying on a capacity market would increase transparency by forcing more pricing and discussions into the public domain. Presently, the contract price of individual OPA contracts for natural gas-fired generators is confidential, and negotiations about extending nuclear often take place behind closed doors.

Wyman recommends that a capacity market in Ontario should include features that have proven critical to the success of such markets in other jurisdictions, such as:

Varying the capacity price among different geographic locations within the province.
Incorporating demand response.

Setting resource requirements in a well-reasoned and de-politicized way.

Integrating with neighboring markets, such as New York or Quebec, to the greatest extent possible, by treating out-of-province supply as equivalent to in-province generation to ensure that customers receive the most economical sources of new capacity.

Avoiding local-content requirements.

Combining a capacity market with market-based renewable energy markets or emissions pricing – replacing more politicized mechanisms.

The report concludes that laying the groundwork for the eventual transition away from the OPA’s central procurement towards market-oriented mechanisms is a necessary first step to a reliable, and efficient electricity generation system that reduces ratepayer risk.