Ontario Hits the Gas – How Ontario’s Planned Gas Plant Capacity Procurement Affects Real Estate Owners

Ontario currently has one of the cleanest electricity systems in North America with greenhouse gas emissions from the sector representing about three per cent of our economy’s emissions. As a result, Ontario businesses and residents are shifting towards electrification to reduce their carbon footprint.

However, recent government procurements to increase gas capacity to meet upcoming anticipated energy capacity shortfalls may increase the carbon intensity of the grid in the coming years – reinforcing the importance of on-site renewable energy generation, such as rooftop solar PV, to meet decarbonization objectives. Furthermore, energy prices are anticipated to increase with the upcoming proposed energy mix, supporting putting in place on-site Power Purchase Agreements (PPAs) as a hedge against grid price risk. Read on for further context.

In Ontario, the Independent Electricity System Operator (IESO) is responsible for ensuring grid reliability and planning for growth in the province’s generation capacity. The IESO has recently identified a need for additional capacity in the 2025-2027 period, as well as the decade beyond. For context, “capacity” refers to the ability to meet peak loads on the grid at a given time and is measured in megawatts (MW). Total consumption of energy is measured in megawatt hours (MWh), which is one MW of power used over the course of one hour.

Due to population growth in the province, combined with a rapidly increasing demand for electricity, strain is being placed on existing electricity infrastructure. The IESO forecasts that overall energy demand will grow at an average rate of1.7% per year over the 20-year period of 2023-2042.

To increase grid capacity to meet anticipated demand, the IESO has been running a series of RFPs to procure additional capacity resources from electricity suppliers for the coming years. The first RFP known as the Medium-Term RFP (where some capacity would come online as early as 2024) recently awarded expanded contracts to existing facilities which can fill the gap as shortly as possible. In this process, over 700 MW of additional capacity was procured by the Ontario Government, with the vast majority being supplied by natural gas facilities.

The IESO has also launched a Long-Term RFP, as well as the Expedited Process – both intended to target new-build resources along with the expansion of existing facilities. The Long-Term RFP would target assets with a commercial operation date in 2027, whereas the expedited process would target assets coming online as early as 2025.

While the procurements have been undertaken to meet Ontario’s growing electricity demand and avoid risks of shortfalls and brownouts, they have also attracted controversy due to addition of increased carbon intensity of production in the energy mix, in contrast to the Federal government’s objective of having a net-zero national electrical grid by 2035.

Together the two current procurement processes target the acquisition of 4,000 MW of new capacity, including 2,500 MW from battery storage, non-emitting resources, and biofuel resources. As battery storage is still an emerging technology, the cost of this capacity may be relatively high. The IESO is also planning on acquiring substantial new natural gas capacity of up to 1,500 MW through the process.

Part of the reason – while carbon intensive and detrimental to climate change objectives, gas is an effective “peaking” electricity provider which can be turned on at a moment’s notice to meet rapid increases in demand, relative to nuclear or hydro-electric sources of electricity, which take longer to increase or decrease production.

The IESO has stated that over time they expect to phase out gas plants, likely replacing them with a mix of non-emitting generation, storage, and demand-side and transmissions solutions. Natural gas is viewed as a transition fuel, but nonetheless increases the carbon intensity of the grid.

So, what does this mean for real estate owners looking to decarbonize their real estate portfolios?

On-site renewable energy production – such as rooftop solar PV and geothermal – should be considered as a means to reduce an organization’s Scope 2 emissions. For example, a rooftop solar array on an industrial building can be sized to meet 100% of the on-site energy demand, using renewable energy to meet all electricity requirements agnostic of the carbon intensity of the grid.

Furthermore, as the on-site generation is governed by a PPA, the owner is not exposed to grid price risk. Should the market price of electricity rise in response to the aforementioned procurement processes, the real estate owner is only committed to the price indicated in the private PPA agreement.

At AltCrest Energy, we partner with owner-developers to install renewable energy systems to fully meet their building’s needs and achieve their ESG /decarbonization objectives. AltCrest invests the capital cost to install the systems in exchange for a stable energy contract under a PPA.

If you would like to learn how to protect your business from electricity price escalation and a potentially more carbon intensive grid, our team at AltCrest Energy would be pleased to assist.