Canada: Ontario's Long-Term Energy Plan

On November 23, 2010, the Government of Ontario released its Long-Term Energy Plan (the Plan). The Plan addresses seven key areas: demand, supply, conservation, transmission, Aboriginal communities, capital investments and electricity prices. Although the Plan reaffirms previously announced Government policy and initiatives, in certain areas clarification is given on how these will proceed forward and when. Those elements of the Plan which are forward-looking have been posted to the Environmental Registry as a draft Supply Mix directive to the Ontario Power Authority (OPA) for a 45-day comment period. Following the comment period, the Supply Mix directive will be formally issued to the OPA and will form the basis for a new Integrated Power System Plan (IPSP). We expect the IPSP will then be considered in public hearings before the Ontario Energy Board (OEB).

Supply

On the topic of supply, the Plan addresses each of the main components of Ontario's current generation supply mix. It reiterates the Government's commitment to ending the use of coal for electricity generation by 2014, and, consistent with a directive issued to the OPA earlier this year, converting Atikokan Generating Station from coal to biomass. It also calls for the conversion of Thunder Bay Generating Station from coal to natural gas. The Plan reiterates the Government's commitment to nuclear power, which is to be achieved by refurbishing 10,000 MW of nuclear capacity at the Bruce and Darlington stations, and by building two new units at Darlington.  The Plan indicates that Ontario Power Generation (OPG) will invest $300 million to ensure that the Pickering B Station will continue to operate until 2020.  On the topic of nuclear new build, the Plan indicates that although the Government has continued to negotiate with Atomic Energy of Canada Limited (AECL) for two new units, it does not expect to be able to conclude a final deal until the uncertainty surrounding the proposed sale of AECL is resolved.

As for renewable generating facilities, the Plan indicates that most of the economical, large-scale hydroelectric power in the Province has already been developed or is in the process of being developed. It states that there is an ongoing role for smaller hydroelectric projects, which are eligible under the Feed-in Tariff (FIT) Program. The Plan contemplates the continued existence of the FIT Program, and indicates that future FIT projects will be connected to Hydro One's soon to be completed Bruce-to-Milton transmission line and other priority transmission projects discussed below. The Plan reiterates the OPA's intent to review the FIT Program in 2011, and revise the FIT rules, form of contract, and prices, as necessary. The Plan also contains a commitment to combined heat and power (CHP), by way of individual negotiations for larger projects, and a standard offer program for projects up to 20 MW in size.

Transmission

The Plan lists five new priority transmission projects, three of which are located in Southwestern Ontario (the Sarnia-London corridor), the fourth is a new transmission line in Northern Ontario (the East-West Tie), and the fifth is a new transmission line to Pickle Lake, commencing from the existing grid near Nipigon, Ontario. The last project is expected to serve mining, exploration and development opportunities in the prolific "Ring of Fire" area in Northern Ontario, as well as Aboriginal communities and renewable generation in this region.

The Southwestern Ontario projects are to proceed immediately and will be carried out by Hydro One. The Plan states that the East-West Tie project will be submitted to the OEB to determine the most qualified and cost-effective transmission company to develop the line. This is consistent with a policy instituted by the OEB in August 2010 that new major transmission project development requires OEB designation of the developer to ensure that the build-out planning and development of the grid occurs on a best-qualified and cost-effective basis. The policy reasons for this approach appear to relate to promoting transparency of costs and to some degree instilling greater competition in the transmission sector. The challenge with these objectives is the potential impact that an altogether new and additional regulatory approval requirement may have on the overall timing and implementation of a "priority" project. With respect to the Pickle Lake Project, extensive consultations with potentially affected Aboriginal communities and stakeholders is expected. Unlike the other priority projects, no in-service timing estimate has been provided, presumably due to these expected consultation requirements.

The transmission section of the Plan appears to be a formalization and restatement of the previous "Shareholders Letter" to Hydro One dated September 21, 2009, in which the Government requested Hydro One and the OPA begin the planning and development work on 20 identified transmission projects. The Plan now defines which of those projects have "priority" status, and should be completed first. According to the Plan, these projects, along with the soon to be completed Bruce-to-Milton transmission line, are intended to enable the connection of approximately 4,000 MW of renewable generation projects to the grid.

Electricity Prices

The Plan predicts that the industrial rate will rise by 2.7% annually over the next 20 years, and that the consumer rate will go up by 3.5% annually over this same period. While these numbers may appear gradual, the majority of the increases are forecast to occur in the near term; according to the Plan, residential prices are expected to rise by 46% over the next five years. This rapid increase in prices is attributable roughly evenly between the costs of upgrades to infrastructure and the costs of renewable energy projects. The Government's mitigation plan for this is the "Ontario Clean Energy Benefit," which provides a 10% discount on the electricity bills of residential and other small users, starting January 1, 2011 and lasting for five years. There are also a number of initiatives for industrial users to better enable them to save on their electricity costs, including the "Industrial Accelerator Program" and changes in the calculation of the Global Adjustment Mechanism.

Conclusion

Although the Plan mostly reiterates existing Government policy, in a few areas it provides greater detail regarding existing policy or new policy initiatives. In conjunction with the issuance of the Plan, the Government has posted a draft Supply Mix directive to the Environmental Registry, which contains the forward-looking aspects of the Plan. Following a 45-day comment period, the Supply Mix directive will be finalized and issued to the OPA. We expect this directive along with the content of the Plan, will then be used in the development of a more detailed Integrated Power System Plan for review by the OEB starting in late 2011. Once approved, the final IPSP will constitute the detailed long-term energy plan for the next 20 years, and will be updated every three years as required by regulation.

Elliot Smith is an associate who works extensively on major infrastructure projects, providing assistance with project development, procurement, contract negotiation and administration issues. Jacob Sadikman is an associate who practises focuses on the energy sector and on regulatory matters relating to trading and marketplace activities for securities, commodities and derivatives. Rocco Sebastiano is a partner who focuses on engineering, procurement and construction law and infrastructure matters. Gordon Nettleton is a partner who specializes in energy regulatory, environmental and business law matters and has significant experience in the regulation of oil and gas pipeline and electricity industries.

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