Proposal to create a regulation under the Ontario Energy Board Act, 1998 to change cost responsibility rules for certain electricity system connection infrastructure for high-growth areas where load growth materializing in the future is very likely

Context:

The Ministry of Energy and Electrification (Ministry) is consulting on potential regulatory changes that would, if approved, change the cost responsibility framework for certain electricity system infrastructure, including how costs are allocated to customers and how those costs are recovered by the utility companies that build the infrastructure. These changes may be made at the transmission and / or the distribution level, and where the prospect of load materializing in the future is very likely.

For clarity, the proposed regulatory treatment would apply only to customer connection infrastructure (i.e., in the case of distribution infrastructure, assets required to expand the distribution system to connect a specific customer or group of customers to the electricity system and in the case of transmission infrastructure, line or transformer connection assets). It would not apply to what are referred to as network assets at the transmission level or distribution system network assets (or “enhancements”) at the distribution level (i.e., infrastructure that benefits the whole system and which is paid for by all ratepayers).

Note that the government has proposed legislative changes to the Ontario Energy Board Act, 1998 to establish the Ministry’s legislative authority to create and enable these possible regulations. You can find those proposed legislative changes here: Proposed Amendments to the Electricity Act, 1998, Ontario Energy Board Act, 1998 and the Energy Consumer Protection Act, 2010 to enable an affordable energy future | Environmental Registry of Ontario.

This consultation is pursuant to the regulation or regulations that would emerge from those proposed legislative changes, if passed.

Proposal:

The Ministry is considering developing a regulation or regulations that could:

• Reduce the cost and financial burden on 'first mover' customers (i.e., the first customer(s) that want(s) to connect in an area where electricity infrastructure capacity from the distribution or transmission networks is not sufficient to service that new demand). Existing rules require first-mover customers to bear the full costs and financial risk of building new connection infrastructure, even if that new infrastructure results in capacity that exceeds the customer’s requirements due to the engineering or optimal sizing of the assets to meet the customer’s requirements. The proposed changes could re-allocate the costs and financial risk associated with this excess capacity.
• Provide the transmitter or distributor with the assurances they need to build certain connection infrastructure to support anticipated growth without a confirmed customer for all of the capacity. This proposed change, applied at strategically significant locations, would enable more timely development of connection infrastructure to enhance system readiness for economic development, housing expansion, and electrification.

See below for further details on the rationale behind our consideration of addressing these two scenarios in this proposal.

The Ministry is not proposing to deviate from the fundamental ‘beneficiary pays’ principle that underlies the province’s current cost responsibility framework. In accordance with the Ontario Energy Board’s Transmission System Code and Distribution System Code, the costs of electricity infrastructure are generally borne by those who benefit. This approach is designed to protect ratepayers from paying for infrastructure that benefits only one or a small number of customers. Beneficiaries / specific customers will continue to pay a share of infrastructure costs, and financial risk will be allocated appropriately to achieve objectives.

Consultation Questions:

The Ministry is undertaking consultation on a potential regulation(s) with a particular focus on the following questions:

1. What criteria should be considered when determining which projects would be subject to new allocation of costs or financial risk? What types of projects should be subject? (see details below for examples of the types of projects that could be considered)
2. What approach should the regulation or regulations take to fairly allocate costs and financial risks between specific connecting customers and ratepayers?
3. What controls should be put in place to ensure that the proposed amendments do not lead to over-building, and to minimize risk to ratepayers, i.e. the risk of stranded assets?

The Ministry is also interested in hearing and addressing any other feedback around the proposal.

Depending on the outcomes of consultation, the Ministry intends to post a draft regulation or draft regulations for further stakeholder consultation.

Proposal Rationale and Background:

The proposal reflects Ontario’s commitment to supporting growth and affordability. The Independent Electricity System Operator has projected electricity demand to grow by 75% by 2050. Given the expected increase in electricity system demand, driven by economic growth, housing development, electrification and the energy transition, there is a need for timely and cost-effective expansion of the electricity grid. A proposed regulation(s) could help to reduce connection costs for first-mover customers, enable faster implementation of grid connection infrastructure upgrades, and enhance system readiness for industrial and housing development and electrification in certain circumstances, while driving affordability for Ontarians. 

There are two primary issues that could be addressed through regulations (and the Ministry welcomes feedback on whether there are other issues that could be addressed):

• First-mover customers currently bear a disproportionate cost and financial risk associated with the construction of new connection infrastructure. The first mover may be reimbursed if other customers use the excess capacity within the appropriate connection horizon, but are not reimbursed by customers that materialize after that period.  As a result, first mover customers seeking to connect to the transmission or distribution systems argue that they bear a disproportionate cost and financial risk associated with the infrastructure they need to connect to the grid.
• Transmitters and distributors are not incented to build new connection infrastructure in anticipation of future growth and therefore generally build incrementally only after customers commit to new capacity. In other words, even when a transmitter may be confident that future customers will materialize in an area, they cannot deliberately build excess capacity unless a specific customer is willing to make a financial commitment in advance of when they might need it or the IESO is able to identify the future need, and they are not willing to accept the risk of building without such assurance. Distributors are expected to build infrastructure as an enhancement to their systems if it is to meet forecasts of general load growth, however such investments may not address a future specific connection expansion need. This can result in higher total connection costs relative to building connection capacity proactively, as connection infrastructure may become quickly over-subscribed in high-growth areas by the time new customers are ready to commit, and subsequent work is required to retrofit or upgrade infrastructure to meet the new demand.

In both of these scenarios, the existing cost allocation and recovery framework can be a prudent way to balance attributing costs to benefitting customers and avoiding risk of ratepayers paying for excess capacity.  However, this may unnecessarily limit investment and expansion and places excess burden and risk on the aforementioned first-movers, especially in areas where the government expects or is promoting high growth.

Environmental Impact:

Action is required to ensure that Ontario can continue to harness its clean energy advantage. The proposal could help to reduce connection costs for first mover connection customers, enhance site readiness and investment attraction at strategically significant locations, and accelerate economic growth, housing development, and electrification. Neighbouring jurisdictions have already taken action to expedite electricity system connections, enhancing their attractiveness to business investment by providing more timely and cost-effective connection. The proposal is anticipated to have a positive environmental impact by supporting Ontario in harnessing its competitive clean energy advantage, by ensuring the system is not forced to play constant catch-up to new load requests, which currently delays critical housing expansion, economic development, and electrification initiatives. The proposed amendments would not change the existing Environmental Assessment process, which will remain the core mechanism by which the environmental costs and risks of electricity infrastructure expansions are evaluated and environmental protections are planned.

Related Initiatives:

The Ministry is currently undertaking a consultation and engagement process to inform Ontario’s first Integrated Energy Resource Plan. Ontario has a growing need for power, driven by greater electrification, the connection of new businesses and an increase in housing development to serve a growing population.  The Ministry has also published Ontario’s Affordable Energy Future: The Pressing Case for More Power, which outlines Ontario’s vision for an integrated energy future, and provides important context for our consultation on an Integrated Energy Resource Plan. Timely and cost-effective expansion of the electricity grid is a priority within the government’s vision.

The Ontario Energy Board (OEB) is currently consulting on possible complementary changes to the standards governing transmission system connection costs, which could reduce the upfront cost burden and financial risk for proponents and developers. Information on this review can be found here: https://engagewithus.oeb.ca/tcr. The OEB is also undertaking a review of distribution system expansion connection and revenue horizons, with the aim of ensuring infrastructure development aligns with Ontario’s growth objectives. Information on this review can be found here:  https://engagewithus.oeb.ca/system-expansion-for-housing-developments-consultation.