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Insights

February 01, 2024

ARTICLE

Energy planning and energy transition: 5 perspectives on Ontario's clean energy opportunity

John Vellone, Partner and National Leader, Energy, Resources and Renewables Sector

If you put five lawyers in a room, you’ll get five different opinions.

It is from this perspective that five members of BLG’s electricity markets group provides their views on David Collie’s Jan. 19, 2024 Electrification and Energy Transition Panel report titled “Ontario’s Clean Energy Opportunity” (the Report).

The scope of the Report is ambitious - outlining the opportunity for Ontario to prosper and leverage its clean energy advantage to facilitate the local economic growth – but the result is light on details.  The common refrain appears to be that it was “underwhelming.”

However, the Report delivers on the panel’s terms of reference. And while providing 29 sensible, albeit academic, recommendations, much of the actual work, including decision making about policy, pacing and implementation is left to the government.  As it should be.

In many ways, EETP was a victim of its own success. The panel was established in April 2022, consulted broadly between March and July 2023, and as time passed and the myriad of topics it touched on grew in importance across the sector – expectations increased.

As can happen, current events overtook the EETP in a way that was difficult to foresee.  In this Insight, our team comments on various key aspects of the Report and provides their views on the potential impacts.

"Energy transition" remains undefined

Mark Rodger, Partner and Regional Co-Chair of the Electricity Markets Group

Important context for the EETP report is the absence of specificity regarding what constitutes “energy transition” for Ontario. While the report makes multiple references to “addressing climate change”, “the clean energy economy” and “net zero” (another undefined term), it correctly recognizes that the Minister of Energy along with the provincial government will continue to lead energy planning. Ultimately, the province of Ontario will determine what is, and what is not, energy transition (which may not be consistent with current Government of Canada policies).

The recent Enbridge Gas decision (EB-2022-0200), and the Minister of Energy’s swift, negative reaction to a central Ontario Energy Board (OEB) finding in that case, illustrates the critical importance and need for the province to articulate, sooner rather than later, what energy transition means. In the Enbridge case, a key OEB finding was based upon “the reality of the energy transition” which poses a risk that assets used to service existing and new Enbridge customers will become stranded because of this energy transition.  However, to our knowledge the province of Ontario has at no time indicated that an energy transition objective is phasing out the use of natural gas. Our conclusion for why the Minister of Energy objected so strongly to this implication inherent in the OEB’s decision is because the deciding Board panel took it upon itself (arguably reaching beyond its legislative mandate) to offer an interpretation of energy transition contrary to the government’s position.  If this is correct, then the Minister of Energy’s reaction to the OEB decision was both predictable and justified.  For example, in some highly energy intensive processes, the conversion to natural gas is the energy transition.  This would include Ontario steel makers who are making the switch from higher emission coke-fired blast ovens to significantly lower emission Electric Arc Furnaces which consume large volumes of natural gas as part of the heating and melting process.  

To provide clarity about what energy transition means for Ontario, we support the EETP recommendation that “Government will need to provide direction on complex and contentious issues to ensure an orderly transition that allocates resources effectively and protects customers”.

Execution of energy transition still at risk of delays without a full understanding of the legal basis for Duty to Consult

Cherie Brant, Partner and National Leader, Indigenous Law

Never before have we seen a policy panel convened at the early outset with a mandate to consider the Indigenous perspectives in the energy space for future planning and transition efforts. It was always the case that Indigenous interests needed to be brought “into the policy discussion" by rights holders. One only needs to look back at the supply and demand planning of the Integrated Power System Plan back in 2008 or even the breakup of Ontario Hydro in 1999 to understand that there is a whole set of rights that were not as well understood (in the transfer of ownership of transmission and distribution lines) as they are today.

The concept of “true partnerships with Indigenous partners" is sprinkled throughout the Report after conducting extensive engagements with existing and future Indigenous partners in the clean energy economy. However, without a full understanding of the legal basis for these rights holders, we risk watering down the exercise to a “social licence" when the process is meant to build informed consensus with a substantive role for the Crown. If we don't have the opportunity to build our understanding of legal concepts such as the honour of the Crown, we run the risk of creating “solutions" for problems we don't truly understand.

Implementation of the clean energy economy must recognize that the honour of the Crown and requirement to discharge and satisfy the duty to consult cannot be delegated to third parties. These important concepts regarding the nature of Indigenous rights are absent from the Report's executive summaries and recommendations. This presents a risk that industry participants do not understand the weight to be given to these constitutional rights protections. While Indigenous and treaty rights are collective in nature, certain rights may be exercised by individual members of a First Nation while other historical rights and practices must be codified in order to be effectively managed. Failure of industry participants to understand the nature of Indigenous rights could result in further project delays if other non-participating Indigenous groups raise concerns tied to the Crown's duty to consult.

Cost allocation and recovery policies for natural gas and electricity connections (Recommendation 15)

Colm Boyle, Senior Associate

Cost allocation and recovery policies are hotly contested subjects in both the natural gas context as result of the recent Enbridge Gas cost of service decision (EB-2022-0200) and in the electricity distribution context as part of Elexicon’s ICM application (EB-2022-0024) to upgrade its system and pilot new methods of home construction to facilitate the energy transition. In each case, the issue focuses on reducing or extending the revenue horizon calculated to, respectively, increase or reduce the upfront costs paid by customers for new utility infrastructure. Interveners have generally aligned their positions on revenue horizons with their constituent’s interests.

Even the OEB Commissioners are not aligned on revenue horizons in the natural gas context. Unusually, the Enbridge cost of service decision had a dissent by OEB Commissioner Allision Duff who did not think there was enough evidence to demonstrate that the Ontario electricity grid could support a scenario of “no-new-gas-connections”. Commissioner Duff did not support the majority’s reduction of the residential revenue horizon from 40 years to zero. This decision also spurred a statement from the Minister of Energy, Todd Smith, on housing affordability stating that this decision “…could lead to tens of thousands of dollars added to the cost of building new homes.”

Recommendation 15 correctly identifies the fundamental disagreement and potential unfairness regarding the cost allocation and recovery policies for natural gas and electricity connections. Changes resulting from Recommendation 15 will likely be significant departures from long standing OEB policies that have been in place for decades. We expect that broad consultation and phased implementation may be necessary to minimize impacts on existing and future investment in Ontario (e.g., generators participating in IESO procurement process had certain cost assumptions in bidding). Clarity on approaches to cost allocation and recovery will also be helpful to ensure that customers are provided with non-discriminatory access to utilities.

Legislative and ministerial implementation of recommendations required

Sarah Diebel, Counsel

The Report is premised on rapid transformation and emphasizes themes of coordination, collaboration, compromise, and change management.  It suggests Ontario should embrace more expansive electrification and signals policy objectives to inform government and regulatory decision-making over the short-term (up to 2030), medium-term (2030 – 2050), and long-term (beyond 2050).  It also acknowledges these challenges and opportunities are not unique to Ontario and should be situated within a climate of clean investment competitiveness, where subsidies and incentives offered by different jurisdictions will be complex to understand and align.  

The core concept of “energy transition” is given an amorphous meaning, as the structural transition of how a society supplies and uses energy, usually driven by technological developments and shifts in human needs and goals; and, the scope of the Report is extensive, where electrification and the transformation of Ontario’s economy to clean energy sources is unprecedented in pace and scale…will be a multi-decade social, economic and pollical process that will affect every sector and community in Ontario.  

To give effect to one or more of its 29 Recommendations, the Report will need to be followed by legislative amendments and/or operationalizing directives from the Minister of Energy to the IESO and the OEB.   For example, procurement directives will likely continue to flow to the IESO for new electricity supply (from clean energy resources, conservation and demand response), and policy directives flow to the OEB to inform cost-effectiveness, rate setting, and cost-allocation across customer classes.  What to expect – familiar features with a fresh policy filter.

Distributed energy resources

Kristyn Annis, Partner 

The Report is valuable in that it speaks to the role of local stakeholders and distributed energy resources (DERs) will play in contributing to the energy transition. The Report notes that “on a geographic basis, local decisions and distributed solutions can often be implemented and scale more quickly than centralized approaches, produce co-benefits (such as resilience) and build sustained local support by making communities partners in their energy future."

Later in the Report, the Panel references the IESO’s commissioned Ontario’s Distributed Energy Resources Potential Study, “which showed that over a 10-year timeframe (2023–2032), it would be possible to cost-effectively meet all incremental system needs with DER capacity.” Specifically, DERs could satisfy a material portion of the province’s energy needs – and could provide a whopping 1.3 to 4.3 GW of peak summer demand by 2032. The Report also links the use of DERs in local planning to the energy transition and states that:

“Where they are clean and reliable, DERs can also contribute to emissions reduction while supporting reliability at the local level. These innovations in scalable, often customer-owned energy solutions, have the potential to significantly alter the range and number of energy services delivered at the distribution level.”

In addition to the possibility of DERs helping to meet system needs the Report notes that “many local governments in Ontario have developed detailed and ambitious strategies to address climate change, transform their municipal energy systems, conserve energy, and reduce both corporate and total greenhouse gas emissions.” The Report cites Toronto, Ottawa, Hamilton and Oxford as examples. Recommendation 7 makes the link between local planning and emphasizes the need to “facilitate, resource and enable the energy transition at the municipal level”:

Recommendation 7: To ensure municipalities, communities and local businesses are in the best position to participate in energy decision-making and take responsibility in pursuing their energy transition objectives, the Ministry of Energy should develop a strengthened framework for local energy planning and decision-making and take steps to facilitate its implementation. The goal should be to develop mature Comprehensive Local Energy Planning processes through which communities can effectively contribute to Ontario’s energy transition in ways that suit their needs and reflect their local strengths, opportunities, and priorities. Developing Comprehensive Local Energy Plans with transparency on cost implications and rate impacts can help to align community planning with provincial policy objectives.

The Report accurately summarizes the need from the regulatory and market perspective:

“To maximize the cost-effective potential of DERs, the market models and regulatory frameworks by which the distribution sector is managed, and the ways in which the bulk electricity system is planned and managed, will need to evolve. The assessment of the achievable potential of DER technologies therefore must be complemented with rigorous analysis to understand how evolving (utility) business models and design of the wholesale market can enable DERs. New ways of organizing distribution system operation and participation, such as non-wire solutions, aggregators, virtual power plants, Distribution System Operators and other local energy markets, hold significant potential. The emerging consensus holds that DERs, while lacking some attributes of economies of scale compared to central grid infrastructure, offer opportunities to stack multiple value streams for the customer (including resilience) and the electricity system (from ancillary services to energy capacity).”

I couldn’t agree more.

Key Contacts