Today, most nations of the world have an energy policy of some sort. Reliability and security of supply are typically overarching objectives, even in the most developed and richest of economies. Increasingly, renewable energy has become a household word in energy policies. Renewable energy policy often has an identifying bell tower, like a white paper or a strategic directive issued by the relevant government department, even a gleaming piece of green legislation. In Ontario, district energy does not have a tall bell tower so it can be difficult to extract a definitive policy and regulatory framework. This article describes pieces of the policy and regulatory architecture that touch the district energy landscape in Ontario.
Introduction
In 2009, Ontario attracted worldwide attention when the province’s Government introduced the Green Energy and Green Economy Act, 2009 (Green Energy Act). Barely two years later, the number of applications submitted to the resulting Feed-in Tariff (FIT) program is nothing short of astounding. Tens of thousands of applications, coupled with mandatory connections, conservation targets, and transmission and distribution infrastructure planning requirements contained in the Act, has resulted in policy makers and regulators banging their heads to find continued solutions to effect implementation.
Decisions relating to transmission and distribution infrastructure development and the attendant cost allocation occupy significant amounts of attention from the Ontario Energy Board (the province’s energy regulator) and the Ontario Power Authority (OPA). But as provincial authorities, distributors and transmitters grapple with prioritizing connection issues and associated infrastructure development, there is an equally important piece of the clean energy plan sitting perhaps closer to the proverbial home, er, um, load – namely, district energy.
First Things First
For the purposes of this article, district energy is defined as the central provision of heating or cooling. Heating distributes heat generated in a centralized location for residential and commercial heating requirements such as space and water heating. The heat may be obtained from a combined heat and power (CHP) plant. Cooling distributes thermal energy in the form of chilled water from a central plant to multiple buildings through a network of underground pipes for use in space and process cooling.
The Policy Context
Today, any discussion of energy policy in Ontario necessarily begins with the province’s Long Term Energy Plan. In November 2010, the Ontario Government issued its updated energy policy – the Long Term Energy Plan (LTEP). Key elements of the LTEP include:
- Demand will grow about 15 percent between 2010 and 2030;
- Ontario will be coal-free by 2014;
- Nuclear power will continue to account for approximately 50 percent of the province’s electricity supply ;
- Ontario’s target for clean, renewable energy (wind, solar and bioenergy) is 10,700 MW by 2018;
- CHP is an energy-efficient source of power and the OPA will develop a standard offer program for projects under 20 MW; and
- Conservation remains a priority with targets of 7,100 MW.
In February of 2011, the Ministry of Energy issued the Supply Mix Directive, which reflects the key elements of the LTEP. The directive also requires the Ontario Power Authority to prepare a 20-year integrated power system plan (IPSP) to meet the government’s goals.
In May 2011, the OPA issued its IPSP Planning and Consultation document to provide stakeholders with information on the status and outlook for the electricity system. The document is intended to guide consultations that will assist the OPA in developing an updated IPSP.
District Energy: The Needle in the Haystack?
District energy does not occupy an express place in the LTEP or the Green Energy Act. However, district energy that generates power from a CHP plant that utilizes an eligible green energy fuel source would be eligible for the FIT Program. In addition, the LTEP does contain an important and explicit reference to the development of a CHP standard offer program. This focus on CHP is an important element in the district energy space.
Ministerial Directives
CHP has been on the Ontario Government’s radar as an important element to develop prior to the LTEP. The Minister of Energy issued a directive to the OPA in June 2005 to procure up to 1,000 MW of CHP projects. In April 2008, the Minister further directed that approximately 100 MW of this be renewable CHP. To date approximately 400 MW have been procured. (Another direction, issued on June 14, 2007, directed the OPA to launch a clean energy supply standard offer program for the procurement of small CHP facilities.)
In November 2010, the Minister of Energy directed the OPA to complete the procurement of the 1000 MW of CHP projects under certain conditions (CHP Directive). The CHP Directive essentially replaced and superseded the previous three CHP and clean energy related directives. Under the CHP Directive, CHP projects under 20 MW are to be purchased under a standard offer program and the larger, under individually negotiated contracts. In both exercises, the OPA is required to consider the following:
- Projects must be located in parts of the province that the OPA identifies as appropriate;
- cost effectiveness of the project;
- whether the project can be accommodated by local distribution systems and whether there are local benefits associated with the project;
- whether the projects meets technical requirements and is designed as a viable source of supply to a heat load;
- the extent to which the project is sized to match the heat load requirements (useful heat output);
- a project’s ability to accommodate electricity system load following and other operability requirements; and
- contract terms shall reflect a reasonable costs for Ontario electricity consumers and a reasonable balance of risk and reward between project proponents and consumers.
CHP at the Altar: An SOP of My Own
On May 6, 2011, the OPA launched the clean energy standard offer program (CESOP), a day which opened the door for project applications to be accepted until June 30, 2011 (the launch period). The program rules reflect the requirements contained in the CHP Directive.
The CESOP has upfront locational eligibility requirements. The original draft program rules specified a list of areas where projects could be located. The final program rules will accept applications for projects in other areas as well, following the launch period.
The program has two streams: Combined Heat & Power (with which this article is concerned), and Energy Recovery. The CHPSOP is intended to support efficient use of natural gas-fired electricity generating facilities. To be eligible to participate in CHPSOP, a proposed generating facility must constitute a CHP facility that utilizes natural gas for the production of 95% or more of the electricity generated by the facility as averaged over a contract year, and may only supplement natural gas with “Eligible Alternative Fuels”, being renewable biomass, biogas, and any “Eligible Primary Energy Source”.
The CHP facility must generate electricity and useful heat output (specified), deliver the electricity through a meter to a distribution system or an electrical host facility, and deliver the useful heat output through a meter to one or more host facilities. Behind-the-meter configurations will only be accepted where there is a sufficient technical rationale.
The OPA will work together with the Independent Electricity System Operator and any applicable transmitter and Local Distribution Company (LDC) to determine if there is sufficient transmission and distribution system connection resources to accommodate the project, taking into account: (i) all prior CESOP Applications, (ii) prior applications under the FIT Program, and (iii) any other generation that is existing, committed or subject to ministerial directive.
The relative prioritization of prior applications under the FIT Program could be problematic for CESOP applicants. The FIT Program has received more than twenty thousand applications since October 2009. Moreover, the CHPSOP Contract is primarily a financial agreement that is intended to provide Suppliers with the benefit of a financial contract based on net revenue support level in $/MW-month for the 20-year term of CHPSOP Contract.
CHP Individual Procurement Initiatives
The CHP Directive also authorized the procurement of individually negotiated CHP projects greater than 20 MW in capacity. The OPA issued a request for proposals in respect of this on June 21, 2011 (CHP IV). The OPA is targeting October 2011 for the selection of proponents. As with FIT and CESOP projects, the potential for CHP IV projects will be significantly affected by available transmission and distribution. The OPA has stated that it will target projects that are located in areas that can be accommodated by the transmission and distribution grids.
Any Old-fashioned Regulation?
District energy, including CHP, remains largely unregulated in Ontario. District energy projects are not part of a rate-based regime from which the recovery of costs can relied upon. However, the regulatory function of transmission and distribution investment planning and cost allocation can substantially affect the viability of CHP projects.
Summary
Although district energy in Ontario remains largely unregulated, the articulation of Ontario’s district energy policy has been emerging for the past several years. As discussed above, Ontario’s district energy policy has been largely focussed on CHP. The current CESOP and CHP IV procurement exercise are promising attempts to increase CHP’s role in energy supply. An optimist will choose to ignore the looming cloud of crowded transmission and distribution capacity. District heating and cooling, absent CHP, will continue to rely largely on market mechanics and, in many instances, municipal interest, to fully develop. So for now, there is no bell tower for district energy in Ontario. But with the inherent localized nature of district energy solutions, perhaps the lack of a policy bell tower is an appropriate analogy.
About the Author
Bernadette Corpuz is a Senior Associate in the Electricity Markets Group of the law firm Borden Ladner Gervais LLP (BLG). As a member of the Electricity Markets Group, Ms. Corpuz advises a wide range of energy market participants, including distributors, transmitters, generators, and commercial users with respect to a variety of commercial and corporate transactions related matters, including mergers and acquisitions, financing and energy markets. Ms. Corpuz can be reached at bcorpuz@blg.com or 416-367-6747.
