For more than a decade, the purchase and sale of electricity in Ontario has been managed through the operation of a competitive wholesale market. Each hour, the IESO receives offers from a wide range of suppliers to provide energy (as well as bids from large consumers to reduce energy use on demand) and then schedules the lowest-cost offers needed to meet demand. This market ensures the efficient and transparent use of generation and other resources to balance the system on a real-time basis.
In this way, real-time supply needs are met through the wholesale market, with the market price covering
the operating costs of generators and other suppliers. As a result, the wholesale, or Hourly Ontario Energy
Price, reflects the true cost of producing energy over the short term based on current supply and demand conditions.
Most generators in Ontario, however, have contracts that ensure there is enough generation and other forms of supply to meet longer-term demand needs and cover the cost of building and financing new infrastructure. These long-term contracts have been instrumental in ensuring reliability over the years. As existing contracts expire, the IESO sees an opportunity to take a different approach to meeting Ontario's future capacity needs. One of these options is to procure capacity through an open auction.
Learn more about how an incremental capacity auction would help to ensure reliability in Ontario.
Why Markets Matter
Alberta, New York, New England and other jurisdictions throughout North America also use a market-based approach to manage their electricity systems. They do this because markets offer a platform for competition and openness, producing transparent prices and outcomes that benefit producers and consumers alike—with information about generator output, prices and demand available to everyone through the click of a mouse. Market mechanisms with transparent price signals have proven their effectiveness in bringing suppliers and consumers together, helping participants to manage risk, and supporting efficient decision making about the production and consumption of electricity.
Wholesale markets work
to open up the electricity sector and help level the playing field by, for
example, allowing consumers to compete against generators to provide services
that help balance the system. Ontario's electricity system features a wide
range of participants from large generators to small consumers who are
aggregated through service providers.
This diversity of
supply makes the system more competitive and helps lower the cost of providing
electricity service. New players are bringing with them new services and
capabilities to help meet system needs, enabling the IESO to manage the system
in more efficient and cost-effective ways.
For the first time in May 2016, the IESO procured demand response resources through Ontario’s Demand Response (DR) Auction. The DR Auction provides a new competitive, transparent, and cost-effective method for procuring demand response resources to help meet the province’s capacity needs.
The Future of Market Development at the IESO
The electricity sector is changing to include a growing number and diversity of resources. From distributed wind and solar generation, to new types of demand response, electric vehicles, and storage resources, the electricity landscape is becoming increasingly complex. Markets have an essential role to play in this transition. They help to identify needs and provide price signals that can efficiently coordinate the activities of all players.
Now is a good time to consider changes to Ontario's energy markets−the province has a strong supply situation and can benefit from over a decade of experience with wholesale markets. In particular, the IESO can draw upon past work aimed at enhancing market efficiency including the work of the Electricity Market Forum and numerous market development stakeholder engagements. By proactively making change now, Ontario can best prepare itself to manage the challenges and benefit from the opportunities of an evolving electricity sector.
Together with its stakeholders, the IESO is undertaking a major market development effort called the Market Renewal Project. The project is focused on enhancing Ontario's existing market design and preparing for a more dynamic marketplace in the future. The project will include a suite of initiatives that will lead to changes to our energy market and the way we procure capacity.