IESO to develop design of clean energy credit registry

On January 26, Ontario’s Minister of Energy issued a letter to the province’s Independent Electricity System Operator (IESO), requesting a report regarding the creation of a registry for the creation, trading and retirement of clean energy credits (CECs) in Ontario.

What you need to know

• The Minister’s letter highlights Ontario’s “clean energy advantage” (with 94% of electricity generated from nuclear, hydro, wind and solar in 2020) and the growing demand for low carbon electricity to meet environmental and sustainability goals.
• The IESO is tasked with preparing a report, by July 4, 2022, that outlines detailed design options for a CEC registry. According to the Minister, the report must take into account the following design principles: the registry should 1) be scoped for electricity generated and consumed in Ontario, with the potential to facilitate cross-border trading in the future, 2) facilitate the voluntary purchase of CECs, 3) evaluate market demand through stakeholder engagement, 4) ensure the flow of sale proceeds to Ontario ratepayers, and 5) provide flexibility for future expansion to other products or markets.
• According to the Minister’s letter, the IESO should examine the availability of CECs from contracted and regulated resources to enable the launch of the registry in January 2023.
• Stakeholders are invited to consult the IESO’s schedule of activities and engagement plan, and email [email protected] to be added to the distribution list for this initiative.

Discussion

Growing demand for credits from low carbon energy

Companies–especially those committed to achieving net-zero emissions–are increasingly considering ways to reduce their Scope 2 emissions (i.e., indirect emissions resulting from their energy consumption). Although many of these companies are looking to decrease their energy use and improve their energy efficiency, some companies are also looking to either purchase low-carbon electricity, either directly or indirectly by purchasing the environmental attributes (EAs) associated with third-party generation. In some jurisdictions, these EAs can be converted into certified offset or renewable energy credits for compliance purposes (i.e., in jurisdictions with enabling emissions reduction regulations or renewable portfolio standards). Yet in some cases, even if these EAs cannot be converted into compliance instruments, they may be traded voluntarily and purchased by companies looking to balance their Scope 2 emissions according to accepted carbon accounting rules¹.

As a result of this growing demand, certain electricity markets like Alberta’s have recently experienced a significant increase in private power purchase agreements (PPAs), which often provide for the sale of EAs associated with the low carbon power production. In comparison, in jurisdictions with significant rate-regulated generation or publicly-procured PPAs (e.g., IESO-issued supply or capacity contracts in Ontario), opportunities to monetize EAs from renewable generation often depend on an enabling market framework being put in place, including mechanisms for certifying marketable EAs, and tracking the purchase, sale and retirement of any associated CECs to avoid claims or perceptions of double counting.

Past IESO consultation

In general, the PPAs between the IESO and various renewable energy generators assign the right and interest to all EAs associated with the electricity production to the IESO. Over a decade ago, in 2010-2011, the IESO (then, Ontario Power Authority (OPA)) undertook consultation regarding the potential sale of the EAs from these contracted facilities into a voluntary market. No significant demand was identified at the time due to various constraints. At the time, the market for the voluntary purchase of EAs was limited, especially for EAs had not been converted into any form of renewable energy credit, and that were not tracked on an established registry. Now, however given the rise of the voluntary carbon markets, there is renewed interest in a CEC registry to support a voluntary CEC market in Ontario.

Minister of Energy’s direction to IESO

According to the letter issued by the Minister of Energy, the IESO is tasked with preparing a report (by July 4, 2022) that outlines detailed design options and recommendations for a provincial CEC market and registry, with consideration for several design principles:

• Scoped to Ontario. The registry should be scoped to cover CECs for electricity generated and consumed in Ontario and enable CEC trading in the province (with the potential to support future cross-border trading).
• Voluntary. The purchase of CECs would be entirely voluntary.
• Customer choice. The IESO is expected to evaluate market demand via stakeholder engagement and design product offerings to satisfy that demand.
• Monetization of investments made. CECs should be available in respect of existing non-emitting generation (i.e., nuclear, hydro, wind, solar and bioenergy), with sale proceeds flowing to ratepayers that have borne the significant costs of investments in decarbonizing Ontario’s electricity system.
• Future-proof. The registry should offer flexibility and the potential for expansion to other products or markets, with consideration for how the registry can incentivize future clean generation investments.

The IESO is expected to examine the availability of CECs from contracted and regulated generation resources to enable the launch of the registry in January 2023. In addition, the Minister’s letter asks the IESO to work with generators/brokers that already offer voluntary CECs to maximize the registry’s potential application, to assess potential CEC price ranges, to assess the impact of the CEC registry on other environmental programs Ontario’s Emissions Performance Standards (to avoid double counting of CECs and instruments issued under other programs), and to engage with relevant stakeholders.

Next steps

The IESO has published a draft engagement plan, with the following milestones: 1) a stakeholder engagement webinar and launch of a CEC survey on February 24; 2) stakeholder feedback regarding the webinar due by March 17; 3) survey feedback due by March 24; 4) publication of the IESO’s response to this consultation on March 31; 5) technical sessions with stakeholders in March and April; and 6) a webinar to share survey/technical session findings and draft design options in the Q2 2022². Stakeholders are invited to email [email protected] to be added to the IESO’s distribution list for this initiative.

To discuss these issues, please contact the author(s).

This publication is a general discussion of certain legal and related developments and should not be relied upon as legal advice. If you require legal advice, we would be pleased to discuss the issues in this publication with you, in the context of your particular circumstances.

For permission to republish this or any other publication, contact Janelle Weed.

© 2024 by Torys LLP.

All rights reserved.