Memo
Date:
February 9, 2015
To:
IESO Stakeholder Engagement
Cc:
APPrO Board, APPrO Market Affairs Working Group
From:
Dave Butters, President & CEO
RE:
Ontario Capacity Auction High Level Draft Design Document
Priority: High
APPrO understands that the IESO wishes to seek input from stakeholders on the Ontario
Capacity Auction Draft High Level Design Document, which was released on December 11,
2014.
With respect to the Capacity Auction Draft High Level Design Document, APPrO offers the
following comments:

The IESO has proposed a 3- to 4-year forward period and a commitment period of one
i
year . APPrO believes these design specifications (specifically the relatively short-term
commitment period) to be barriers preventing new generation development from
participating in the capacity auction. Further, a focus on short term commitments will
most likely result in short term projects at minimal investment (e.g., simple cycle peakers
with previously used engines located west of Dawn), or projects with alternative market
access (located across the border and arbitraging the capacity markets here and
ii
elsewhere). With respect to Locational Based Auctions (Zones), the IESO notes that
experience from other jurisdictions has demonstrated the importance of having a robust
locational process for creating and modelling zones in capacity auctions. In evaluating
zonal capacity requirements and how best to meet them via the capacity auction, market
power must be taken into consideration. Market power mitigation is discussed at a very
high level within the Design Document; however details surrounding potential for the
exercise of market power and mitigation measures are not identified. As previously
stated APPrO believes that market power is an important issue in which clearly defined
criteria will be required in order to enable some zonal premiums to be sustainable at
appropriate levels.

In the context of market power, APPrO notes that the document is silent on the issue of
export of capacity by market participants. This is potentially an important contributor to
mitigation of buy-side market power. The IESO has previously indicated that this would
be a parallel activity.

The Draft High Level Design Document indicates that multi-year commitment options will
be considered to enable new resources that clear in the Capacity Auction to lock-in their
clearing price for more than one year, subject to conditions. Providing this flexibility may
in theory incentivize new generation development, however in addition to the uncertainty
1
APPrO Memo
in terms of its application, this increases the overall complexity of the capacity auction
design. While the design is currently at a high-level, the question remains as to whether
the design will be too complex for what is needed to meet Ontario’s future adequacy
requirements.
With respect to general concerns regarding implementation of a capacity auction in Ontario,
APPrO offers the following comments:

As acknowledged by the IESO , there remain broad questions about the capacity
auction that require further attention. In APPrO’s view, clarity from the IESO is still
required on how fundamental policy and market structure issues will be addressed in the
capacity auction design. In particular, the Design Document should provide details as to
how independent power producers and prospective investors can be assured that
Ministerial Directives and/or government policy decisions will not undermine capacity
iv
auction value .

In light of these yet-to-be-answered broad questions associated with introducing a
capacity auction in Ontario, APPrO still seeks to understand what the IESO’s criteria for
‘go/no-go’ are in terms of moving forward with an Ontario-made capacity auction. It is
unclear how work related to the design elements will ultimately lead to a decision.

APPrO reiterates that the process and timeframe for addressing governance issues must
v
be addressed and is critical. As Ontario does not have a regime similar to the U.S. ,
governance issues need to be discussed and addressed before decisions are made
regarding detailed design elements of a capacity auction and its potential
implementation.
iii
In closing, APPrO submits that a significant amount of work will be required in the detailed
design phase, particularly with respect to addressing well-known capacity market issues in
other jurisdictions and how Ontario’s unique market characteristics will be taken into account
in order to decide if implementing a capacity auction in Ontario truly makes sense. It is critical
that an appropriate amount of time be taken to accomplish this.
i
Each capacity auction will be conducted once annually for two 6-month commitment periods covering the winter and
summer.
ii
See slide 16 of Ontario Capacity Auction Draft High Level Design Document:
http://www.ieso.ca/Documents/consult/ca/ca-20141211-High_Level_Design.pdf.
iii
See slide 4 of Ontario Capacity Auction Draft High Level Design Document:
http://www.ieso.ca/Documents/consult/ca/ca-20141211-High_Level_Design.pdf.
iv
For example, by creating oversupply under other procurements.
v
Stakeholders in the United States benefit from multiple opportunities to address issues related to market rule
changes, including through the FERC.
2