Distribution System Operator

February 20, 2024

One of the big topics of conversation in the industry right now is the concept of a Distribution System Operation (DSO).  Currently, all the procurement of electricity in Ontario is done by the Independent Electricity System Operation (IESO). The IESO is owned by the Government of Ontario.  This procurement includes all the solar and wind contracts, including small rooftop solar installations.  The only contracts that a local distribution company (LDC) like NOTL Hydro can enter into is a net metering contract which, by definition, does not add power to the grid over the course of a year.  For more information on net metering, you can read my blog from 2022 https://www.notlhydro.com/local-generation-and-net-metering/ .

The idea with a DSO is that LDCs like NOTL Hydro are closer to their customers so they should have the authority to manage their local grid and contract within their service areas.  There are three forces driving the interest in DSO’s:

  1. On the demand side, with electrification and increasing industrial requirements the need for electricity is expected to increase significantly over the next few decades.  All economically viable sources of generation will be needed including new local generation.  The feasibility of getting new transmission lines to supply this electricity is also in question, increasing the benefits of local generation.   As mentioned, the LDC is best equipped to engage in contracting with these local suppliers.
  2. On the supply side, with the technology for solar and other forms of distributed energy resources (DERs) becoming ever cheaper, local consumers and businesses will want to invest in their technologies and sell to the grid.  Again, the LDC is best equipped to be able to integrate these suppliers.
  3. Many LDCs themselves want to get into this part of the business to which they are currently denied.  Part of this is to make a bigger profit by having additional services but part of it is also to provide a better overall service and lower cost to their customers.

For a more detailed explanation of a DSO you can read the following study prepared by the Ontario Energy Association. https://energyontario.ca//Files/OEA_DSO_Study_Dec_13_2023_FINAL.pdf

There is a test DSO currently underway in Southwestern Ontario.  This area has seen a huge increase in the demand for electricity; largely driven by the growth of the greenhouse industry but now also seeing future growth in the automotive industry.  The transmission support to the area has not been able to keep up.  The test DSO, run by an LDC (Essex Powerlines) is running a local market into which businesses with their own generation, like many of the greenhouses, can bid in so as to sell to the local grid.

I support the concept of a DSO but there is a wide range of what could be considered a DSO: 

At one extreme, the LDC could be responsible for sourcing all of the electricity its customers need and for operating a local market to price this electricity.  This would be the local equivalent of what the IESO does for all of Ontario.  In the United States, where there are over 2.000 electrical utilities, most have this responsibility but the reality is that most are able to contract this out to larger utilities or government agencies (like the Tennessee Valley Authority) who have the size, skills and expertise needed.

At the other extreme, the IESO would still provide all its current services and the LDCs would simply have the right to contract with a few local providers to enhance local production.  The impact of this additional local production would be quite small.

What will likely result will be the typical compromise.  The IESO will continue to manage the transmission system and all the large generation connected to the transmission grid.  That is really as it should be as the IESO is owned and supported by the Government of Ontario and takes a holistic provincial approach in their decision making.  The LDCs will be allowed to procure locally with grid connected generation.  There are a lot of details that will need to be determined including:

  • Any limits on the amount of local generation an LDC can procure for a specified percentage of load or how large a local generator can be before it has to deal with the IESO by default?
  • Will the LDC procurement be with fixed price contracts or a market?
  • Local procurement will affect the nature of the load the IESO will need to manage.  This could lead to higher costs provincially (offset by lower local costs).  How will this be managed?
  • How will the local and provincial markets be integrated?

There is one other important aspect that will need to be considered.  Right now, LDCs do not have any risk related to the cost of electricity.  Their job is to manage the cost of delivering it.  This is a very low risk business.  Becoming involved in procurement increases risk.  Who bears that risk (ratepayers or shareholders) and how it is managed will need to be clearly set out beforehand.

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