Ontario is preparing the largest energy procurement in its history, which will reshape its electrical grid for decades to come, but it’s also headed for a possible collision course with federal policies designed to phase out natural gas by 2035.

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Last week, Ontario Energy Minister Stephen Lecce said he wants an “all-of-the-above approach” to procuring energy and added natural gas to the list of acceptable sources, which already included nuclear, hydroelectric, renewables and biomass.

Much is at stake as the province faces sharply rising energy consumption and rolls out a series of long-term procurements in the next year and a half or so. Collectively, the contracts — each expected to last 20 years — could add as much as 5,000 megawatts to the grid, enough for five million homes.

Natural gas deadline nears

But Lecce’s “technology-agnostic” approach means the province may sign natural gas contracts that extend beyond the federal government’s planned phase-out date of 2035, and it’s unclear who would foot the bill if natural gas is banned before the contracts expire.

“There’s a broader debate on the extent to which we as a country should continue to be using natural gas,” Reena Goyal, a lawyer at Blakes, Cassels & Graydon LLP who focuses on energy law, said. “There’s a debate at the federal level versus the provincial level.”

Ontario’s decision marks the latest clash on the country’s journey towards a net-zero electrical grid and raises questions about what role natural gas can or will play as a transition fuel in the coming decades.

At the federal level, Environment and Climate Change Canada (ECCC) has drafted federal Clean Electricity Regulations (CER) that create emissions standards that effectively force natural gas to be phased out by 2035, with a few exceptions that could make some natural gas use possible until 2040. It ties into the federal commitment to decarbonize the electrical grid as part of the path to reaching net-zero emissions by 2050 and limiting climate change.

The CER regulations have not yet been finalized, nor even passed into legislation, and the timeline for both remains uncertain.

A spokesperson for ECCC did not provide comment by the time of publication.

But the cost of such regulations is leading to pushback from Ontario and other provinces and creating uncertainty in the marketplace. Alberta, Nova Scotia and Saskatchewan still heavily rely on fossil fuels in their electrical grids and would require significant investment to convert to clean electricity.

Electricity demand to soar

Ontario’s grid operator — known as the Independent Electricity System Operator (IESO) — said it has one of the world’s cleanest grids, with about 90 per cent of the electricity produced from non-carbon-emitting sources. It phased out coal in the 2010s.

The IESO estimates nuclear provides 54 per cent of Ontario’s electricity, hydroelectric accounts for 26 per cent, and wind combined with solar and biofuels accounts for 10 per cent. Natural gas provides the remaining 10 per cent.

But the IESO said that phasing out natural gas will be more difficult than phasing out coal, in part because Ontario’s electricity consumption is projected to sharply rise as a result of population growth, the energy transition and the increasing demands from data processing and other technologies such as artificial intelligence.

It projects electricity consumption will grow 60 per cent by 2050, or an average of 1.9 per cent per year.

“There’s a couple hockey stick projections going on” when it comes to electricity consumption, Stephen Furlan, a lawyer at McCarthy Tétrault LLP who works on energy projects, said.

The electric vehicle transition means more consumers are switching to a plug in the wall instead of using gasoline, buses and trains are going electric, and there are various industries, such as steel, that are retrofitting existing technology to move off fossil fuels and onto the electrical grid, creating even more demand.

“They’re looking at projections for those things, (and) while you’re looking at that, you’re removing natural gas by 2035 or 2040,” Furlan said.

The result is that “the world has changed quite dramatically in a very short period of time,” he said.

Last year, the IESO launched a procurement known as Long-Term RFP 1 (LT1), in which it procured nearly 2,200 megawatts of additional capacity, enough to power 2.2 million homes. It included new natural gas projects, but also the largest battery storage procurement in provincial history.

To put that in perspective, about 16 million people live in Ontario, according to Statistics Canada.

But the procurement that Lecce spoke about last week, known as Long-Term 2 RFP (LT2), is designed to address energy needs emerging in 2029 and into the 2030s, and is expected to feature 20-year contracts.

“Our government is stepping up to deliver our province’s largest-ever competitive energy procurement with a focus on keeping costs down for families,” said Lecce, who took over as energy minister in a cabinet reshuffle earlier this summer. “We have elevated Ontario’s concerns to the federal government on this proposal and stand ready to work with them on a new approach that ensures energy remains affordable and reliable for families well into the future.”

He also said he opposes “a federal mandate that undermines the reliability of our grid and increases costs for Ontario families and seniors.”

Critics say Lecce is setting the province up for a large bill over time by expanding natural gas contracts.

For instance, Keith Brooks, programs director at Environmental Defence, said solar and wind projects are more affordable.

“The costs to keep them up are lower because there’s no fuel,” he said. “Wind and solar should win a lot of this procurement.”

But he added it depends on how the province responds to the market uncertainty created by the energy transition.

Goyal, the energy lawyer at Blakes who previously worked for IESO, said the IESO included a clause in the LT1 procurement contracts with natural gas providers that specifically deemed the government responsible to continue paying natural gas companies until the end of their contract, even if natural gas use is prohibited, as it could be under the draft federal clean electricity regulations.

But in a compromise of sorts, she said the clause also means the government will not make payments after April 30, 2040, even if the contract extends beyond that timeframe.

In its response to the CER, the IESO — which is responsible for ensuring grid reliability — expects natural gas to play a role until 2040. It said it will need to add natural gas in the coming decade as Ontario takes nuclear plants offline in order to refurbish them.

“As about 90 per cent of the electricity, the grid needs some flexible generation capacity available to turn on and off quickly, increase and decrease output, and to be on standby in case of sudden system changes,” the IESO said in November 2023.

Still, that doesn’t mean that the marketplace sees a role for natural gas as a transition fuel.

Goyal said LT1 had two components: one was effectively for natural gas procurement and the other was largely battery procurement.

The natural gas procurement was undersubscribed, meaning the IESO did not receive enough interest to award contracts to meet its targets. Meanwhile, the battery component was oversubscribed, she said.

That dynamic has raised questions about the role that market investors see for natural gas as a transition fuel in Ontario as it sets out to award contracts under LT2, which is expected to wrap up in February 2026.

Furlan said the CER regulations allow for natural gas use with carbon-capture technology and storage, but that remains a novel technology in Ontario.

“The real issue on natural gas is that the federal government is putting forth clean electricity regulations,” he said. “I don’t know that the market will do anything until it’s sorted out. Like no one’s going to put that kind of capital up until it’s sorted.”

• Email: gfriedman@postmedia.com

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