Ontario’s IESO Launches Major Reforms

On May 1st, Ontario’s Independent Electricity System Operator (IESO) implemented a major reform to improve efficiency, transparency, and cost-effectiveness. The key changes include: 

• Replaced the uniform pricing model with nodal pricing  

• Launched the Day-Ahead Market (DAM) 

• Consolidated the dual-schedule system into a single schedule 

What is the IESO? 

The IESO is Ontario’s Independent System Operator (ISO). In deregulated power markets, ISO controls and maintains the wholesale electricity transmission with the goal of providing reliable and cost-effective electricity. There are eight deregulated electricity markets in the U.S and two in Canada- IESO and Alberta Electric System Operator (AESO); BC has a vertically integrated electricity market served by BC Hydro. 

U.S. and Canada ISOs

The demand and supply of electricity on the grid have to be balanced in real time, which is achieved with power markets. In DAM, ISOs forecast the next day’s load, and electricity generators submit prices and volumes that they’re willing to produce. ISOs then set a clearing price after meeting the projected demand from all the generators. In the Real Time Market (RTM), ISOs then use the same system to meet the difference in supply and demand, anywhere from an hour to 5 minutes prior to ensure grid balance. 

Nodal pricing is also known as locational marginal pricing (LMP), which reflects the energy price of different parts of the grid. Before the reform, IESO had a uniform pricing model, which meant that the electricity price was universal across the grid. 

The old Day-Ahead Commitment Process (DACP) of IESO is not financially binding. The differences in generation expectations and deviations in real-time generation were not penalized; the new DAM is financially binding. 

With the previous dual-schedule system, the unconstrained overlooked the physical constraint for the province-wide uniform market price; the constrained schedule account for system condition and is used by IESO for dispatch; the discrepancy of two schedules then were handled with congestion system management credits (CMSC)- which add up to around $100 Million per year. The new single schedule market considers congestion with LMP, which eliminates CSMCs and reflects the true cost of electricity production and consumption. 

Together, the reform is anticipated to save Ontario $700 Million over the next decade by reducing out-of-market payments and increasing efficiency.