A New Blueprint for Ontario's Electricity Market

An ongoing challenge for power markets worldwide is to assure sufficient continued investment to maintain reliability. A properly designed capacity market – in which plants receive payment for available supply capacity whether or not the power generator runs – may enable Ontario to increase reliance on market signals for new investment. To be effective, the government must pair building a capacity market with several changes in the role and function of existing Ontario power market institutions. The government should isolate policymakers from implementation agencies. The Ontario power sector today has oversupply, a mismatch of generator capabilities and needs, rising prices to final consumers, a lack of transparency in prices, and volatile and contradictory policies. Consequently, private-sector actors are unable to justify investment without some form of government-backed contract. The government’s failure to rely on either sound planning or market principles has meant that the province has not procured generation capacity at a long-run least cost. Current surplus supply conditions provide a window for thoughtful policy review. The government should establish a market that sends transparent and effective price signals of the need for new electricity generation capacity. Doing so first requires creating appropriate buffers between implementation entities and policymakers, meaning that the government should not use ministerial directives to interfere with the day-to-day operation of key power sector institutions. It also requires that the province replace the Ontario Power Authority’s principal buyer role with newly created supply entities.