Creation of a Distribution System Operator Model for Ontario LDCs: Opportunities, Challenges and Next Steps

By: Ron W. Clark, Cathy Jares and Sarah Simmons^[1]

Introduction

Ontario’s electricity system is changing significantly, with local distribution companies (“LDCs”) at the forefront. For the first time in decades, Ontario expects substantial load growth due to electrification and economic development. As the Independent Electricity System Operator (“IESO”) secures new bulk system supply resources, LDCs are planning for the impact of a low-carbon economy on their distribution systems. LDCs maintain the distribution system and provide delivery services, however, the increased connection of distributed energy resources (“DERs”) like solar, storage and flexible loads (including EV charging) presents new challenges and opportunities. Overall, it is expected that the provision of distribution services in the future will become increasingly complex due to the need to manage two-way flows of electricity on the grid and the need to coordinate with customers and non-wires service providers.

A distribution system operator (“DSO”) is an entity that, by balancing distribution-connected generation and other electricity resources with consumption, can facilitate integration of a diverse range of DERs into the grid.

Key stakeholders, including the IESO, a number of LDCs and energy service providers, have begun to explore what a DSO model would look like. This article summarizes recent developments and provides thoughts on how this model might progress.

Rationale for Establishing a DSO

In a recent article, Report of the Electrification and Energy Transition Panel (“EETP”): Summary and Comments,^[2] Ron Clark and Natasha Atyeo discussed the Panel’s report, “Ontario’s Clean Energy Opportunity,”^[3] which provided a review of paths forward for Ontario’s energy sector.

The EETP Report examined recent changes in the global energy landscape, and how technological advancements are assisting with efforts to address climate change, decarbonize energy supply and improve efficiency. The need for rapid implementation of DERs was highlighted, which would offer opportunities for resource management, cost savings and emission reduction. DERs are often smaller-scale technologies, such as solar panels and onsite battery storage, that are located on the consumer's side of the meter. DERs are gaining traction among individuals and businesses as they allow communities to produce and distribute their own electricity, leading to cost reductions and energy security. Viewed from a wider lens, DERs reduce reliance on the provincial system and the amount of electricity that it must provide.^[4] The EETP Report urges key stakeholders in the Ontario energy system to support innovative models and regulatory frameworks to enable the effective participation of DERs in the sector. Despite this emphasis on the importance of DERs, absent from the EETP Report is any guidance or discussion on regulatory reform that would be required to move towards a model where LDCs would be able to adopt DSO functionality for the purpose of increasing DER implementation.

According to the EETP Report:

The current transition to clean energy is driven by an emerging global commitment to reduce greenhouse gas emissions and the use of unabated fossil fuels as a primary driver of climate change. This transition involves a strategic evolution towards clean and renewable energy sources, greater electrification of energy end-uses and a comprehensive effort to enhance energy efficiency.^[5]

In the transportation sector, for example, at least 20% of new vehicles sold in Canada must be zero-emission vehicles (“ZEVs”) by 2026, at least 60% by 2030, and 100% by 2035.^[6] According to a recent Statistics Canada article,^[7] there could be up to 10 million ZEVs on the road in Canada by 2035. This would result in additional electricity consumption in the range of 30 to 60 million MWh, which is equivalent to 4.7% to 9.4% of the electricity generation in 2022.

Consistent with the transition described above, the IESO’s Annual Planning Outlook forecasts a steady increase in electricity demand, projecting an average annual growth rate of about 2% through 2050. This increase is driven by factors like population and economic growth, the expansion of the mining and steel industries, the electrification of the transportation sector, including electric vehicles and residential shifts due to more people working from home. Based on projected demand and supply patterns, Ontario will face a supply deficit after 2028.^[8]

More recently, in April 2024, the Electricity Distributors’ Association (“EDA”) issued a paper developed with Power Advisory, Elenchus Research Associates and Toronto Metropolitan University’s Centre for Urban Energy entitled Solving Gridlock: Our Vision for a Customer-Centric Energy Transition.^[9] The EDA report recognizes that LDCs play a crucial role in enabling the integration of customer-driven DERs and enhancing grid reliability through investments in enabling technologies, and further estimates that DERs could offset distribution-level spending of between $200 million and $800 million annually by 2030 with higher achievable savings if the barriers to achieving the full economic potential of DERs were addressed.^[10] While the report focuses on the challenges utilities encounter when assessing necessary grid-enabling investments, the EDA notes that:

With the increasing connection of DERs, coordination with the [IESO] wholesale market becomes essential, involving communication of distribution constraints and real-time outages affecting DER availability. By adopting the functions of a [DSO], LDCs can further facilitate the co-optimization of DER operations and dispatch, which is crucial for their integration into the wholesale market, particularly considering DERs may operate as IESO market participants, impacting LDC planning and real-time operations.^[11]

Given the challenges posed by the electricity transition, policymakers will need to fully utilize all potential sources of clean electricity, including DERs. DSOs can play a key role in greater and more efficient deployment of such DERs. Overall, the main reason for exploring new business models and DSO functions is to meet the changing needs of modern distribution systems. This involves integrating new and increasingly variable loads, improving grid flexibility and modernization, and ensuring seamless coordination between transmission and distribution systems. Beyond maintaining static grid infrastructure, there is a need to actively manage the resources connected to the grid.

Potential DSO Models and Benefits

At the beginning of 2022, the IESO launched the Transmission-Distribution Coordination Working Group (“TDWG”).^[12] The mandate of the TDWG is to support the DER Market Vision and Design Project, which has the goal of determining how to cost-effectively enhance the value DERs can provide to Ontario’s electricity system by expanding participation in the wholesale markets. One required aspect of implementing DERs into the wholesale system and market operations is the development of processes to allow market participants to effectively share information in a timely fashion. The TDWG is intended to provide a stakeholder forum to discuss this objective and develop transmission-distribution coordination processes and protocols to govern how communications would occur between the IESO, LDCs, and DER market participants. It is anticipated that the results of the TDWG initiative will create the basis for new market rules that will support the new DER participation models that the IESO has committed to put in place by 2026.

The TDWG has been reviewing various models for the implementation of the DSO function by LDCs. These include Total DSO model, which allows the DSO to serve as the wholesale market participant on behalf of DER owners, and the Dual Participation model, wherein DER owners are wholesale market participants, but the DSO may override IESO dispatch if needed for distribution reliability.

• Total DSO model: A model where the DSO acts as a neutral market facilitator to coordinate, optimize and dispatch DERs for the benefit of all market players.
  
• Dual Participation model: A model where the DSO coordinates and dispatches DERs for the benefit of customers and the distribution grid, while the IESO coordinates and dispatches DERs for the benefit of customers, and the transmission grid.

In its Distribution System Operator (DSO) Study^[13] (the “DSO Study”) the Ontario Energy Association (“OEA”), in collaboration with Ernst & Young LLP and a steering committee of Ontario-based LDCs, assessed the potential benefits, cost saving and related challenges of implementing a DSO functional model within the Province of Ontario. The purpose of the DSO Study was to consider the optimal means of enabling the adoption of DERs in Ontario, and directly compares both the Total DSO model and the Dual Participation model.

Key findings of the DSO Study indicate that both models could result in cost savings and additional societal benefits. However, the OEA suggests that the Total DSO model may create higher DER penetration and other benefits compared to the Dual Participation model.

The OEA further suggests that Ontario should consider adapting its electricity system to allow LDCs to support and manage the adoption of DERs through the implementation of a DSO model. Research conducted in connection with the DSO Study indicates that LDCs in various jurisdictions have evolved to meet market and regulatory requirements needed to fulfil the role of DSO. Incorporating DSO functionality within an LDC can create numerous economic and other positive outcomes for the electricity system in Ontario. Specifically, the DSO Study found that a Total DSO model delivered by LDCs could provide net benefits of $5.2 billion to $11.8 billion over a 20-year period.

Under the Total DSO model, the DSO is responsible for optimizing the advantages that DERs offer across multiple layers of the electricity system. Where an LDC acts as DSO, it would take on responsibility for functions such as managing the distribution network, coordinating DER services and operations, optimizing system performance, and facilitating market participation. The LDC would become the sole point of contact for the dispatch of DERs into local and wholesale markets.

By adopting DSO functionality, the DSO Study found that LDCs would be enabled to:

• act as unbiased intermediaries;
• improve trust and transparency;
• ensure grid investment decisions are made by the most informed stakeholder;
• enable participating utilities to more actively manage the system; and
• provide faster, more affordable connections, and ensure a more customer-centric experience.

In its conclusion, the OEA’s DSO Study recommended that DSO functionality be expanded to meet current needs and opportunities and that a clear path forward to allow LDCs to operate as DSOs would be beneficial to Ontario.

Since the release of the OEA’s DSO Study, the TDWG has continued to explore potential DSO functions and a third model has also emerged; the Market Facilitator DSO model. Under this model, the DER owners remain market participants, but the DSO may optimize the distribution network to minimize curtailment to DER and aggregator availability. Further, DER owners and aggregators would submit their bids/offers to DSO, which the DSO in turn would relay to the IESO. Similarly, the IESO’s dispatch would be relayed by the DSO to DER owners and aggregators.

While discussions about the appropriate business model and coordination functions continue, it is clear that LDCs would assuming new roles and responsibilities under any DSO model. These evolving functions demand additional capabilities, including planning, forecasting, real-time monitoring, data sharing platforms, and communication.

Case Study: PowerShare

PowerShare is a near real-time electricity market being implemented by Essex Powerlines in Leamington, Ontario. Approximately 60% of Ontario’s greenhouses can be found in the Leamington Area. The high concentration of greenhouses in Leamington account for a significant amount of required load. To mitigate local constraints on the grid and to create flexibility within the distribution system, Essex Powerlines will implement and operate local energy market where DER owners will be able to sell their excess or stored generation, or to curtail, in response to local grid needs.

The DSO function utilizes NODES’ independent third-party market platform to facilitate transactions, provide metering, validation and settlement services. The pilot project will develop Local Market Rules as well as a Transmission-Distribution Coordination Protocol for testing. The project aims to demonstrate both the “total DSO model” where local flexibility is first provided to the local market and residual capacity simulated to be offered at the wholesale level, and the “hybrid DSO model” where flexibility is provided to both the local (live) and wholesale (simulated) levels simultaneously.

Key outcomes of this project include a deeper understanding of: transmission-distribution coordination processes, the value of DERs as non-wires alternatives to mitigate local and bulk level constraints while deferring traditional infrastructure upgrades, and the level of engagement and interest from DER asset owners to provide grid services.

PowerShare is supported by the Independent Electricity System Operator Grid Innovation Fund and the Ontario Energy Board Innovation Sandbox.

Key Challenges

Despite conclusions and recommendations in the various studies and reports highlighting the role that DSOs can play in harnessing the benefits of DERs, current DSO and similar projects are funded on an ad hoc basis. A predictable and ongoing funding mechanism would be required as part of rate base for willing and able LDCs to sustainably implement a DSO model.  At the same time, political sensitivities around affordability of electricity will cause policymakers to move cautiously in restructuring rates to accommodate the DSO function.

Another key challenge is the need to demonstrate how a DSO model would provide incentives for DER market participation such that the system benefits would be accretive to those gained from existing incentives such as the IESO’s Capacity Auction, which is a procurement mechanism that is intended to secure Ontario’s additional capacity needs through a competitive process. Participation is permitted by existing and non-committed demand response, generation, storage and import resources. Successful participants receive payment for making their capacity available during a specified period of time. As evidenced by the IESO’s TDWG, the ability for DERs to access revenues from both the wholesale market and local markets is essential.

Non-wires alternatives are intended to reduce or avoid costly infrastructure installation, such as increased transmission, distribution and large-scale generation infrastructure, that typically flows from an increase in the electricity needs of a community. By utilizing DERs at a local level to meet increased demand, the need for traditional infrastructure investments can be replaced or delayed, with the goal of reducing costs for ratepayers.

As evidenced by the OEB’s recent Non-Wires Solutions Guidelines for Electricity Distributors,^[14] LDCs must consider non-wires solutions in distribution system plans, including all planned investments that are greater than $2 million. With the expectation of increased activity by LDCs to integrated DERs as non-wires solutions, with time, the need for greater coordination with the IESO will be apparent, including visibility into when and how LDCs will be moving load for the reliability of their distribution system. Further, as discussed in Power Advisory’s summary and commentary note on changes to the OEB’s Distribution System Code enabling flexible hosting capacity, “if an LDC enters a flexible hosting capacity arrangement with a DER under contract with the IESO, and the distributor lowers the output of the DER for distribution system constraints, there is no consideration on what information must be shared with the IESO for IESO-Administered Market operation.”^[15]

Implementation Steps

Ontario will need to develop appropriate regulatory and legislative frameworks to support the adoption and development of a DSO structure, which could include the development of new or revised:

• Determining DSO Functions – Establishing new roles and responsibilities to be performed by a DSO including planning, forecasting, data platforms, and communications
• Customer Experience – Ensuring that the new framework is supported by DER proponents and customers, and enables customer investment in DERs
• Market Rules – Whether and how DSO would participate in the wholesale market or how they would facilitate operation of DERs in the wholesale market
• DSO Licence And Code – Whether all LDCs would be mandated/entitled to become DSOs for their respective service territories or whether factors such as size, capacity and financial resources would apply such that only select LDCs would take on this function
• Settlement Mechanisms – Whether the operation of local markets or local programs would also require new settlement arrangements between DSOs, DERs and the IESO
• Rate Structures – Whether there is sufficient and sustainable funding for DSO capabilities as part of electricity rates

Indeed, the potential transition to a DSO model in Ontario demands a thorough examination of various factors by multiple stakeholders, including the Ministry of Energy, OEB, IESO and customers. Addressing aspects such as governance, financing, customer engagement, and workforce readiness is essential to facilitate a seamless transition and ensure the successful implementation of the new model. Ultimately, the shift to a DSO model represents a transformation in the electricity sector paradigm in Ontario, underscoring the importance of diligent analysis and strategic planning to navigate this transition effectively.