Ontario Announces Changes to Reduce Electricity Infrastructure Costs for New Housing Developments

On October 21, 2024, the Ontario government announced new measures aimed at reducing electricity system expansion costs for new residential developments. A key aspect of the announcement is that the “revenue horizon” for the recovery of expansion costs will be expanded from 25 years to 40 years. This means that developers (and therefore home purchasers) will pay less in up-front expansion charges, because it will be assumed that the costs will be recovered from connected customers and other ratepayers over the next 40 years. This change, which follows recent recommendations from the Ontario Energy Board (OEB), will be implemented through planned amendments to OEB rules. Additionally, the government says it will amend the Ontario Energy Board Act, 1998 (OEB Act) to enable additional regulation-making powers to protect existing ratepayers from the impacts of changes to the OEB rules.

In the Minister of Energy’s November 2023 Letter of Direction to the OEB, the regulator was asked to: (i) review electricity infrastructure unit costs in the electricity sector and potential models for cost recovery that could help to ensure infrastructure costs are kept low and are not a barrier to growth; and (ii) review its electricity distribution system expansion connection horizon and revenue horizon direction to ensure that the balance of growth and ratepayer costs remain appropriate.

Over the course of March to May 2024, the OEB convened and proceeded with a System Expansion For Housing Developments Consultation. This led to the OEB’s Report Back to the Minister on System Expansion For Housing Developments (OEB Report) that was provided to the Minister of Energy and Electrification in July 2024. The OEB Report was published on October 21, 2024. The OEB Report addresses the Minister’s requests and sets out recommended next steps, three of which relate to the way that connection costs will be shared among developers (who represent new customers) and with existing customers:

1. Extend the revenue horizon used in the evaluation of expansion projects to recognize the life of assets used in connecting and serving residential customers.
2. Add new provisions for the Distribution System Code (DSC) to clarify for distributors and customers how extended connection horizons beyond the standard five years should be employed.
3. Develop new DSC provisions for a capacity allocation model that specifically addresses multi-year, multi-party developments to ensure a fair allocation of costs between connecting parties.

Among other things, these changes would reduce up-front expansion cost contributions from developers for required new infrastructure and would see the new expansion costs spread more fairly among subsequent developments (customers) making use of the new infrastructure. As stated by the OEB: “These adjustments aim to reduce the capital contributions needed from a single developer, by distributing costs over an increased number of developers/customers and an extended timeframe, while maintaining an appropriate allocation of risk between new and existing customers.”

The Minister of Energy and Electrification’s October 21, 2024, announcement indicates that the government plans to adopt the OEB’s recommendations. Among other things, the Minister will ask the OEB to take the following steps:

• Amend the DSC to extend the revenue horizon for connecting residential developments from 25 years up to 40 years. As explained in the OEB Report, the change to the revenue horizon will reduce the shortfall between costs and revenue in the economic evaluation that determines what contribution a developer must pay for new expansion facilities. This is expected to lead to reduced expansion costs for customers such as subdivision developers.
• Amend the DSC in order “to provide clarity regarding the conditions under which a local distribution company should extend the connection horizon for new developments.” The idea is that, in some cases, it is appropriate to consider attachments to new expansion facilities over more than the standard five years, such that the forecast revenues to support the new facilities are higher and the up-front contributions from developers are lower.
• Establish a new capacity allocation model that considers multi-customer, multi-year projects, addressing the concern that “first-movers” pay more than their fair share. According to the OEB, this new capacity allocation model will ensure that developers who connect first pay a fair share of the costs, while those who connect later will contribute based on their allocated share of the new facilities.
• Consider further amendments to the DSC to extend the connection horizon for new electricity lines associated with housing development projects to 15 years.

Additionally, the Minister of Energy and Electrification indicates that new powers proposed to be added to the OEB Act could allow the government to enact regulations that would “reduce costs for first-mover customers by allowing costs of new infrastructure to be allocated as additional customers in high-growth areas connect to the line, rather than all costs being paid by the ‘first mover.’”

We will continue to report on the implementation of the OEB’s recommendations to support system expansion for housing developments.