Electricity Distribution: Investing today to solve gridlock

Tom Heintzman: Welcome to The Sustainability Agenda, a podcast series focusing on the evolving complexities of the sustainability landscape. I’m your host, Tom Heintzman. Please join me as we explore today’s most pressing issues with special guests that will give you some new perspectives and help you make sense of what really matters.

Teresa Sarkesian: There is a need for us to expand the grid to accommodate the demand and the integration of renewable energy resources. We also need to upgrade our substations, our transformers and our distribution lines. And we project that the LDCs will need to invest between 106 to 120 billion between now and 2050

Tom Heintzman: Welcome to our multi-part series on the role of electrification in the transition to a clean economy. Like last year, we’re producing a number of episodes on different facets of electrification in the lead up to CIBC’s second annual electrification summit, taking place on April 23rd, 2025. Throughout each episode, we’ll explore key issues enabling our electrified future, as well as the opportunities and challenges for participants along the electrification value chain. On today’s episode, we’ll explore issues at the heart of the electricity distribution system. Think of the traditional design of the electricity system as hub and spoke, with generation centrally located, high voltage transmission lines sending that electricity long distances, at which point the voltage is stepped down so that the power can come into communities and power our houses and workplaces. As a result of this traditional design, where the distribution system meets the consumers, is often referred to as the edge of the grid. There are a lot of changes going on at the edge of the grid from increased power loads due to electric vehicles, electrified heating, notably heat pumps, electrified industry, including data centers. And there are also changes with generation being added at the edge of the grid. Think of solar panels on your home, which feed electricity back into the grid and create two-way flows when traditionally the flow of electricity was only going one direction. Today we’ll discuss how the demands on the distribution grid are changing and how local hydro utilities are navigating the challenges. Today I’m delighted to welcome my special guest, Teresa Sarkesian, President and CEO of the Electricity Distributors Association, which represents local hydro utilities in Ontario. Teresa has more than 30 years of experience in policy development and advocacy. She first joined the EDA in 2009 and was appointed president and CEO in 2016. Under her leadership, the EDA has made significant strides in positioning and promoting and protecting the local utility sector. Good morning, Teresa, and welcome to the show.

Teresa Sarkesian: Thank you so much, Tom. I’m delighted to be here.

Tom Heintzman: Fantastic. Well, Theresa, let’s start by looking backwards a bit. There is a lot of change underway in the electricity distribution system, but I’d like to start with describing for our listeners how the distribution systems have operated for most of their lifetimes. So the traditional view of electricity distribution, could you describe the historical role that the distribution systems played in our electricity system and how they function?

Teresa Sarkesian: Well, historically, the first electrification in Ontario began in the late 19th and early 20th century. Water power generating facilities across the province were important in supporting activities like street lights and street cars. From there, public utility commissions were developed by municipalities. Municipalities and the public utility commissions played a key role in electrifying Ontario, which explains the more decentralized structure of electricity in Ontario versus some other provinces. Around the year 2000, the local hydro commissions were corporatized by the province and became businesses under the Business Corporations Act. That is the structure that you see today. Currently, Ontario is served by about 55 local hydro utilities, also known as local distribution companies or LDCs, and they’re regulated by the Ontario Energy Board. They are predominantly owned by municipalities. In fact, more than 100 municipalities own shares in their local hydro utility. And there are, course, a couple of privately owned utilities. Our members own more than $31 billion in electricity system infrastructure assets and invest more than $2.5 billion annually to maintain and upgrade the distribution grid.

Tom Heintzman: That’s great background, Teresa. So now let’s walk through some of the changes that are going on at the edge of the grid. Maybe you could explain for the listeners how to unpack the changes that are going on, both in terms of usage of electricity, how usage is changing, and also the generation side, as we see more and more local generation. And as you do so, Maybe you could just touch on a few of the acronyms that we hear. This industry is full of acronyms and our listeners may run into phrases or concepts like NWA’s, DER’s, DSM, V2G. So maybe you could just unpack a couple of these terms as you discuss what’s evolving at the edge of the grid.

Teresa Sarkesian: Let me decipher the alphabet soup of acronyms. Our sector loves acronyms and then I’ll explain how they impact the role of distributors. All of these functions in relation to the acronyms that you mentioned are what we call behind the meter activities. The utility owns all the infrastructure up to the meter which is that little box on the side of your house or your business. Activities behind the meter are owned and operated by customers and are not considered to be part of the electricity grid. Part of our goal at the EDA is to optimize these activities behind the meter to create more opportunities for customers to participate in the electricity system and leverage these behind the meter solutions to enhance reliability and manage long-term costs in the electricity grid. So let’s start with NWA. It’s short for non-wires alternatives. This is an alternative investment that can defer or even replace for the need for a specific transmission or distribution system component. It could be small scale generation. It could be an aggregation of various solar panels and other types of solutions. A DER is a distributed energy resource. It is often a small-scale electricity generation or a storage device that has the potential to be connected to the grid. DSM is short for Demand Side Management. It was a term used primarily in the gas industry, but now it’s being used in electricity as well. And this is a program or a process used to control electricity demand that can lead to cost savings for customers and also reduce the need for additional build out of generation at the bulk system. And finally, V2G means vehicle to grid. This is the ability to upload the electricity stored in a battery of an electric vehicle to the distribution grid to assist in emergency situations such as an outage or to enhance reliability. As I mentioned, all these activities have significant potential for the role of the distributor and engaging with customers. With regard to the non-wires alternatives, there’s been a significant pilot project in electric service territory in York Region to aggregate distributed energy resources to defer building new transmission. The project successfully reduced peak demand at the local grid level, helping to ensure a more reliable system and potentially defer the need for additional transmission infrastructure investments. However, we need the regulator to approve this pilot project for scale and expansion to other LDCs who would like to use this solution. A couple of utilities are also exploring the potential of the vehicle to grid storage to enhance local reliability. Again, these projects are pilots and we need to work with the government and our regulator, the Ontario Energy Board, to create the appropriate regulatory framework to permit and scale these solutions. And for example, on electricity DSM, we are currently in the process of working with the IESO to play a role in promoting and marketing provincial DSM programs for electricity to help customers reduce their bills. To take advantage of all these activities behind the meter, we need to be able to support two-way power flow, which is not currently permitted. We also need to be able to have sight lines on the generation and storage activity, so we need to invest in monitoring systems that can allow us to dispatch the DER into the grid to support reliability. There are other needed foundational investments that will support ongoing grid modernization and digitalization of utilities. But again, these require approval by our regulators and new thinkings and solutions around the future utility business model. It is an exciting time in the electricity sector right now and innovation and change is taking place all around us.

Tom Heintzman: Alot going on. Okay, so just to recap, we have an old distribution world where, to oversimplify, the distribution grid was relatively dumb wires, just sending electricity one direction from generators ultimately to the, to the homes or to the businesses. Now we have a whole slew of activities that are going on at the edge of the grid. You mentioned EVs. We mentioned DERs, solar panels, demand side management, smart homes where people are changing the usage of their buildings in real time or near real time. How does this change the role of the distributor? What impact does it have on distribution grids? And how will these grids have to change to accommodate all of these new usages? And where would they get the capital for this change?

Teresa Sarkesian: All excellent questions. As we outlined in the EDA’s 2024 Solving Gridlock vision paper, electricity distributors in Ontario face several significant challenges in modernizing the grid to support the Ontario government’s economic growth agenda. So around this time last year, our Independent Electricity System Operator, which is the market operator, projected that demand would increase by 60 % by 2050. However, they increased that forecast late last year to 75 % increase in demand by 2050. And to put this in context, for the past decade in Ontario, we’ve had very flat and stable demand for electricity. This is no longer the case, so significant capital investments will be needed to expand the distribution system to address this increased demand. There is a need for us to expand the grid to accommodate the demand and the integration of renewable energy resources. We also need to upgrade our substations, our transformers and our distribution lines. And we project that the LDCs will need to invest between 106 to 120 billion between now and 2050 due to the increased electricity demand from electrification, fuel switching, expanded industrial economic growth and interest from heavy loads such as data centers. EV charging and industrial electrification can create peak demand spikes. This will require smarter load management and demand response systems. And we need to invest in automation, energy storage and two-way power flow management to help balance supply and demand. And you asked the question about where are we going to get the capital for these changes. It’s an excellent question because traditional funding for the utilities come from approved rates from our regulator, the Ontario Energy Board. But as we transition into a new environment with the increased demands, the upgrades are going to be extensive. And as I mentioned before, we’re looking at an increase in capital investments in our grid over the next 25 years between 106 to 120 billion. And this is on top of what the IESO is forecasting for the overall system in terms of transmission and generation. They’re predicting approximately 400 billion. So we’re looking at over 520 billion over the next 25 years. So that’s really an astronomical amount. Presently our LDCs haven’t been eligible for quite a number of government programs that are currently supporting the build-out of generation, particularly nuclear and also transmission. So for example, we are not eligible for support from the Canada Infrastructure Bank, nor are we eligible to claim the new federal investment tax credits. We are unclear if we will be able to be eligible for the new Ontario Growth Fund. We have been eligible for some competitive project funding, through the federal government’s SREPs program and the IESO Grid Innovation Fund, but it’s simply not enough to support the capital needs long term. Utilities have also been eligible for funding through the Ontario Infrastructure Fund, but some of them have moved away from that and have renegotiated debt restructuring with traditional banks. We think that the tax base may need to pay for a portion of these upgrades. I do want to talk a little bit about the opportunity for an expanded role of the private sector in the distribution companies. As I mentioned, The LDC shareholders, are mostly municipalities, don’t have the required capital for upgrades. So the private sector could potentially step in and inject some capital into the system. Currently, private interest can invest up to 10 % in a utility without it impacting the tax exempt status of the utility. The current federal government is exploring increasing that threshold. However, if there is a government change that may or may not happen. And recently the EDA was successful in getting a four-year limited transfer tax exemption for all transactions related to utility consolidation, if that might be of interest to utility shareholders. And that four-year limited exemption started on January 1st of this year. So with all that being said, the EDA’s advocacy continues with many parties to find ways to bring more funding alternatives to the distribution sector so they may have the capital to invest to modernize the grid to meet the demands it is facing in the new economy. 

Tom Heintzman: So Teresa, the numbers you quoted are close to staggering. 106 to 120 billion just in Ontario, just for distribution, and more than 500 billion for the Ontario system. And then obviously take that across the country and across North America. Those numbers are jaw dropping. And obviously they’re proportionate to the amount of change that we see at the edge of the grid. You know, we haven’t seen EVs until the last decade or so, more and more heat pumps, more and more data centers, et cetera. I’d like you to just look forward five years, maybe 10 years, and give me a sense of what you think it looks like. And in particular, I’m interested in a concept called distribution system operators. And our listeners will know that most of the electricity systems in North America are controlled at the generation level by an independent system operator who dispatches the generators. But with more and more generation moving to the edge of the grid and also the consumption being more and more dynamic, so smart homes, buildings that are able to shift their load from daytime to nighttime, etc. EVs that can choose when to charge up. There’s much more intelligence at the edge of the grid. And so I guess one of my questions is, in the next five to 10 years, do you see a similar organization or organizations emerging at the edge of the grid to manage both supply and demand in the same way we have the IESO, the independent system operator operating at a provincial level, whether at local levels, we’ll start seeing distribution system operators.

Teresa Sarkesian: My short answer is absolutely. In fact, the EDA has been advocating since 2017 for various models such as a distribution system operator model. That is something that we definitely see for the utility over the next five to 10 years. And the distribution system operator is a future distribution utility that is prepared and designed for a high penetration of distributed energy resources connecting to the distribution grid. And the DSO would include new capabilities and functions such as DER forecasting, DER operations and dispatch. And that dispatch includes not only to the distribution grid, but also to the bulk system which is run by the IESO. And we’re looking at facilitation of local markets where the distributor would be providing an incentive to a customer to sell its generation into the distribution grid or its energy storage. And we’re also looking at more transmission and distribution system coordination. Because as you point out, energy has been basically running one way from the generator to the transmitter to the distributor, to the customer. We’re now looking for a much more interactive dynamic system, not only between the distributor and the customer, but also the distributor and the transmitter and the IESO. So if a utility was a DSO, it could better understand the full potential and community benefit of the distributed energy resources locally. And as we discussed earlier, they could take advantage of that behind the meter activity and optimize those benefits for both the customer, the community, and the electricity grid. And that means both the distribution grid and the bulk system. DSOs are going to be playing a crucial role in addressing increasing demand. So it’s everything from sources such as solar panels, batteries, and other DERs, aggregation of these DERs, and they can be used beneficially in capacity constrained areas and assist in affordability by mitigating some of the capital intensive costs of generation and transmission. The customer will benefit, as I mentioned, they will be paid an incentive. And then the broader customers with the DSO model could benefit because we could have more reliable service, potentially lower costs, and more opportunities for customer participation in energy programs like demand response or the sale of excess power back to the grid. I’m very encouraged that the government has recently directed the Ontario Energy Board to start looking at the future business models of the utility, including the DSO. So I’m very encouraged about the future of us getting on the right path to become DSOs.

Tom Heintzman: Certainly is an exciting time. And so as the demand grows and all these different uses, we will have to come up with solutions. And fortunately, the intelligence in the system will enable much more efficient use and management of generation at the edge of the grid. So last question, Teresa. Your organization has done a lot of great thinking and produced a number of thought pieces. You mentioned solving gridlock, which is extremely insightful. Our conversation has been largely focused on Ontario, but obviously the same trends are happening throughout North America and frankly throughout the world. I’m wondering whether there’s any key insights from either the Solving Gridlock paper or more generally that you would extend to our listeners listening more globally. Any lessons from Ontario that can help other jurisdictions to advance grid modernization?

Teresa Sarkesian: Thanks for that, Tom, and I’ve got to put a plug in for our solving gridlock paper because it is a vision paper where we outline a roadmap for a customer driven electricity system in Ontario, emphasizing the role of the local utility companies in modernizing the grid and enhancing customer service. And one of our key recommendations going forward is that our local distribution companies need to be grid ready to manage the energy transition. So what does that mean? We need to get moving now on what we view are foundational investments that are required to improve grid resilience, grid modernization, the use of DER management systems, and digital technology investments to enable customers to participate in the market, both locally and at the bulk system. And these priorities have also been identified in the provincial government’s vision for an affordable energy future that they released last fall. So this is a very interesting time in Ontario. Our provincial government has bold ambitions and has given clear direction to its regulators and agencies about the policy priorities that are needed to build Ontario into an energy superpower. And with that, we are seeing the province beginning to address a number of recommendations in our solving gridlock paper to look at funding for modernization and grid resilience and future utility business models. It’s an encouraging and very fast moving time. So we do encourage everyone around the world to look to Ontario and watch how we grow and develop over the next five to 10 years. So we’ve got our work cut out for us, but I know that our LDCs are up for the challenge and so is the EDA.

Tom Heintzman: Well, Teresa, thanks for joining the show. It’s been a pleasure talking to you and thanks to all our listeners for tuning in.

Teresa Sarkesian: Thank you so much, Tom. 

Tom Heintzman: Please join us next time as we tackle some of sustainability’s biggest questions, providing you different perspectives to help you move forward. I’m your host, Tom Heintzman, and this is The Sustainability Agenda.

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