As Ontario confronts a surge in electrification, economic growth, and technological disruption, local distribution companies ("LDCs") stand at the crossroads of risk and opportunity.
On April 30, 2025, Gowling WLG hosted its annual Energy Dinner, bringing together senior energy sector and financial sector leaders from across the province to critically examine the future of Ontario's LDCs. In a wide-ranging discussion, the need for Ontario to rethink its power distribution sector model to find ways of supporting the massive growth and redevelopment of the distribution sector now getting underway was made clear.
Rethinking Ontario's risk framework
Ontario's current regulatory regime, overseen by the Ontario Energy Board ("OEB") and the Ministry of Energy, emphasizes cost-certainty and prudence. The OEB's rate-making practices have historically been grounded in a cost-of-service model that requires utilities to justify capital and operational expenditures based on historic costs and proven need.
This structure discourages future-oriented investments with uncertain returns, such as grid innovation, digitalization, or advanced energy technologies. Yet the need for forward-looking investment is urgent.
Electricity demand in Ontario is projected by IESO to increase by 75 per cent by 2050, driven by transportation electrification, population growth, and the rise of energy-intensive digital industries. Ontario's aging grid infrastructure is under strain, and the current model lacks the flexibility to support the transformation that Ontario can capitalize on.
One key take-away from the discussion was that signs of flexibility and an inclination toward sector innovation are emerging. The Electrification and Energy Transition Panel ("EETF") chaired by David Collie acknowledged systemic risks for example posed by stranded natural gas assets and recommended proactive planning. The EETF highlighted that stranded assets could cost utilities billions if not addressed, urging a shift toward diversified energy investments.
Ontario's natural gas system delivered 582 petajoules ("PJ") of energy for space and water heating in 2021, covering over 60 per cent of household needs, a dependence that will decrease over the long-term. Meanwhile, as we discussed in a previous article, the 2024 Fall Economic Statement announced the removal of tax barriers for private investment in municipally-owned utilities, enabling alternative capital streams for LDCs.
Embracing higher-risk, high-reward initiatives such as distributed energy resource (DER) integration, virtual power plants, and dynamic pricing pilots can help Ontario meet rising demand while unlocking broader economic gains. This shift requires not only regulatory tools, like performance-based ratemaking, but also significant cultural change: embedding innovation KPIs and risk-taking behaviours into utility governance models—which is no mean feat.
Financing the next generation of LDC transformation
Ontario's LDCs are integral to community well-being and economic growth, providing the infrastructure that supports economic stability and commercial productivity. Ontario's over 50 LDCs collectively manage over 123,000 km of distribution lines and serve more than five million customers covering residential, business, industrial and institutional customers. These entities not only deliver electricity, but they also support regional economic ecosystems.
LDC-related capital projects, such as substation upgrades, smart grid deployments, and resiliency hardening (e.g., storm-proofing infrastructure), produce multiplier effects: they create demand for construction, engineering, and skilled trades while enabling downstream investment in sectors like manufacturing, life sciences, agritech and the stability and resilience of our grid makes Ontario a great place to do business.
The LDCs operate in a purposefully careful policy space. Political necessity to maintain low residential rates often has prevented discussions on how we can unlock more capital spending. Residential electricity rates in Ontario remain among the highest in Canada, averaging 13.2 cents/kWh as of 2023, which fuels public resistance to further increases. The challenge is intensified by the fact that most LDCs are municipally owned and governed, subjecting them to both political and community scrutiny.
To address this, governments must unlock blended financing tools that reduce the burden on ratepayers while enabling modernization. Expansion of infrastructure bank investments, resilience funds, and climate transition programs could prioritize LDC-eligible projects.
For instance, Infrastructure Ontario's Loan Program could be expanded to cover larger LDC projects covering areas such as smart metering or DER platforms.1 Moreover, LDCs could also consider consolidating with other LDCs which would pool capital and reduce administrative overhead, increasing financial efficiency without negatively impacting ratepayers.
A broader conversation of LDCs' developmental mandate is overdue. If utilities can demonstrate alignment with provincial and local economic strategies—such as job creation, innovation corridor development, or electrified transit support, they should be able to access comprehensive economic development funding in addition to traditional utility financing. The broader civil purpose that LDCs today are demonstrating perhaps gives LDCs a license to draw on more funds they otherwise would not.
Ontario's strategic opportunity
With AI and cloud computing driving demand, data centers are poised to consume over 1,000 terawatt-hours globally by 2026—more than double 2022 levels, according to the International Energy Agency ("IEA").2
In Ontario, data centers may account for up to 13 per cent of new electricity demand by 2035, based on IESO projections. This growth brings engineering and regulatory challenges. Hyperscale centers can draw 100–500 megawatts, straining LDC grids, particularly when paired with on-site renewables that create bidirectional flows. Managing this load requires smart infrastructure, real-time monitoring, and predictive analytics.
Another key issue is rate design. Cost-based pricing may not account for peak demand impacts. Some propose premium pricing to reflect grid strain, while others caution that this could deter investment. A solution may lie in tiered pricing, energy efficiency incentives, or time-of-use billing. Despite the complexity, the economic upside is significant. Data centers attract billions in capital, create high-skill jobs, and boost demand for local services like fiber networks and mechanical systems. Ontario's clean, 90 per cent emissions-free grid and cool climate position it well against U.S. competitors. With the right partnerships and policy clarity, LDCs can become key enablers of Ontario's digital economy.
The energy transition also represents a strategic inflection point for Ontario. LDCs can lead, not follow, if the province rethinks its regulatory stance, modernizes funding tools, and further embraces new industrial drivers like AI and data infrastructure.
By proactively aligning energy systems with economic development, Ontario can position its LDCs as catalysts for long-term prosperity. We look forward to the continuing conversation.
Footnotes
1. Infrastructure Ontario, Infrastructure Lending. https://www.infrastructureontario.ca/en/what-we-do/infrastructure-lending/
2. International Energy Agency, AI is set to drive surging electricity demand from data centres while offering the potential to transform how the energy sector works https://www.iea.org/news/ai-is-set-to-drive-surging-electricity-demand-from-data-centres-while-offering-the-potential-to-transform-how-the-energy-sector-works
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