Canada: Designing Alberta's New Electricity Capacity Market: Work Begins But Much To Be Done

Earlier this month, members of BLG attended the Alberta Electric System Operator's (AESO's) first stakeholder engagement session in Calgary on the design of Alberta's forthcoming capacity market. As we wrote about in Alberta to Cap Electricity Rates and Bring in a Capacity Market, the provincial government first announced the introduction of a capacity market in November. Stakeholders turned out in large numbers and filled the conference room to hear more from the AESO about this fundamental change to Alberta's power market.

The session was not a debate on the merits of the government's decision to introduce a capacity market — that ship has sailed. Rather, it was about identifying the capacity market's desired end state, key market design features to resolve, expected timelines, and the development of the AESO's consultation process to involve stakeholders in the decision making. While the session provided valuable insight into the AESO's current thinking, participants — including BLG — left with many unanswered questions.

Objective and Timeline

The capacity market is intended to ensure an adequate power supply in Alberta by placing a value on generators' ability to supply capacity, and compensating the generators for that service. Capacity will become a monetized product, exchangeable in a market that will operate in parallel with the province's existing energy-only market (EOM) and ancillary services market.

The AESO provided the audience with an instructive statement describing a potential outcome of the capacity market's development:

"The desired end state is to develop a capacity market that utilizes competitive market forces, ensures continued supply adequacy and reliability at a reasonable cost and is flexible to reflect the unique aspects of Alberta's electricity industry. (emphasis added)"

The goal is to complete the design and implementation structure of the capacity market by the end of 2018, to facilitate first capacity procurement in 2019, and first delivery in 2021.

Starting Market Design Assumptions

While the AESO did not provide a definitive framework, it revealed several potential starting assumptions for the capacity market's design. These provide stakeholders with an indication of the AESO's design starting point, unless stakeholder feedback suggests that one (or more) of these assumptions require further consideration. The assumptions are summarized below, with some of our preliminary thoughts to encourage discussion at this early stage of the market design process.

  • The Capacity Product Capacity obligations will be a forward physical obligation requiring the capacity sold in the capacity market to be available to provide energy when needed in Alberta. The intent is to provide capacity payments for a physical product that is ultimately delivered. No surprise here. The goal is to keep the lights on, so physical supply (and not a financial product/obligation) that can be called upon if needed is a reasonable assumption in our view, in light of the indicated desired end state.
  • Generator Obligations There will be a "must offer" requirement. All existing capacity must offer their eligible capacity to the market and planned capacity (i.e. new, including expansions) must offer for the delivery year they are connected. This is consistent with the "must offer, must comply" rule in the EOM, and prevents generators from withholding eligible capacity to drive up the clearing price in a procurement.
  • One Market Alberta will initially be a single market zone. This is consistent with Alberta's EOM rules that do not provide for locational pricing. The AESO acknowledged that design flexibility to permit locational pricing is required in the event that Alberta's transmission policy changes in the future.
  • Resource Adequacy Components A key component of any capacity market is the determination of the projected peak load and reserve requirement needed for the forward period for which capacity is procured. Capacity cannot be procured without first forecasting market requirements for capacity. This will be done by a single market coordinator, presumably the AESO.
  • Product Characteristics The capacity market will only deal with the supply of eligible capacity. Attributes of that capacity (e.g. greenhouse gas emission (GHG) intensity, total capacity factor, ramp-up capability, and energy production costs) will not be considered when awarding capacity contracts. Like the upcoming Renewable Energy Program (REP), capacity procurements will be technology-neutral. It is assumed that the capacity market's objective will solely be ensuring sufficient power supply– not achieving any other electricity system or policy goal. We look forward to stakeholders' reactions to this proposed assumption, but the AESO is suggesting that other policy goals will be achieved through other mechanisms. For example, GHG reductions in the power sector will be achieved through programs like the REP. Another mechanism to reduce GHG reductions is the way in which Alberta's carbon levy is imposed on different types of generation to impact the merit-order dispatch of the different types of generation in the EOM.
  • Market Independence Energy and ancillary services markets will be separate from the capacity market. Capacity market procurements will operate independently.
  • Participation rights Market participants who unsuccessfully bid to supply the capacity market will still be eligible to participate in the energy and ancillary services markets. This is consistent with the independent but parallel operation of the energy, ancillary service and capacity markets.
  • Renewables Generators awarded support payments under Renewable Energy Support Agreements (RESAs) in round one of the REP (occurring this year) will not be eligible to sell that capacity in the capacity market. While no decision has been made on whether or not renewables will be eligible to supply in the capacity market, the rationale seems to be that this year's RESA winners will obtain all financial support necessary from their RESAs. Also, if this assumption remains, the AESO will not recover any of the payments it will make under a RESA by requiring the RESA generator to participate in future capacity procurements and remit any capacity payments it may receive to the AESO.
  • Market Oversight Capacity market mechanisms and the behaviour of its participants will be subject to regulatory oversight. The AESO will "design the 'rules of the game;'" the Market Surveillance Administrator (MSA) and the Alberta Utilities Commission are likely to play an important role as well. Like the EOM, mitigating market power of participants and ensuring a fair, efficient and openly competitive capacity market is a reasonable goal to expect in the final design.

Key Questions

The AESO (along with session attendees) identified and asked a number of questions that will affect the ultimate design of and participation by suppliers in the capacity market. Some of these questions and our thoughts on such questions include:

  • What will be the resource adequacy requirement for each period? Capacity procurement for a future period will procure a specified amount of capacity for that period. This will require future demand (peak load) for that period to be modelled and determined by the market coordinator. A reserve margin/buffer will be added to the projected peak load to ensure that reliability of electricity is maintained for Albertans under periods of high demand and/or in the event of generation and transmission outages. The way, and transparency, with which this resource adequacy requirement is determined by the market coordinator is likely to spark debate.
  • Who will buy the capacity? The obligation to procure the capacity must be placed somewhere in the market. In some jurisdictions load serving entities (e.g. distribution facility owners) must procure capacity for the load that they serve. Other jurisdictions place the obligation on a single purchasing entity such as the AESO.
  • What will be the frequency of the capacity procurements and the length of the delivery periods/contracts? Procurements must be held sufficiently in advance of a future period for newly-procured generation – either green or brownfield projects – to be built in time and for existing generators to make and implement generation retirement decisions. Supplementary procurements for a period may also be required as the resource adequacy requirement evolves approaching that period. Generators will require some assurance that regular procurements for future periods will also be held before committing to new or expansion generation projects.

Financing, as ever, is key. The length of the delivery period or capacity contract will be very important when it comes to project financeability. The AESO rejected long-term contracts in adopting a capacity market, so twenty year contracts would be surprising. But we could see annual capacity procurements resulting in rolling five to ten year contracts. After all, the AESO has acknowledged the importance of revenue sufficiency and certainty for generators to finance projects. To us, the answer to this question will be critical to incentivizing generators and financiers to develop the new dispatchable capacity needed to firm the renewables and replace the coal capacity that is being phased out.

  • Will there be a price floor or cap as in Alberta's current energy only market? If, as noted above, all existing capacity will have to be offered, then will there be restrictions on offer prices to influence the capacity clearing price? For example, should the AESO set a cap based upon the estimated net cost (i.e. net of expected revenues in the energy and/or ancillary services markets) to build and operate new capacity or should capacity suppliers be unconstrained in their offers? If a cap is considered, then the way, and transparency, with which it is determined will be important.
  • Which generating sources will be eligible to participate? Participation of renewables appears to be on the table. Although, renewables will be ineligible if awarded contracts in the first phase of the REP. It is unclear whether included renewables will include only dispatchable renewables like hydro, renewables paired with energy storage, or all renewables. Decisions will also have to be made with respect to capacity located outside of Alberta where the electricity could be imported through existing or new interties. The treatment of cogeneration, common in the oil sands, also has to be addressed, given that some of this capacity is consumed on-site by the generators. Defining procurement participants will also require the AESO to decide if customers willing to reduce demand (e.g. shut down or reduce production) in the forward period will be able to bid and compete with generators for the clearing price.
  • How will capacity costs be allocated? The capacity market will result in payments being made to ensure the reliability of electricity supply. Customers will benefit and have to pay that cost, even if settled and paid by a market clearing-house (like the AESO) or load providers. This necessitates a decision regarding its allocation across customer groups. Industrial customers will also want to be able to manage that cost, so the ability to enter into hedging arrangements should be facilitated.
  • What existing examples can Alberta draw from? The AESO indicated at the session that it intends to draw as much as possible from existing capacity market design while designing Alberta's market. Clearly, as the AESO noted, at the same time the "unique aspects of Alberta's electricity industry" will have to be considered. The "PJM" wholesale market serving 14 U.S. states is frequently cited as a successful model, including by the provincial government. While PJM is a potential model, it is also significantly different. PJM serves 61 million people, operates on a fully-integrated, multi-jurisdictional basis and has 180,000 MW of installed capacity. Alberta is a single jurisdiction, weakly interconnected to neighbouring markets, with a comparably small 16,300 MW of installed capacity.
  • How will the capacity market impact the energy and ancillary services market? The AESO has indicated that introducing a capacity market will put downward pressure on what power pool prices in Alberta would otherwise be. This has been experienced in other capacity markets and is a reasonable position. However, this raises serious concerns for existing generators — for example an existing renewable generator who may not be eligible to participate in the capacity market. In a province trying to increase market share for renewable energy, Alberta will not want to drive existing renewable generators out of business by denying them capacity payments while at the same time depressing the revenues they earn in the energy market.

Another issue to consider is the relative value of each of the capacity and energy component revenue going forward and the resulting impact on project financing. We understand that in some implemented capacity markets, generators earn a small portion of revenue from the capacity market and the rest is earned from sale of electricity in the energy or ancillary services markets. If that is to be the case in Alberta, will new generation projects be financeable if the bulk of projected revenue is still exposed to price risk in the energy market? Will capacity revenue be sufficient to cover the capital and fixed operating costs needed to build the required new generation in Alberta?

The net result of all of this is that many stakeholders are trying to figure out how the energy, ancillary services and capacity markets are going to effectively operate together, and what the effect will be on their organizations, aggregate revenues and electricity costs under a newly-designed market. Bolting on the REP to the existing energy market was one thing. Alberta now plans to additionally tack on a capacity market. Doable? Yes, but it will not be simple and some participants may not be happy with the impact to their businesses. After just settling the PPA litigation and agreeing to compensate coal plant owners for the phase out of coal by 2030, the Province presumably hopes this design change can be implemented without much controversy. We will be watching the stakeholder consultation with interest to see if that can be done.

Next Steps

The primary purpose of the AESO engagement session was to assure market participants and other stakeholders that engagement will be extensive and thorough, the decision-making process and rationale will be transparent and the consultation process will be designed to ensure that all stakeholders are informed.

In that regard, the AESO is soliciting stakeholder comments about the content of the session. A copy of the presentation given to attendees at the sessions is available online. A feedback matrix has been released for stakeholders to use to comment on the content of the session. The deadline for feedback is February 10, 2017.

Those looking to learn more about a capacity market should also take a look at the report prepared for the MSA that was released the week of January 16, 2017, to help educate stakeholders on unique issues for Alberta. We also understand that Charles River Associates has been retained to help identify issues and inform stakeholders. That should be quite helpful once it is released.

The Alberta capacity market design work has begun but much is to be done. A long road lies ahead to design Alberta's capacity market and complete 2019's first procurement. BLG will be there every step of the way actively monitoring development of the consultation and design processes and sharing our thoughts on the issues. We will publish updates regularly as the design evolves and would welcome the opportunity to receive your thoughts on this important change to Alberta's electricity market.

About BLG

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.