On November 23, 2016, the Government of Alberta announced the restructuring of Alberta’s electricity market, from a fully deregulated regime to a hybrid system that incorporates capacity payment mechanisms.
Alberta is one of the few jurisdictions in the world with an “energy-only” market. This means that Alberta generators only recover the wholesale price of electricity. Investors are only able to recover invested capital if they can leverage high-priced hours, and in this way, the energy-only system contains the risk of supply instability and may not promote investment in generation facilities and, in particular, renewable energy sources.
Alberta’s Capacity Market
Over the next 14 years, the Alberta Government estimates that it will need up to $25 billion of new investment in electricity generation to support, in part, the growing electricity needs of the province and to implement the province’s plan to phase-out coal-fired generation and meet its target of 30% renewable electricity capacity by 2030. In order to achieve this, the province intends to support 5,000 MW of additional renewable capacity.
Accordingly, current and potential energy investors as well as the Alberta Electric System Operator (AESO) recommended that Alberta transition to a capacity power market regime, which is expected to promote stability in the price and supply of electricity and investment in energy. This recommendation can be found in the AESO’s report entitled, Alberta Wholesale Electricity Market Transition Recommendation.
Under the proposed market scheme, Alberta will incorporate mechanisms to compensate power producers for their generation capacity. Alberta’s electricity market will therefore be comprised of two separate markets: (i) a market for energy; and, (ii) a market for capacity, in which generators will agree to have availability to supply electricity when required. Each of these markets produce separate revenue streams: (i) energy payments, which are paid to the generator for electricity that is purchased; and (ii) capacity payments, which are paid to the generator for making generation capacity available on demand.
Timeline for the Capacity Market
- Alberta’s capacity market will be developed in consultation with stakeholders, and will be implemented by 2021.
- AESO has estimated that the design of the market will take 2 years to complete, with an additional year to finalize legal contracts and to set up a procurement process.
- The first capacity contracts are expected to be formed at least three years after the design process starts.
- Accordingly, the earliest date that capacity procured through the initial auction would be in service will likely be in 2024.
Issues and Developments to Monitor
The possible implications of the power market overhaul on Alberta’s energy landscape will need to be considered in light of other commitments recently announced by the Alberta Government, such as its renewable energy initiatives. At present, some issues to consider include:
- Price Stability: Although there are many direct benefits to consumers from capacity markets, such as the reduction of price spikes, consumers risk incurring increased costs. The Government of Alberta recently announced its commitment to protecting consumers from volatile prices by implementing a price cap of 6.8 cents per kilowatt hour from June 2017 to June 2021. However, as the cap on electricity prices and the implementation of power capacity payments will likely not overlap, the implications of the capacity power market on consumer prices remains uncertain.
- Overlap and Interplay with Other Initiatives: How the capacity market will interact with the principles of the energy-only market and specifically the principles legislated within the Fair, Efficient and Open Competition Regulation (FEOC) will be critical to watch. Specifically, whether and how the FEOC principles will be applied to the various relationships between generators participating in the Alberta market, including the successful bidders from both the Renewable Electricity Program, and the auction for capacity contracts, and how such incentives will be addressed with incumbent generators who already invested, built and operate natural gas and renewable generation facilities in Alberta.
- Supply Reliability: The capacity market provides incentives for electricity generators to supply the power pool, as well as with the means to invest in renewable energy sources. It remains to be seen whether the market overhaul will remedy possible gaps in Alberta’s power supply, especially during the period of coal phase-out, and whether it will reinforce Alberta’s Climate Leadership Plan.
We will be watching these developments closely.