New electricity market could mean higher rates

AESO may have to buy extra power, says Raj Retnanandan.

Alberta electricity consumers should be aware that the Alberta government’s plan to introduce a capacity market for electricity by November 2021 is likely to hurt residential and business consumers and raise average customer bills by 12 per cent to 15 per cent.

Opposition to the changes has been muted because of the complexity of the process, which is indeed troubling. While the government’s goal of introducing renewable sources of power is commendable, the implementation of the policy by the Alberta Electric System Operator (AESO) is failing consumers and needs to be addressed urgently. In late 2015, Alberta’s Climate Leadership Plan mandated the phase-out of coal generating plants and the provision of approximately 30 per cent of the electricity supply from renewable sources of power, such as wind and solar, by 2030. In 2016, Alberta generated 12 per cent of its electricity from renewables.

Retiring these coal plants and adding significant renewable power generation introduced uncertainty regarding the ability of the existing energy-only market to attract enough investment in future generation to reliably meet power demand at all times.

What is the difference between today’s market and the planned capacity market? In the energyonly market, companies recover the variable costs of producing energy and their fixed investment costs by selling electricity into the Alberta Power Pool. In a capacity market, companies receive revenue by selling energy, but also make money from capacity payments, which compensate them for the portion of their fixed costs they can’t recover from the energy sales.

In exchange for those capacity payments, companies agree to provide adequate generating capacity plus reserves to reliably meet electricity demand. The “capacity costs” are paid for by their customers. Two key objectives in moving from an energy-only market are reducing price volatility (created by the removal of coal generation), and ensuring cost increases due to the capacity payments are offset by lower energy costs. Unfortunately, the capacity market plan is not likely to achieve either of these objectives.

First, generators could influence the price of energy delivered at certain times to their benefit. While the AESO has proposed measures to curb this practice, they will likely be largely ineffective.

One solution used in other jurisdictions with capacity markets is to sell the energy into what’s called a time-ahead or day-ahead market, in which participants commit to buy or sell wholesale electricity before it’s actually needed. This has reduced the exercise of market power by generators, helping reduce energy prices and price volatility.

Notwithstanding extensive consultations by the AESO, companies have successfully resisted any move to a time-ahead energy market, to the detriment of consumers’ wallets.

Further, the addition of significant renewable sources of generation affects reliability because the power supply can change quickly, depending on such factors as wind velocity and cloud cover.

Supply and demand in the electricity system must remain in balance to ensure customers always have the power they need. As part of the capacity targets, this calls for procuring quickresponding reserves such as electricity storage, or quick responding generation including gasfired power plants, to keep the system balanced.

Unless sufficient quick-responding reserves are acquired by setting an appropriate price for them, the AESO might have to buy extra power reserves at a high cost to consumers.

To avoid such unnecessary costs to consumers, at least two changes are required. First, the AESO needs to set a timetable for introducing a time-ahead energy market by November 2023.

Second, given the reliability concerns created by the expected significant growth in the renewable electricity supply, the capacity auction should be designed to procure sufficient quick-responding balancing reserves as part of the target capacity procurements.

Without these two changes, consumers will be adversely affected by the introduction of a capacity market for a long time to come.

In late 2015, Alberta’s Climate Leadership Plan mandated the phase-out of coal generating plants.