Alberta Capacity Market Design: Our Five Takeaways from Last Week’s Education Session

Alberta announced late last year that it will create a new electricity capacity market.  This capacity market will operate in parallel with the province’s existing energy only electricity market (“EOM”) and ancillary services market.  The capacity market will provide a new potential source of revenue to generators for having the capacity to generate electricity, even when they are not actually generating and delivering electricity to the grid. At a high level, this is being done to provide equity investors and project financiers with the sufficient and stable revenue streams needed for them to build the new power projects needed in Alberta as coal is being phased out.  In other words, the capacity market is expected to ensure that Alberta has the generation capacity it needs in the future.

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.  However, many stakeholders in Alberta know very little about an electricity capacity market.  To help, the AESO hosted a Capacity Market Education Session in Calgary last week. Given that it was a cool minus 27 here that day we opted to attend the session (and multi-task) through the web. The session was run by Charles River Associates (CRA) at the request of (and we would assume paid for by) the AESO. The session was very informative, though CRA carefully avoided expressing any opinion concerning Alberta’s capacity market design, in addition to leaving the audience’s more politically motivated questions unanswered.

Overall, the session provided a foundational analysis of capacity market design issues and how they were resolved in each of the PJM, ISO-NE, NYISO, MISO, Great Britain and Irish markets. CRA’s slides for the session are available at previously published a piece in which we identified and analyzed a number of similar issues with Alberta’s capacity market, generally.  For those that want to know more about our views concerning Alberta’s capacity market, our earlier piece is available here. For those readers who took a pass on the CRA session and clicked here expecting a succinct overview, the following are 5 takeaways from the CRA session that stood out to us.

1 – Existing Renewables: Critically, the extent to which existing renewable power projects will be permitted to bid in Alberta’s new capacity market remains an unanswered question for the AESO to resolve. The AESO previously stated that this year’s Renewable Electricity Program (REP) is limited to new (or expansions of existing) renewable energy projects.  It is also expected that the new capacity market will put downward pressure on power pool prices in the EOM.  Since existing renewable projects cannot even bid in this year’s REP, where does that leave them with no money from the REP and the capacity market exerting downward pressure on pool prices? According to CRA, the other jurisdictions (except for Great Britain) permit variable generators to participate in the capacity market but each has very technical calculations (based on for example meteorological data) that determine the amount of capacity that the variable generators can bid into the capacity procurement.  Expect the existing renewable generators to push hard for capacity market participation and a minimal grind of their capacity in each procurement.

2 – Project Finance: Financiers of new Alberta power projects will be looking to the new capacity market to provide them with some long-term certainty when it comes to the sufficiency of cash flows. To us, this will require that special attention is paid to the “commitment period”, or the period over which a project is paid to meet its capacity performance obligations. We took some comfort in the fact that CRA noted that some jurisdictions had different commitment periods for existing versus new resources. In particular, CRA noted that Great Britain had a 15 year period for new projects that was in “response to UK capital markets aversion to merchant risk”.  A similar concept would help to project finance new generation here in Alberta where we have also seen an aversion for capital markets to accept merchant power risk.

3 – Continued Importance of EOM: The EOM will continue to be important for generators.  It was suggested that the EOM, and developers’ views of the likely prices and variability in prices for on peak periods, will determine the make-up of the new Alberta generation fleet.  For example, whether we see new simple cycle or combined cycle plants, and whether we see pumped hydro storage, will depend a lot on proponents’ views of what the EOM pool prices will look like in future years.  The EOM will still be very important in Alberta.

4 – Supply Adequacy/Demand Curve:  Lots of talk about determining a capacity demand curve for each capacity procurement, or a curve that plots maximum prices against the quantity of procured capacity to help determine the clearing price.  Kinked, linear, convex and sloped, plus seasonal variability and loss of firm load expectation or LOLE, were all discussed while we multi-tasked. We will leave the demand curves to the power market economists. However, it was clear to us that by whom and how that is determined will be very important for customers who will foot the bill if too much capacity is procured and who will also bear the risk of brown outs if not enough capacity is procured. It seemed like most jurisdictions left that to the regulatory bodies, though according to CRA the Brits had that done by the British Government. We will be interested in seeing who will decide the supply adequacy/demand curve in Alberta and whether stakeholders, including politicians, will have input and visibility into that process.

5 – Uniqueness of Alberta: The session generally involved CRA identifying and explaining a design issue and then stating how each of 6 different capacity markets dealt with the issue. We were having a hard time equating Alberta to PJM or Great Britain, so we decided to ask a question about whether CRA will be providing any analysis on the differences between those markets and Alberta. CRA acknowledged that each jurisdiction had different characteristics (e.g. size, interconnectedness) and, more importantly, that each had legacy market issues that impacted their capacity market design choices. Accordingly, CRA is preparing a more fulsome report that will explain this and that it hopes to release through the AESO by the end of February.  Stay tuned for that, as in our view the capacity market has to be designed in Alberta to be simple (KISS principle please), achieve Alberta’s objectives, and reflect the unique characteristics of the Alberta market.

There were many other issues discussed by CRA, but we will leave it to others to highlight those for stakeholders.  Plus describing any more than 5 takeaways would be overkill, and when it comes to this subject matter likely leave your brain hurting – unless of course you hold a PhD in power market economics in which case you do not need to be reading this thought piece.

Kent D. Howie

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