We are going to know soon what the new capacity market for electricity will look like in Alberta. The capacity market design work, led by the Alberta Electric System Operator (AESO), started in January. Since then the AESO has issued a series of straw proposals on various design issues (each called a “Straw Alberta Market” or a “SAM” for short), and sought input from 5 different stakeholder committees struck by the AESO. We got SAM 1.0 in May, and SAM 2.0 in August. Last month the AESO announced that it will issue SAM 3.0 in December to reflect the recent work of the stakeholder committees, but that SAM 3.0 will be quickly replaced in January by the AESO’s own draft comprehensive design of Alberta’s capacity market. That AESO draft, informed by SAM 3.0, will then be fine-tuned and finalized between January and June of next year.
There are a myriad of complex and interrelated capacity market design issues to be resolved by the AESO: the Rubik’s Cube analogy was used at a conference we attended earlier this month to describe capacity market design. So we acknowledge at the outset that it is a bit unfair for AlbertaPowerMarket.com to pick out and discuss a single capacity market design issue in isolation. However, to us one of the more significant design issues to be resolved is the length of the delivery period (sometimes called the commitment period) that will apply to new generation facilities. More particularly, should new generation facilities be provided with a longer (and different) delivery period than the new capacity market will provide for existing generation facilities? A longer delivery period would provide the builder of the new generation facility with more price certainty (longer term or duration), and therefore make it easier for the builder to finance construction of its new generation facility. In making its decision on this issue the AESO will have to choose between 2 competing views on the length of the delivery period.
The first view, generally supported by thermal developers who do not own existing coal or gas plants in Alberta, is that the delivery period should be longer for new generation facilities. The primary rationale for Alberta moving to a capacity market is that it is supposed to provide the revenue certainty needed to finance new non-renewable generation required in Alberta. The best way to provide revenue certainty, so the argument does, is to provide new generation projects that are successful in a capacity auction with the option to lock in a longer delivery period. New generation projects would have the option to receive capacity payments for a longer period of time without having to succeed in another capacity auction. Such a longer delivery period for new generation facilities is available in some other capacity markets, e.g. PJM (up to 3 years), ISO-NE (up to 7 years), Ireland (up to 10 years) and Great Britain (up to 15 years).
The competing view, generally supported by the owners of the existing coal and gas generating facilities that were built in Alberta without the benefit of a capacity market, is that the delivery period for new generation facilities should be the same as that for existing generation facilities that are successful in the capacity auction. They argue that there should be a level playing field in the capacity market between new and existing generation facilities. In choosing a capacity market, Alberta rejected the use of long-term contracts to procure new non-renewable electricity for Alberta. Accordingly, it is asserted that it would be inconsistent for Alberta to reject long-term contracts but then provide long-term delivery periods in the capacity market for new generation facilities. Holders of this view support a 1 year capacity delivery period for both existing and new generation facilities of all fuel types.
The AESO is going to have to choose between these 2 competing views on the length of the delivery period for new generation facilities. It will have to decide if a 1 year delivery period for new capacity will provide the revenue certainty needed to attract new investment and new entrants (if that is something the AESO values) to the Alberta market. In making this decision, the AESO will have to balance the need to provide the revenue certainty required by investors in new generation projects with the need to allow capacity prices to rise and fall over the short term to reflect competitive market forces. The AESO is also going to have to choose between the views of those generators/existing facilities currently in the market (the incumbents) and those generators/new facilities who are looking to enter the market (the new entrants).
A 1 year delivery term is a little more revenue certainty than one already finds in the existing energy market, but it does not send a signal to the market that anything fundamentally has changed in Alberta. A short term delivery period is however consistent with Alberta’s historic philosophy that investors, and not consumers, should bear the risk of changes in the power market. At the same time, a 10 or 15 year delivery period is long given Alberta’s rejection of a long-term contract approach to incent new non-renewable generation. Might we see a compromise in the 3 to 7 year range?
At the end of the day, the AESO is going to have to design a capacity market that achieves the purpose for bringing in the capacity market in the first place. The design will also have to reflect the size and attributes of the Alberta electricity market and not those of PJM, Great Britain or any other market.
The AESO may well decide that, initially, a short delivery period is all the revenue certainty that is needed for the first successful capacity auction to be held in 2019. However, if that occurs do not be surprised if the short delivery period is later increased for future capacity auctions that occur after the announced coal-to-gas conversions in Alberta have run their course and new greenfield non-renewable generation facilities are required in the province to secure supply.
AlbertaPowerMarket.com will continue following capacity market design, including how the delivery period issue is dealt with in SAM 3.0 that will be released by the AESO early in December. For those interested in this and other capacity market design issues the AESO is hosting a capacity market stakeholder session (including via webinar) in Calgary on December 11th to review the SAM 3.0 recommendations. We will attend this session, and keep you up to date as capacity market design accelerates here in Alberta in the coming months.
Kent Howie is the head of the Electricity Markets Group at the Calgary, Alberta office of the national law firm Borden Ladner Gervais LLP. He is also the editor of and regular contributor to AlbertaPowerMarket.com. The views expressed in this article are the personal views of the author, and not the views of Borden Ladner Gervais LLP.