After two years of consultation, the Alberta Electric System Operator (AESO) filed provisional market rules for Alberta’s proposed capacity market in late January. Legislation requires the Alberta Utilities Commission to issue a decision on these provisional rules in 6 months. A decision is expected by August 1, 2019.
The outcome of the formal hearing process will have major implications for power project developers in Alberta, as well as reverberations for the design of other capacity markets including Ontario’s.
The issue of how to design capacity markets has occupied economists and planners for years. The widely-shared goal of harnessing market forces to entice private capital to build enough capacity has led to many competing designs and trials, with billions of dollars involved. Because success has often been elusive, the efforts to find better design options continue unabated.
Comments made by intervenors in Alberta’s current hearing reveal just how difficult some of the ongoing challenges are, and how determined many players are to address them. They may even hold lessons for people working on capacity market designs in other jurisdictions.
Intervenors were given one month to review the AESO’s application and file intervenor evidence by the end of February. Thirteen intervenors filed evidence in response to the AESO’s proposed capacity market rules. Intervenors submitted a diverse set of views on the proposed market design.
Three questions encompass most of the evidence filed by intervenors:
1. Will the capacity market achieve the reliability target?
2. Will the cost of the capacity market be reasonable? and
3. Will the capacity market sufficiently incent investment?
These are the most challenging questions to address in designing a market, and it shows that the Albertan intervenors have generally focused on the important issues.
Reliability
From a reliability perspective, a capacity market is a mechanism to incent enough resources to achieve a reliability target. The Government of Alberta passed legislation requiring the AESO to develop a capacity market to meet a legislated reliability standard.
The AESO has proposed market rules that will determine the minimum amount of resources needed to meet the reliability target. This minimum volume is determined using a statistical model called a Resource Adequacy Model (RAM). The AESO has described the RAM the key inputs and assumptions as well as the modeling approach in its application to the AUC.
Many intervenors have raised concerns that the calculation is a “black box” which cannot be understood or reviewed by intervenors. However, three other intervenors successfully and independently reproduced the AESO’s results using their own models.
The real debate around the reliability assessment relates to modeling assumptions such as load forecasts, the expected availability and outage scheduling of generators (outages are not scheduled or approved by the AESO), and how price responsive load could behave. It is argued that relatively small changes in these assumptions could have concerning impacts to the minimum procurement volume and the capacity expected to clear the market.
The complex technical nature of these models has led the AUC to direct the AESO to hold a technical conference with intervenors. The AESO has scheduled the technical conference for May 6 and 7, 2019. The AESO will file a report summarizing the technical conference by May 24, 2019.
Cost
The Government of Alberta also established a requirement that the capacity market provide reliable supply at a reasonable cost. The costs in a capacity market are driven by the volume purchased and the capacity price for that volume.
Few intervenors have raised concerns about the expected capacity price. This aligns closely with the analyses filed by the AESO showing that there is little impact on average costs due to the design choices for the capacity market.
Many intervenors have filed evidence that the AESO’s proposal will purchase too much capacity and that the excess capacity provides little value to consumers. They have proposed alternatives intended to reduce the amount of capacity purchased by the AESO, and in some cases have proposed rules that would allow the AESO to purchase less than the amount required to meet Alberta’s legislated reliability standard.
The interventions more generally highlight the concerns about the change from the energy-only market design - that only charged for energy consumed - to a market design that introduces centrally planned procurement. The challenge is achieving a proper balance between cost and reliability risk in an expedited regulatory process.
Investable
A broader concern is with regard to the ability of the holistic design to incent new investment and reduce regulatory uncertainty.
Some intervenors argue that more revenue should come from the energy market whereas others argue that the investment signal and fixed cost recovery should come from the capacity market. The Alberta Utilities Commission has also asked for views on a reliability option model that would effectively require capacity resources to commit to generate at a pre-defined strike price. There is no lack of views on design trade-offs and potential market models that could be adopted.
Many intervenor proposals would create significant uncertainty for investors in other ways. One intervenor has proposed delaying the adoption of the capacity market until a point when new capacity is needed. Another intervenor has proposed off-ramps to review the entire capacity market design if prices are too high or resource returns are too low.
These proposals, if adopted, create uncertainty that will lead investors to delay their investments. It also creates the potential for facilities to delist and exit the market because future revenues are too uncertain.
This uncertainty has the potential to result in under-procurement and require the AESO to take out of market actions to ensure reliability. This situation is among the worst possible outcomes for Alberta’s transition: high prices and low reliability. Concerns about potential costs need to be appropriately balanced against the certainty needed for investors.
A key question that will only be addressed in time is whether the capacity market model that is adopted will be successful in attracting new investment.
Capacity Market Lessons for Ontario from Alberta
The lack of oversight for Ontario’s adoption of a capacity market could be problematic. Alberta’s process has shown that stakeholder engagement will not resolve all concerns about capacity market design. The AESO held stakeholder engagement sessions and solicited comments on Comprehensive Market Designs and draft rules for over 2 years. Despite this, 13 intervenors filed evidence raising concerns with the AESO’s proposed capacity market design. The Alberta Utilities Commission will provide oversight to hear and decide on stakeholder concerns about the AESO’s proposal.
It is likely that stakeholders will have more concerns with Ontario’s detailed designs than with the high-level designs. Alberta’s process has also shown that many concerns relate to details in the proposed design. Stakeholders have often agreed on broad principles only to later disagree about the detailed design decisions.
Ontario’s incremental market will be relatively small and have unique characteristics that need to considered in its design. Alberta’s design had to account for the unique characteristics of that market, such as its small size. Ontario’s incremental market will initially be even smaller than Alberta’s capacity market and will require careful consideration of how to mitigate shocks in a small market.
Ontario’s adoption of a capacity market is helped by a long-standing resource adequacy standard and central planning. Many intervenors in Alberta have raised concerns about over-procurement that are driven in part by Alberta’s adoption of a legislated reliability target. This should be a lesser concern in Ontario where the system is already centrally planned to meet a resource adequacy standard.
Key questions coming out of Alberta’s debate over capacity market design
• How do you know when you have achieved a proper balance between cost and reliability risk in an expedited regulatory process?
• Should the model effectively require capacity resources to commit to generate at a pre-defined strike price?
• How to manage the risk that the capacity market will under-procure, likely leading to higher prices and reliability challenges?
• What degree of oversight is appropriate to create necessary level of investor confidence?
• How to mitigate shocks in a small market?