Policy Direction for Alberta s Capacity Market Framework

Transcription

1 Policy Direction for Alberta s Capacity Market Framework August 15, 2017 Alberta Department of Energy

2 Table of Contents Executive Summary Introduction Policy Direction for Alberta s Capacity Market Framework Competitive forces will determine outcomes The principles of fair, efficient and open competition will apply to the capacity market Consumers will continue to be able to choose their electricity retailer New capacity market framework in place in A centralized obligation to procure capacity will be created and placed on the Alberta Electric System Operator The supply adequacy standard and targeted capacity amount for the future will be centrally determined Next Steps... 12

3 Executive Summary This paper summarizes the policy directions determined by government related to the capacity market framework, which was announced in November It is intended to provide industry, technical stakeholders and potential investors with the background necessary to enable them to participate in the policy and technical design process. Alberta Energy is leading the policy design of the capacity market framework, while the Alberta Electric System Operator (AESO) is leading the technical design component. Six policy directions form the foundation of Alberta s capacity market framework, and will remain central to both the policy and technical designs. Competition will remain a key part of Alberta s electricity market, and capacity procurement will be designed to operate competitively. This provides better prices for consumers, and allows the system to benefit from innovations in technology that would not likely occur under a non-competitive system. To this end, the principles of fair, efficient and open competition will apply to the capacity market. The competitive nature of the market will extend to consumers continuing to choose their electricity retailer. As announced, the new capacity market framework represents a substantial shift in the way that Alberta s electricity industry is structured, and will be in place in This timeline is based on the work needed to establish a capacity market and make the changes needed to the energy and ancillary services market. A 2021 implementation timeframe also aligns with when it is likely that capacity obligations will need to be in place to meet the province s electricity needs. The AESO will be given the role of procuring capacity in a centralized manner to help ensure that the right amount is procured, but may allow flexibility for loads to make arrangements to meet their own capacity obligation. The AESO will determine the targeted capacity amount based on supply adequacy standards that will be set by government. The targeted capacity amount will be approved by the Alberta Utilities Commission. Separating the responsibility for determining the targeted capacity amount and approving it will create institutional checks and balances. The next steps in the capacity market framework development process will be engaging stakeholders on relevant outstanding policy questions in the fall of Government recognizes that implementing the capacity market framework will require legislative changes. Drafting and consulting on legislation will take place following policy direction on outstanding questions. As the technical design process will run parallel to the policy process, the AESO anticipates holding the first capacity procurement in 2020, for the delivery of the first capacity obligation in P a g e

4 1 Introduction In November 2016, the Government of Alberta announced that the province s electricity system would transition from an energy-only market to a capacity market framework that includes a capacity market operating in conjunction with energy and ancillary services markets. The capacity market framework best aligns with the Government of Alberta s electricity system transition outcomes: 1. A reliable and resilient system; 2. Improved environmental performance; 3. Reasonable cost to electricity consumers; and 4. Economic development and job creation. This policy paper is intended to provide industry, technical stakeholders and potential investors with a summary of the government policy that is the foundation of Alberta s capacity market framework. These policy directions will shape both the policy and technical design of the capacity market framework, respectively led by Alberta Energy and the Alberta Electric System Operator (AESO). Government is sharing its policy direction and the rationale for that direction with technical stakeholders to enable them to more fully participate in the policy and technical design process. 1.1 Rationale for Transition The need to transition the province s existing energy-only market to a capacity market was driven by analysis that indicated the current energy-only market would not ensure the needed investment for new generation in Alberta. This analysis was consistent with recommendations from external experts and AESO and was confirmed with current and potential energy investors, and consumer groups. By 2030, Alberta will need up to an estimated $25 billion of new investment in electricity generation to replace baseload generation from the phase out of coal and meet the electricity needs of a growing province. At the same time, more intermittent renewable generation is expected to come online as Alberta works to achieve its goal of 30 per cent renewables by In a capacity market, power generators are paid through a combination of competitively procured capacity obligation agreements, which contribute towards their fixed capital costs, and revenue from the energy and ancillary services markets. This combination of markets is expected to decrease the reliance on high prices in the spot market to ensure a reliable supply of electricity, and thus should protect Alberta consumers from price volatility. Stabilizing the revenue streams and addition of regular, predictable capacity procurements will also provide more predictable incentives for investment in new generation. The transition to a capacity market is part of a broader suite of initiatives to improve Alberta s electricity system. Figure 1 shows the policy initiatives underway that will have an effect on the 2 P a g e

5 electricity system transition. Successful transition to a capacity market is critical to many of the initiatives. This highlights the importance of ensuring that Alberta s capacity market is designed to meet the needs of the province s electricity system. Figure 1: Current government led electricity initiatives. The new framework will ensure that the capacity market is stable and transparent and integrates well with the energy and ancillary services markets. The capacity market will rely on the principle of fair, efficient, and open competition to achieve sufficient investment to ensure supply adequacy and reliability at the lowest cost for consumers while working effectively within Alberta s electricity framework. Competitive bids will be used to ensure the province s long-term electricity supply adequacy requirements are met, starting in The design and implementation of a capacity market framework requires multiple related policy decisions to ensure both the transition and implementation phases are successful. Government is aware that the transition will also require a review of, and possibly changes to, legislation that defines Alberta s electricity framework, including the Electric Utilities Act, Alberta Utilities 3 P a g e

6 Commission Act, Hydro and Electric Energy Act, and Public Utilities Act. Some of the regulations that support these Acts will also require review and may require amendments. 4 P a g e

7 2 Policy Direction for Alberta s Capacity Market Framework The policy direction for Alberta s capacity market framework is described in the sections below. Together these policy directions form the foundation that the capacity market framework will be built on, including complementary policies, legislative changes, technical design and supporting rules and guidelines. 2.1 Competitive forces will determine outcomes Alberta s capacity market framework, which includes capacity, energy and ancillary services markets, will be designed to operate so competition among market participants will decide who is successful in their bids and offers in the different markets. This principle also aligns with onetime or more limited procurement processes using competitive forces to determine outcomes, such as the Renewable Electricity Program (REP). This principle is important because it guides how the capacity market will be designed, operated and regulated. It will also be fundamental for guiding changes required in the energy and the ancillary services markets. This direction is consistent with the current legislative framework, which relies on competitive market forces to determine outcomes Policy Rationale Competitive forces have the benefit of creating downward pressure on prices and driving innovation. The rapid and large-scale development of co-generation 1 in the Alberta oil sands is a prime example of competition advancing innovation in Alberta. Between 1996 and 2016, over 4,000 megawatts of co-generation was added to Alberta s electricity system, which accounts for almost 45 per cent of the total capacity added to the system in that timeframe. This innovation made the cost of oil sands production more competitive in Alberta. The competitive electricity system gave company owners the flexibility to make the business decision to invest in cogeneration and turn it to the oil sands industry s advantage. With the complexity of the electricity system and the constantly evolving needs of suppliers and consumers, competitive forces can guide decisions by allowing demand and supply to determine prices and the allocation of resources. Competition among suppliers also encourages innovations that reduce prices for consumers. This policy direction is consistent with government policy in other areas of the electricity system. For example, the government has chosen to rely on competitive forces to determine the outcome for REP. 1 Co-generation is the dual production of electricity and steam, the latter of which is used for industrial processes. 5 P a g e

8 2.2 The principles of fair, efficient and open competition will apply to the capacity market The transition to a capacity market framework will be guided by the objective that efficient markets for capacity, energy, and ancillary services are based on fair, efficient and open competition. Participants in the capacity market will be expected to conduct themselves in a manner that supports these principles. Development within the capacity market will be driven by decisions made by investors. Investors will compete against one another resulting in efficient, market-based outcomes for consumers. The AESO will be guided by this principle in the technical design of the capacity market Policy Rationale When compared against other potential electricity frameworks, government determined that a capacity market framework best meets Albertans needs today and in the future as it uniquely maintains the benefits that Albertans receive through competition. These benefits include the pressure among power producers to keep consumer costs low, and the incentives that competition provides for innovation in both the supply and consumption of electricity. Fair, efficient and open competition is critical to enabling the capacity market framework and all of the non-regulated components of the electricity system to deliver these competitive benefits to Albertans. Having a fair, efficient, and openly competitive capacity market ensures that consumers are provided with the most cost-effective outcome, new participants are welcomed into the market, and there remain incentives for innovation. Implications of maintaining this principle include: 1. The capacity market will be designed to competitively procure the capacity needed to support supply adequacy based on the ability to provide capacity at lowest price; and 2. Eligibility to participate in the capacity market will be determined based on technical characteristics and requirements driven by the need for adequate supply for the overall Alberta electricity system. 2 This principle has been a longstanding component of Alberta s investment-driven market framework, and is currently legislated in the Electric Utilities Act and in the Fair, Efficient, and Open Competition Regulation. Government may determine that, as Alberta moves into the future, it is appropriate to introduce new expectations of the electricity sector to deliver specific outcomes. The implementation of these outcomes as related to markets for electricity will be implemented based on fair, efficient and open competition within the market. 2 In other jurisdictions, there are multiple sources of capacity that have been considered for eligibility to participate in their respective capacity markets. Examples of these sources of capacity include storage, imports, demand response, energy efficiency and increases to the maximum capacity (uprates) of existing resources. The decision about what sources of capacity will be eligible to participate in Alberta s capacity market is a technical design element that will be determined by the AESO as it completes the technical design of the capacity market. 6 P a g e

9 2.3 Consumers will continue to be able to choose their electricity retailer Currently, eligible consumers can choose between the regulated rate option (RRO) or a competitive retail product offered by many retailers for their electricity. Self-retail 3 is also an option. The introduction of a capacity market framework does not impact this principle. Consumers will retain their ability to choose between competitive products, regulated retail products, or selfretail options Policy Rationale The purpose of introducing a capacity market framework is related to ensuring future reliability and greater price stability. The introduction of the capacity market framework is not related to consumer choice or consumers ability to choose between a regulated rate provider, electricity retailer, or self-retailing. A capacity market framework can function well alongside a competitive retail market. Consumers will continue to be able to choose between a regulated rate option or a competitive retail product in the new framework. 2.4 New capacity market framework in place in 2021 The first delivery of capacity based on capacity-procurement is targeted to occur in This timeline is based on other jurisdictions experience in adopting capacity market frameworks, and an assessment of when Alberta is likely to require additional sources of capacity supply. A capacity procurement process needs to be conducted in advance of delivery. For Alberta s transition, capacity procurement needs to take place in 2020 at the latest to meet the delivery of capacity obligation in Determining what needs to be in place by 2021 is important to allow government to meet legislative timelines and provide greater certainty to market participants. Before a capacity market procurement process can take place, Alberta Energy and its agencies need to: Establish clear policies, legislations and regulations for the capacity market framework, and its governance and oversight by end of 2018; Develop a technical capacity market design and approve associated rules or other legal documents by end of 2019; Clarify integration of the capacity market with both the energy and ancillary services markets by end of 2019; 3 Self-retailers buy their electricity directly from the wholesale market solely for their own load requirements. Selfretailers do not provide electricity services to other consumers. 7 P a g e

10 Put systems (e.g., procurement structures) in place to support procurement by end of 2019; and Develop and implement IT systems necessary to support the new capacity market framework before It will be important to take the time to design a capacity market that will operate efficiently with both the energy and ancillary markets. With the short timeline leading up to the first procurement process, the initial procurement may not produce market outcomes as efficient as could be expected in future procurements. The short timelines may effectively preclude new entrants who cannot complete construction in time for delivery of capacity obligations in This would not be the case in future procurements once the desired lead time prior to delivery of capacity obligations can be established. The long-range goal will be to evolve the procurement process to enable the time lag between the procurement process and delivery year to reach a more appropriate lead time, up to multiple years, and to allow enough time for the construction of new generating assets Policy Rationale Delivery of the first capacity obligation in 2021 was selected to ensure continued reliability of electric power in Alberta. The capacity market needs to be in place and functioning before the majority of coal facilities retire and the system experiences significant increases in generation from intermittent renewables to avoid any significant reliability or price risks. In the next 13 years, Alberta s electricity system will see the retirement of more than 6,500 megawatts of coal-fired generation approximately 40 per cent of its capacity. Air quality standards and carbon pricing may result in business decisions to shut down coal units earlier than their end-of-life dates mandated by the Government of Canada. There is also a chance that this could be compounded by the declining availability of aging coal units. In the same time frame, Alberta expects to see the addition of 5,000 MW of renewables, and of that, a significant portion is expected to be intermittent in nature. A 2021 capacity obligation date provides government, agencies and the electricity industry itself with a set of ambitious timelines. Much collaboration will be needed, and there will be a focus on practical solutions to see that the transition occurs as efficiently as possible, while ensuring that critical considerations and design features are thoroughly assessed. While there are many aspects of the framework that need to be addressed, it is paramount that Alberta s electricity sector continues to provide acceptable levels of reliability and to ensure that there is price stability for consumers. 8 P a g e

11 2.5 A centralized obligation to procure capacity will be created and placed on the Alberta Electric System Operator In a capacity market, it is necessary for legislation to identify who will be responsible for the capacity procurement process. It is important that a defined entity or entities have an obligation to procure capacity in order to ensure the efficient implementation of a capacity market, as it is a key feature of the market. The Alberta government will give the AESO the obligation to plan, determine, and administer the obligations to procure the capacity required to meet expected demand. The AESO will hold the default central capacity obligation on behalf of load, but may allow flexibility for loads to make arrangements to meet their own capacity obligation. The details for how this will be done will be developed in the technical design process led by the AESO Policy Rationale The obligation to procure capacity varies across jurisdictions and is largely influenced by the pre-existing institutions, government policies, and regulatory frameworks. Many jurisdictions place the obligation on pre-existing load-serving entities (LSE) to secure capacity to satisfy their share of the supply adequacy requirements. However, in all the capacity market jurisdictions reviewed 4, the system operator runs a centralized procurement process for at least a portion of the system s capacity obligations (net of what has already been self-procured) and allocates the cost of this procurement across LSEs or consumers. In Alberta, there are no legacy LSEs that could reasonably hold an obligation to procure capacity. Instead, the current Alberta market is characterized by a number of regulated distributors and non-regulated Rural Electrification Associations, a large number of competitive retail suppliers, and a large industrial consumer base, some of which are connected directly to transmission. As such, there are no clear entities that that could assume responsibility for securing capacity on behalf of consumers in each geographical area of the province. Jurisdictions such as Great Britain and Ireland, which did not have legacy LSEs, chose to designate the system operator as the primary agency for procuring capacity. 5 Alberta has determined that it is appropriate to give this responsibility to AESO as the central procurement agency for Alberta. Creating a centralized market run by a single entity, such as the AESO, will ensure that all load, plus a reserve margin, is accounted for during the capacity procurement process. The AESO will also be responsible for determining how much capacity has already been procured through 4 Charles Rivers Associates; A Case Study in Capacity Market Design and Considerations for Alberta; page 2; March 30, Charles Rivers Associates; A Case Study in Capacity Market Design and Considerations for Alberta; page 4; March 30, P a g e

12 self-supply to ensure that it right sizes the procurement of capacity. Over-procurement of capacity could result in unnecessary costs to consumers. 2.6 The supply adequacy standard and targeted capacity amount for the future will be centrally determined Alberta s capacity market framework will be developed such that the supply adequacy standard and associated targeted capacity amount will be centrally determined. The supply adequacy standard is often based on a loss-of-load expectation 6 that is either approved or endorsed by government or a relevant regulator. The system operator will then be responsible for converting the supply adequacy standard into a targeted capacity amount that is used for capacity procurement. 7 The supply adequacy standard will be used as an input into the regular determination of the target capacity amount that is required to ensure that the supply adequacy standard is upheld. It is important to clearly define the responsibilities of the entities that will determine the supply adequacy standard, and calculate and approve the future targeted capacity amount. Government will decide the supply adequacy standard. The AESO will be responsible for calculating and recommending the targeted capacity amount. Through its approval process, the Alberta Utilities Commission (AUC) will be responsible for ensuring the recommended targeted capacity amount meets the supply adequacy standard. Separating the calculation and approval functions for the targeted capacity amount creates institutional checks and balances on this critical element where the cost associated with reliability can be evaluated by a regulator with the appropriate mandate. This will also allow stakeholders to have a clear understanding of the process by which this target will be set, and the ways in which they may be able to contribute their specific views to this process Policy Rationale Centrally determining the supply adequacy standard and targeted capacity amount is the common approach used in other jurisdictions, 8 and is a learning that Alberta has chosen to implement. Determining these components centrally allows for the most efficient calculations to be made, and enables relevant sources of information to be incorporated easily. 6 Loss of Load Expectation is expected number of times there would be a power outage event over a given time period due to lack of generation. An example could be a once in ten years event. 7 Charles Rivers Associates; A Case Study in Capacity Market Design and Considerations for Alberta; page 2; March 30, There are at least six notable jurisdictions with capacity markets at different stages of evolution. The four jurisdictions in the United States that operate centralized capacity markets are New York ISO (NYISO), the New England ISO (ISO-NE), the Midcontinent ISO (MISO) and the PJM Interconnect (PJM) and two European markets are Great Britain and Ireland. They have either had considerable experience operating and evolving a capacity market (PJM, NYISO, NE-ISO) or have recently studied the learnings of others and designed a capacity market (Great Britain, Ireland and MISO). From Charles Rivers Associates, A Case Study in Capacity Market Design and Considerations for Alberta, March 30, P a g e

13 This is an important policy design element to determine early in the transition process, as there are details that will be informed by this policy element. It would be difficult for the technical design to progress efficiently in the absence of clarity on this policy. Reliability and supply adequacy are system-wide characteristics, and consistent methodologies and applications are required to ensure that consumers across the province are treated equitably. This will ensure that the level of reliability and supply adequacy is sufficient. 11 P a g e

14 3 Next Steps The policy directions outlined in the policy paper lay the foundation for the detailed policy and technical design of the new capacity market framework. It is critical that any subsequent legislation, regulations and regulatory rules align with these directions. Both Alberta Energy and the AESO will use these as guideposts as they proceed with the policy development and further technical design, in addition to ensuring that policy and design decisions are made in concert with each other moving forward. Being formally tasked with the technical design of the capacity market framework, the AESO is engaging with technical stakeholders on the technical design. Alberta Energy will consult with technical stakeholders on outstanding policy questions, which will feed into the legislative changes required to enact the capacity market. Both the policy and technical design processes will be carried out simultaneously in order to successfully transition to the capacity market. Legislative amendments are required to write into law the existence of a capacity market, define the operational principles for the capacity market, and outline the governance of the capacity market. Further amendments are also required to grant authority to an entity (the AESO) to run the procurement process and ensure delivery of the first capacity obligation. Finally, legislative amendments are required to redefine the roles of the AESO, AUC and Market Surveillance Administrator as they relate to the capacity market. The entire policy process, including legislative and regulatory changes, is expected to take until the end of The first capacity procurement is expected to take place in the timeframe, with first delivery of capacity obligations in P a g e