Capacity Cost Recovery. Eligibility WG Meeting #5 August 1, 2017

Size: px
Start display at page:

Download "Capacity Cost Recovery. Eligibility WG Meeting #5 August 1, 2017"

Transcription

1 Capacity Cost Recovery Eligibility WG Meeting #5 August 1, 2017

2 Overview Question: Should capacity costs flow through the retailer or the Distribution Facility Owner (DFO)? This presentation will cover cost recovery by retailer or DFO. Cost allocation will be dealt within a separate presentation. Outline Overview of Capacity Cost Recovery Illustration of Cost Recovery options Cost flow through DFO and Transmission Direct Connects (TDC) Considerations Cost flow through Service Providers (Retailer/RRO), Self Retailer Considerations Criteria for Option Assessment 2

3 Overview: Mechanism for billing consumers for capacity costs Capacity prices and aggregated costs are set through an organized market auction, conducted a number of years in advance of the delivery year. Aggregated costs for capacity are charged to consumers. Consumers will be billed in the delivery year and capacity resources are paid in the delivery year. For consideration are two approaches for recovering capacity costs: The first approach involves the recovery of costs through an ISO tariff that applies to the Distribution Facility Owners (DFOs) and Direct Connects. The DFOs will then pass on these costs to retailers through tariffs approved by the Alberta Utilities Commission (AUC). This approach assumes Retailers flow capacity costs through to consumers (similar to distribution and transmission charges). The second approach involves the recovery of costs through an ISO tariff that applies to Service Providers (Retailers/RRO) and Self-Retailers (includes some Direct Connects). The main differences between the two approaches are: Nature of the AUC s involvement in the capacity rate setting process. Customization of offering to consumers. Impact on settlement process in terms of changes, time and cost. 3

4 Illustration of Capacity Cost Recovery Options UCAP (MW) UCAP (MW) Pic 1: Illustrative example of cost recovery in capacity market Capacity Providers Capacity Market Auction AESO Centralized Procurement Capacity Payments () Capacity Payments () Cost Allocation Cost Recovery Options for Capacity Charges DFO: Distribution Facility Owner TDC: Transmission Direct Connect RRO: Regulated Rate Option Option A: Cost recovery through DFO and TDC Option B: Cost recovery through Service Providers (Retailer/RRO), Self Retailer 4

5 Cost Recovery through DFO and Transmission Direct Connects Description of option: The capacity costs will be recovered by the AESO through charges to the DFOs and the TDCs. Under this recovery model, capacity costs would be measured to the Point of Delivery (POD). Vast majority of PODs are served by the DFOs. The DFO will structure an Alberta Utilities Commission (AUC) approved tariff to recover their capacity market charges from the sites located within the DFO s service territory. The DFOs currently recover transmission costs from end use consumers in a similar manner. (using kwh, highest kw) AESO Centralized Procurement Cost Allocation Option A: Cost Recovery through DFO and TDC Pic 2: Illustrative example of cost recovery in capacity market DFO: Distribution Facility Owner TDC: Transmission Direct Connect DFO DFO TDC Capacity Market Charge DFO 5

6 Considerations for capacity cost flow through a DFO/TDC Considerations: Unlike competitive retail rates, DFO tariffs are regulated by the AUC. This may provide higher visibility, scrutiny, oversight and control over rates for consumer classes. DFOs may not have the right incentive structure to minimize capacity costs assigned to it by the ISO. Capacity cost recovery through DFO s will be administratively set therefore consistent albeit inflexible (customer classes are fixed). This model supports customer class protection. A DFO can align the capacity price signal with the distribution and transmission price signal, creating a possible efficiency that could lower the combined cost. The rate class and service area determines the consumer rate. There is no ability to choose an alternative offering. Costs of DFO wires and costs of capacity are different in nature. DFO expertise in distribution tariff can not be directly transferred to capacity tariff. DFOs would likely treat capacity costs like their other transmission costs and true up their revenues to actual costs by using deferral account reconciliations and riders. Some consumers dislike the complexity, intergenerational transfers, and continuous adjustment through riders that result from deferral accounts, while other consumers are reassured that only actual costs are being recovered. 6

7 Cost Recovery through Service Providers (Retailer/RRO), Self Retailer Description of option: Under a retailer cost recovery model, capacity costs will be allocated to service providers (retailers) and selfretailers. The retailers will structure competitive retail contracts to recover capacity charges from their customers. RRO providers will establish rates which would be subject to AUC process. Retailers currently recover energy charges in a similar manner. Using billing systems based on energy (kwh). Service Providers (Retailer/RRO) Self- Retailer AESO Centralized Procurement Cost Allocation Option B: Cost recovery through Service Providers (Retailer/RRO), Self Retailer Self- Retailer Service Providers (Retailer/RRO) Pic 3: Illustrative example of cost recovery in capacity market Capacity Market Charge Service Providers (Retailer/RRO) 7

8 Considerations of capacity cost flow through service providers (Retailers/ RRO) Considerations: The ability for retailers to set their own rates affords more flexibility and more timely implementation (of new rates/offerings). Competition would incent retailers to develop capacity products and provide consumers with choice. The Capacity market charges become another competitive lever. Retailers can combine Energy and Capacity offerings to create numerous product options. Consumers may value the right to choose from which retailer to purchase the service. Illustrative example: A customer that wants to buy energy & capacity only from green energy resources. Retailers have the ability to hedge capacity cost risk. Consumer may switch retailers based on performance. Costs of energy and costs of capacity are different in nature. Retailer expertise in energy products can not be directly transferred to capacity products. Degree of retail competition for capacity products is unknown at this time. It may take time to mature. Smaller retailers may be adversely impacted if they have lesser ability to hedge or manage costs of capacity offerings (over fewer customers) i.e. competition may be reduced. Competitive retail rate setting may not align with extramarket objectives. 8

9 Criteria for Assessment The following criteria may be used in assessing the alternative options: There should be a well-defined product and an effective and efficient capacity price signal. The design should allow consumers to manage the cost of capacity if and where appropriate. Simple and straightforward initial implementation should be a priority. The capacity market should be compatible with other components of the electricity framework. Effectiveness (weighting) of criteria for different types of consumers: Consumers likely to offer in capacity market. Consumers likely to respond to capacity tariff/ product price signal. Consumers with Interval meters can offer and respond (but interval metering comes at a cost). Consumers without interval meters would be profiled in order to offer & respond (and any risk would be borne by DFO/Retailer). 9

10 References Power to the People/ Report and recommendations for the Minister of Energy, GOA/ September VIRGINIA STATE CORPORATION COMMISSION/ STAFF INVESTIGATION ON THE RESTRUCTURING OF THE ELECTRIC INDUSTRY/ Competitive Electricity Markets: The Benefits for Customers and the Environment 10