Scarcity pricing in Alberta under the new market design

Transcription

1 Draft for Discussion Purposes Scarcity pricing in Alberta under the new market design AESO Energy & Ancillary Services Working Group 1

2 Disclaimer This document is submitted to the Energy and Ancillary Services Capacity Market Working Group in accordance with the AESO s guidelines in section 5.1 of the Capacity Market Design: Working Group Terms of Reference. Statements made and positions taken in this document are submitted with a goal to reach consensus and practical compromise on overall recommendations for the Capacity Market, and do not represent commercial positions to the sole benefit of the business of TransAlta. 2

3 Key Messages Scarcity, strictly defined, is not only a situation when reserves are required by the system; it can instead be defined as a situation when remaining energy resources are in diminishing supply The AESO will not likely procure capacity to insure for every need so it is reasonable that for short periods the price of energy could rise when it is a scarce (but still available) resource Market power, mitigation, and ex ante conduct rules are explicitly linked to the concept of scarcity In the short-run energy market a mechanism based on competitive market forces may be more robust versus an administrative solution to incent generation and availability 3

4 Scarcity pricing in the energy market is inextricably linked to market power mitigation (1) Legacy: small market, extensive experience with successful competitive energyonly market, trust for market mechanisms, but industry composition is one of high concentration (4) Market forces: Allow for suppliers offers to set the value of scarcity rather than a pre-determined schedule of price adjustments; for example, (a) allow for every supplier to have some X% of their capacity to be exempt from all energy offer mitigation and (b) allow energy supply without a capacity supply obligation to be exempt from all energy offer mitigation, other than the price cap Market forces durable visa-vis administrative rules (4) Define market power properly (2) Consider the Alberta legacy (1) Clarity to support confidence in the market (3) (2) Market power should be defined as the ability to raise prices above competitive levels for a sufficient period of time; durable market power should be mitigated but temporary or transitory market power is not harmful to the market - every generator will have market power ability in periods of scarcity using conventional metrics (3) Clarity is needed; ex ante market power mitigation rules are preferable as they create certainty in the market outcomes 4

5 Issue of scarcity pricing must be evaluated in Alberta-specific context which offer both benefits and challenges Legacy of Alberta s energy-only market design makes it very different from other capacity markets Alberta had a pure energy-only market for more than 20 years Portfolio bidding, a form of economic withholding, was explicitly allowed and most market participants continue to think about strategic bidding options Government, regulator and market participants understand the dynamic efficiency gains of allowing competition in the market to determine pricing outcomes Most stakeholders are relatively unfamiliar with administrative pricing mechanisms Market based solutions to scarcity pricing may work better in Alberta than they do in other markets Source: London Economics International LLC 5

6 Scarcity means many different things in other markets we need an appropriate, clear definition for the Alberta market Market power definition must be updated to reflect time dimension - increased prices that do not last for an extended period of time should not be considered abuse of market power but rather reflect temporary market conditions of scarcity or other events Many ISOs with capacity markets define scarcity conditions as emergency periods when they trigger certain events such as being forced to use reserves or requiring emergency demand response responses, NOT because they are running out of energy Given Alberta s legacy of an energy-only market, and a desire by market participants to have appropriate signals for true scarcity conditions, we suggest a definition that focuses on the actual supply-demand dynamic in the energy market When true scarcity conditions emerge, it is important to allow that to be signaled to all market participant to motivate more investment in generation and to encourage increased energy conservation and investment in energy efficiency 6

7 It is impossible to insure against all possible scarcity conditions, just like it is impossible to insure against all possible home or vehicle accidents (and the ensuing damage) There is a inherent relationship between capacity market parameters and energy market scarcity The capacity market demand curve is based on a set of assumptions about the AESO s (and consumers ) willingness to buy insurance against supply insufficiency - similar to how we buy life and home insurance Capacity payment to generators represents the cost of the insurance policy Capacity procurement will achieve a certain LOLE target but the LOLE target accepts that there may still be some hours (say 2.4 hours/year) that may result in insufficiency and high energy prices (scarcity) It is too expensive to insure for all events which is why AESO sets the requirement for how much capacity it buys with some acknowledgment that it may see some rare events of supply inadequacy (i.e. 1 day in 10 years) 7

8 Possible solutions for introducing energy market scarcity pricing lie along a spectrum of more administrative to more market based options with pros and cons for each More administrative solutions More market-based solutions More administrative Pros Clear rules for all market participants Requires less regulatory oversight More market based More likely to reflect true market dynamics, because market participants can influence pricing Cons May not accurately reflect market dynamics as formulas will be pre-set May not allow for prices to rise sufficiently to reflect true scarcity conditions Outcomes may be less predictable Requires confidence that market participants are not abusing market power 8

9 Proposed solution addresses unique Alberta characteristics and a pragmatic way to ensure prices can rise to provide appropriate incentives to the market Generation that is paid a capacity payment to face ex ante price mitigation in energy market (no ex post mitigation) and price cap could be raised Small component of capacity that has been committed in the capacity market (1%-5%) could be free of ex ante price mitigation to allow for scarcity pricing Generation that is not receiving capacity payments can bid up to price cap in energy market, including generation above UCAP Ex ante conduct and impact tests using reference price bands to ensure that energy market bids are reasonable 9