Alberta Energy - Capacity Market Framework Engagement December 2017

Transcription

1 Capacity Market Cost Allocation - Response Template The engagement is seeking stakeholder feedback on the questions below. Please submit your responses to these questions, and any additional input on this topic, to the Submission Library for the Capacity Market Framework engagement at: Submissions will be accepted on this topic until January 2, 2018 Submitted by: Name Organization Hao Liu AltaLink Management Limited and Berkshire Hathaway Energy Canada ( AltaLink ) Question Cost Allocation Criteria 1. Do the criteria presented in the discussion document fully reflect the elements required in a capacity cost allocation methodology? Response (/N) Explanation/Further Details The criteria generally reflect the elements required to assess approaches for allocation of capacity cost. Some comments regarding the criteria are included below. Economic Efficiency A focus on cost causation will help ensure costs incurred years prior to delivery are borne by consumers who drove those costs. In Alberta, wind output, thermal derating, thermal outages, and intertie availability are the most important drivers of system capacity shortage. These supply side events could occur in any hours. Given Alberta s high load factor and flat load curves, annual or monthly system peak is a weak causation factor for system capacity shortages. As such, allocating capacity cost based on a Page 1

2 consumer s load level at the time of system coincident peak is not consistent with the cost causation principle. The cost allocation methodology must reflect the full value the customer received from the capacity as a result of AESO capacity procurement. The capacity procured by the AESO on behalf of a customer provides two benefits. First, the procured capacity ensures supply is available to meet all customers energy needs at different times across the entire year. A $/MWh based allocation is appropriate to allocate cost to reflect such a value. Another benefit provided by the capacity procured by the AESO is back-up and standby service that ensures sufficient capacity is always available to respond to loss of generation capacity and/or intertie import, or variation of renewable output, or change of load. All load customers, including customers with on-site generation, benefit from this spare capacity, regardless of how much energy they use. In order to fairly allocate cost associated with the space capacity, the most appropriate way is to use $/MW of non-coincident peak demand of a customer. A $/MW approach would ensure all customers paying their fair share of the cost in return for the back-up/standby services they received. In the context of capacity market design, the cost allocation should not be used as a primary mechanism for price signals to influence load behaviors, such as load shifting during coincident peak. As discussed above, load shifting does not necessarily result in reduced capacity procurement given Alberta s flat load curve. In addition, the impact of load shifting is temporay in nature. AESO has no assurance that any of reductions occurred in the past will be delivered in the future. It is important to recognize there are abundant price signals already in existence in various markets to incent load responses. For example, load could sell a demand response product through capacity auction. In addition, load could respond to high energy market prices to curtail its load in a real-time energy market. Further, load could sell into the ancillary services market to provide ancillary service as a demand side resource. Finally, load could provide demand response as a reliability product to shift the demand curve. If sufficient signals are already available, using cost allocation to Page 2

3 provide additional incentives may result in the unintended consequence of cost shifting, un-level playing field, and/or sub optimal investment. 2. Are there other criteria not included in the discussion document that should be considered? N Equity Given the capacity will be procured 3 years in advance by the AESO, all load customers should pay their fair share of these fixed costs. Fairness and objectivity is achieved when the cost allocation approach reflects effective cost causation and the principles of beneficiaries paying for their fair share of the cost. Cross subsidization among customers will be eliminated as a result. No. Capacity Cost Allocation Options 3. Do the options presented in the discussion document accurately reflect the choices available for capacity cost allocation in Alberta? The three options presented in the Alberta Energy discussion paper provides a set of energy based (i.e. $/MWh) approaches for capacity cost allocation. For allocating capacity cost associated with supplying energy, the weighted energy approach is the most appropriate one as it reflects the cost causation principle by assigning weights to different period of loads based on reliability/adequacy modeling. However, the presented cost allocation options do not appropriately reflect the value of AESO procured capacity in provision of backup or standby services. This is because back up and standby service is meant to be a spare capacity to support customer needs when required. It is considered to be an insurance, a standby resource to deal with emergencies and rarely used to supply energy. As such, a $/MWh based approach to allocate cost associated with capacity value will likely result in unfair cost allocation and cross subsidies among customers. Page 3

4 Whereas the weighted energy approach is appropriate in allocating capacity cost associated with supplying energy to customer load, a potential enhancement would be to include a $/MW component to allocate capacity cost associated with providing back-up and standby value. This enhancement would better align the weighted energy approach with the principles of cost causation and reflecting full cost and value. Please see the response to question 4 for a description of AltaLink s recommended option. 4. Is there another viable option (methodology) to allocate capacity costs in Alberta that should be considered? AltaLink proposes that a hybrid weighted energy with supply assurance option be adopted. Such a methodology would allocate approximately 80% of the capacity costs using the weighted energy approach as described in the Alberta Energy s discussion paper and allocate the remaining 20% of the costs based on a $/MWmonth of non-coincident peak demand to reflect cost associated with provision of supply assurance to all load customers. The 20% factor associated supply assurance component roughly reflects the system reserve margin for the system determined by the reliability modeling in order to meet resource adequacy standard. The hybrid approach best reflects cost causation since it ensures the full value of the capacity is reflected in the cost allocation and recovery. The weighted energy portion correctly weights costs according to the impact of individual consumption on the need for capacity in a given period, and the assurance charge weights each customer s non-coincident peak equally since all consumers benefit from the supply assurance, regardless of when they need the standby or backup services. Also, the weighted energy with supply assurance option helps avoid cross subsidization since parties would not be able to avoid paying their fair share of capacity costs. The following example provides an illustration of how the hybrid approach works. Assuming a $1 billion capacity cost amount is occurred, it would be allocated as follows: 80%, or $800 million, would be allocated based on consumer s usage adjusted Page 4

5 by certain weight factors, as per the weighted energy method described in the Alberta Energy discussion paper. 20% (a proxy of reserve margin %), or $200 million, would be allocated based on a $/MW-month non-coincident peak demand basis. AESO would determine the $/MW-month charge based on the following process: Calculating the sum of non-coincident peak of all wholesale customers based on their metering data of recorded maximum hourly load in a month The $200 million would be first allocated to each of the 12 months based on the weight of estimated sum of monthly non-coincident peak of all customers The monthly $/MW charge would be determined from dividing $ million allocated to a specific month by the total sum of monthly non-coincident peak demand of all customers In each month, a customer would pay the following two components of capacity cost: A monthly weighted energy component calculated based on its monthly energy consumption with different $/MWh charges for different periods. A monthly capacity charge component calculated by multiplying a consumer s maximum monthly peak demand by a $/MW-month rate determined as described in the illustrative example above. Consumer Behaviour 5. Do you believe that electricity consumption patterns of the following consumer groups will change as a result of the capacity cost allocation option selected: Residential? AltaLink does not anticipate a material change in residential consumer electricity consumption patterns under any of the options considered, although a weighted energy approach could potentially create certain incentives for energy efficiency. Under the coincident peak approach, residential customers are generally not able to respond to the signals as residential customers do not have smart meters. Page 5

6 Farm/Irrigation? Under the coincident peak methodology, AltaLink anticipates that farm and irrigation consumers could potentially, on a temporary basis, shift their time of consumption away from the time of system coincident peak, depending on weather and other factors. Under both the weighted energy option and the proposed weighted energy with supply assurance option, AltaLink anticipates that farm and irrigation consumers could potentially, on a temporary basis, shift their time of consumption away from high load periods. It is not expected that the total energy option would result in a change to consumption patterns. Small Commercial & Industrial? Large Commercial & Industrial? As described in the response to question 3 above, any change in consumption would be temporary and would result in the AESO procuring the same capacity in future auctions. Similar response for Farm/Irrigation customers above. AltaLink does anticipate that the coincident peak option would incent large commercial and industrial consumers to reduce their load level during the system coincident peak. This may involve installation of on-site generation or change in processes in order to reduce load during system coincident peaks and avoid paying some capacity costs. This will result in capacity cost being shifted from large industrials to other consumers. AltaLink also anticipates there may be some shifting in consumption away from high load periods with the weighted energy and weighted energy with supply assurance option. It is not expected that the total energy option would result in a change to Page 6

7 consumption patterns given their high load factor. 6. Do you believe that your organization s electricity consumption pattern will change as a result of the capacity cost allocation option selected? 7. To which of the consumer groups above does your organization belong? AltaLink is a cost conscious organization that is already reducing its energy costs throughout its operations in an effort to reduce its overall transmission tariff to customers. Any option that increases AltaLink s energy costs will provide a signal to investigate ways to change its consumption patterns. AltaLink is a small commercial consumer. Evaluation of Cost Allocation Options 8. Please rank the Coincident Peak Allocation Option for each of the assessment criteria: Criterion Ranking Rationale Economic Efficiency Low Low Rank With the coincident peak option, cost causation would not reflect cost causation and the full value associated with the capacity. As discussed in our reply to question #1, coincident peak is a weak driver of system capacity needs given Alberta flat load curves. Supply related events are more critical drivers for system capacity shortages and they can happen at any time and any load levels. The price signals from allocating capacity cost based on coincident peak load is inefficient. Any reduction in consumption during the system coincident peak incented by a cost allocation signal would be temporary. It would not result in the AESO procuring less capacity in the following auction as shifting load from coincident peak hours to other hours will not result in a lower procurement Page 7

8 requirement in Alberta given its flat load curve. Such a signal would unduly incent certain customers to install on-site generation to avoid capacity payment, creating an unlevel playing field issue and result in sub optimal investment. Equity Low Low Rank With the coincident peak option, consumers who effectively lower demand only during the specific time of system peak would avoid paying capacity costs regardless of timing and magnitude of individual demand in other hours. Consumers unable to lower demand during system peaks would be harmed since they would pay their share of capacity costs and also the share of capacity costs avoided by others, as capacity is procured 3 years in advance and costs for a given delivery year are fixed for that year. Stability Low Low Rank With the coincident Peak option, the volume of load reduction during the system peak may be unpredictable since loads may not accurately predict the period of peak system load on every occasion. As a result, consumers may see variability in their bills over time and true-ups may be required. Practicality High High Rank This option should be straight forward to implement and understand since the AESO currently uses a CP methodology to recover bulk system transmission costs. 9. Please rank the Total Energy Allocation Option for each of the assessment criteria: Criterion Ranking Rationale Page 8

9 Economic Efficiency Medium Medium Rank Given Alberta s high load factor and the fact that capacity is procured to serve load during all hours, the total energy option better reflects cost causation principle than the coincident peak based approach. On the one hand, the total energy approach gives the same weight for load in different hours across the year, which may ignore the fact that consumer s energy usage during the high load periods has higher impact on the need of incremental capacity. Equity Low Low Rank The total energy option may result in cost shifting resulting from reductions in the share of total energy used by individual consumers with behind the fence generation, cogeneration facilities, demand response and technologies such as rooftop solar. Stability Low Low Rank There may be difficulty predicting the required volume of capacity and associated costs and true-ups may be required due to shifting or avoidance of the system coincident peak behind the fence generation, cogeneration facilities, demand response and technologies such as rooftop solar. Practicality High High The total energy option is the most simple and understandable since cost allocation is based on an individual consumer s share of total energy used during the year. This option avoids uncertainty inherent in the other options which provide incentives for load to either reduce consumption during the coincident system peak or shift load to another time period. 10. Please rank the Weighted Energy Allocation Option for each of the assessment criteria: Criterion Ranking Rationale Page 9

10 Economic Efficiency High High Rank The weighted energy and weighted energy with supply assurance options reflect the highest cost causation out of the options provided, vis-à-vis allocation weighting reflective of the influence of incremental load at specific times on the need for capacity. Price signals would be appropriate since no entities would avoid paying capacity costs and there would be an incentive to consume during hours with less impact on the need for capacity. Such price signals should lead to a reduction in consumption during hours with the greatest impact on the need for capacity, which should result in lower costs in the long-term. Further, the weighted energy with supply assurance helps ensure the full value of capacity is recovered. Equity High The weighted energy and weighted energy with supply assurance options are the most fair and objective of the options provided. Also, cross-subsidization would be minimized since all consumers would pay capacity costs based on their demand during defined periods. Also, those consumers able to respond to price signals by shifting load to other periods of time are able to do so. Stability Medium It may be difficult for consumers to predict capacity costs over time since certain consumers would be incented to shift load to time periods with less impact on the need for capacity. Practicality Medium Implementation may be a challenge, specifically with respect to the complexity in the determination of the weighting by time period. Preferred Option Page 10

11 11. Which capacity cost allocation option do you think is most suitable for Alberta? Why have you selected that option? Additional Input AltaLink believes out of the three options proposed by Alberta Energy, the weighted energy approach would be a suitable cost allocation approach. However, AltaLink recommends the adoption of the proposed weighted energy with supply assurance option as a more balanced approach as it ensures that consumers also pay for the value of capacity relating to the provision of spare capacity. Under this methodology, approximately 80% (a proxy for reserve margine % over the peak demand) of capacity costs would be allocated using the Weighted Energy methodology and the remaining 20% (a proxy for reserve margin %) of costs would be allocated on a non-coincident peak basis since all consumers benefit from assurance of supply. 12. Do you have additional input? The weighted energy with supply assurance option meets relevant policy outcomes and the policy and technical criteria included in the Alberta Energy discussion paper, and it represents a balanced cost allocation approach. It is the best option since it would most effectively reflect cost causation as those consumers driving procurement of capacity and deriving value would pay for that capacity. Also, it would provide a price signal which is appropriate for a cost allocation mechanism, would encourage a shift of consumption away from high load periods, would be fair and non-discriminatory, avoid cross-subsidization since parties cannot avoid paying their share of capacity costs, be relatively easy to implement/settle and would be predictable. As set out in Alberta Energy s discussion paper, the electricity system transition intends to achieve the following desired outcomes: A reliable and resilient system; Improved environmental performance; Reasonable cost to electricity consumers; and Economic development and job creation. All Albertans benefit from these and should pay their fair share in the realization of these outcomes. Information submitted to Alberta Energy through this site is being collected for the purpose of the Capacity Market Technical Engagement Process. The Freedom of Information and Protection of Privacy Act, s. 33 (c) governs Alberta Energy s collection of Page 11

12 personal information which may be included in the submissions. Please direct questions about the collection and use of this information to Alberta Energy,5 th Floor, Amec Place Building, Avenue S.W., Calgary, Alberta, T2P 3W2, (403) Page 12