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 Vittoria Bellissimo Industrial Power Consumers Association of Alberta (IPCAA) 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 (Y/N) N Explanation/Further Details IPCAA commissioned BECL and Associates Ltd. (BECL) to conduct a review of capacity market cost allocation. The BECL presentation and report are being submitted along with this comment matrix. The cost allocation principles selected by BECL are included below: 1. Efficiency allocation methodology sends a clear signal that allow consumers to make rational decisions to achieve the lowest cost of capacity 2. Equity capacity costs are allocated fairly between consumers 3. Simplicity the cost allocation process should yield capacity charges that are clear and understandable 4. Stability and Predictability consumers are able to plan and budget for capacity costs with confidence These principles are very close to what the DOE paper sets out as criteria. The most notable distinction is the inclusion of Predictability in the IPCAA principles. Trueups and variance accounts can be eliminated with the appropriate cost allocation methodology. PJM, NE-ISO and the NYISO have gone in this direction. Customers, particularly large industrial customers, need to have a reasonable expectation for Page 1

2 what their electricity bills will be, and need to be able to budget for these bills in order to run their businesses. Post-period adjustments do not help incent customer behaviour. We should land on a cost allocation methodology that reflects cost causation, incents proper and realistic customer behaviour to reduce costs and satisfies the above principles. 2. Are there other criteria not included in the discussion document that should be considered? Y See above. Also, refer to the BECL presentation. Capacity Cost Allocation Options 3. Do the options presented in the discussion document accurately reflect the choices available for capacity cost allocation in Alberta? N The options presented by the DOE discussion document are very high level. There are variations on these options, that will need to be considered in order to make a final decision. Of the three options presented, coincident peak best reflects cost causation principles and is most suitable for Alberta. IPCAA commissioned a report from an independent expert, BECL, concluding that coincident system peak for the prior year is the recommended allocation factor. IPCAA is recommending an average of 3 monthly winter coincident peaks, because system demand is typically set in the winter months and using averaging will send a strong signal without basing all cost allocation on the events of a single hour. IPCAA submits that this methodology is consistent with the cost allocation principles (criteria) and reflects cost causation. IPCAA submits that the PJM cost allocation methodology in which capacity costs are allocated based on the previous year to delivery year provides the correct signals to: 1. Allow loads to make efficient capacity choices; 2. Lower the cost of capacity for all consumers; Page 2

3 3. Allow consumers to budget and plan for capacity charges; and 4. Eliminate the necessity for true-up and variance accounts. Ratepayers would like to have transparent capacity charges that can be budgeted for. As mentioned above, true-ups/post-period adjustments hinder price signals and should be minimized or avoided all together, if possible. IPCAA also notes that the cost allocation methodology should be based on the average load for the hour, not the 15-minute interval. Consumers need time to react and should be rewarded for reacting. If we use the 15-minute interval, the reaction is never rewarded appropriately and we will mute the incentive to reduce demand. Whichever cost allocation methodology is chosen will influence investment decisions for consumers in Alberta. It is imperative that we send a strong price signal to incent proper behaviour. The price signal will need to be stable for years to incent investments, so once it is established, it will be difficult to make any modifications. 4. Is there another viable option (methodology) to allocate capacity costs in Alberta that should be considered? Y See above. Page 3

4 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? N Currently, residential consumers do not have the mechanisms available to be incented to reduce their peak consumption. This is due to their use of cumulative metering, instead of interval / time-of-use (TOU) / smart metering. However, in the future, this situation may change. In fact, other jurisdictions are already leading the way when it comes to incenting residential consumer behaviour. A well-designed capacity market should drive to account for change and innovation and create an enduring design. For example, in other capacity and energy markets, retailers use mechanisms such as demand response to reduce peak consumption via reducing air conditioning, electric water heaters and/or pool pumps. These retailers, in turn, share the rewards they earn with residential consumers. In some jurisdictions, like Australia, customers are being given ownership of their meters. This is allowing for increased choice via retailers as meter service providers. Thus, any capacity market should be designed looking forward, and not expecting continuation of the current state. Farm/Irrigation? N Currently, farm and irrigation consumers have cumulative meters rather than interval meters. However, this sector is under continuous cost pressures and is well versed in innovating to induce cost savings. Small Commercial & Industrial? Y Providing a capacity allocation methodology that signals the benefit of innovation via a peak demand, rather than an energy signal, will allow these consumer groups to take advantage of opportunities to reduce their demand in the future. A simple energy charge adder will not create an efficient allocation or allow for innovation. Many small commercial and industrial customers have cumulative meters rather than interval meters. However, some have interval meters and as such, are able to respond to price signals in real-time. Page 4

5 Again, providing the proper capacity signal via a peak demand rather than an energy signal will allow these consumer groups (now and in the future) to take advantage of opportunities to reduce their demand. A simple energy charge adder will not create an efficient allocation or allow for innovation. Large Commercial & Industrial? Y For example, in other jurisdictions freezer warehouses shut-down their compressors over peaks in order to reduce their capacity charges, which is what a capacity signal should encourage. In doing so, the capacity need is flattened and future costs are reduced. Large commercial and industrial customers have interval meters and will respond to price signals. For many IPCAA members and other large consumers, electricity is a major input cost in their production cycle. As a result, some large consumers have become price responsive to peak demands and resulting high prices. Historically, there has been 300 to 400 MW of price responsive load in Alberta. Without a clear price signal, these loads will no longer have an incentive to reduce demand in a capacity market. A total energy cost allocation methodology will be an adder to the energy market, which loads will not be able to avoid, and will in turn increase their input costs and reduce their profitability. With capacity now being differentiated as a product, it is essential to both keep that price responsive load reacting to the capacity market signal and increase its capability. Demand response not only reduces electricity prices, it also enhances system reliability in times of stress. The correct cost allocation model is the key to ensuring and enhancing price responsive load. PJM and other markets have recognized that peak demand is the optimal cost allocator. Alberta should learn from their example. If capacity costs are allocated on a weighted energy basis, there is a muted signal for industrial loads to continue to shift their consumption to lower priced hours. IPCAA is concerned that the cost allocation signal will be too muted to continue to ensure industrials will move their consumption. There is a cost to shifting consumption and a muted price signal maybe insufficient to ensure this shifting, which will cost all Page 5

6 consumers more money. 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? Y A properly designed capacity market, based on cost causation, will allow for the efficient and equitable allocation of costs, and will encourage consumption to shift in a manner that saves all customers money. IPCAA submits that many industrial consumers will modify their consumption if the proper cost allocation methodology is implemented. We should be sending the strongest signal possible to reduce demand. Of the options presented, this means using coincident peak to determine a consumer s capacity obligation. Under a total energy or weighted energy methodology, IPCAA members are unlikely to respond, given the weaker signal these methodologies create. IPCAA s members are large industrial consumers. Evaluation of Cost Allocation Options 8. Please rank the Coincident Peak Allocation Option for each of the assessment criteria: Criterion Ranking Rationale Page 6

7 Economic Efficiency High Of the options presented, coincident peak cost allocation is economically efficient in that it will encourage consumers to shift their consumption and hence reduce the overall system demand, which will reduce the total cost of capacity going forward, ultimately reducing costs to all consumers. It is also aligned with cost causation. Equity High The use of coincident peak to allocate costs ensures cost causation and reduces cross-subsidisation between groups. Alberta s peak demand ultimately drives future capacity forecast requirements. Ensuring that a signal is consistently provided to all loads should ultimately minimize future capacity requirements. Stability High In order to achieve stability, IPCAA recommends that the DOE consider the PJMstyle of cost allocation, where the capacity obligation is set the year ahead. NYISO as well as ISO-NE have forms of costs allocation based upon previous year s performance. Doing so would alleviate consumer concerns with respect to planning and budgeting for the capacity market. True-ups and variance accounts would be eliminated. This would create more stability and allow the coincident peak methodology price signal to be more effective. Practicality High The coincident peak approach is simple and easily understandable as the AESO follows the same approach to determine bulk transmission rates. In Rate DTS, the 12 CP signal works to reduce demand and require less bulk transmission to be built, saving all customers money. 9. Please rank the Total Energy Allocation Option for each of the assessment criteria: Criterion Ranking Rationale Page 7

8 Economic Efficiency Low Total energy cost allocation provides no signal to actually reduce demand when it is economic. There is a hurdle cost associated with reducing demand. Spreading capacity market costs out over all hours provides no incentive. Total energy cost allocation does not reflect cost causation. By diluting the value of capacity inefficient outcomes will occur. Equity Low Total energy cost allocation does not result in fair and equitable payments and will result in some cross-subsidization between consumer groups. If everyone pays the same price for capacity, as a $/MWh rate, those that could reduce demand efficiently will not, since no incentive exists. This will ultimately lead to higher costs than what otherwise would have been paid. Stability Low While energy demand growth is in the order of 1% per year, capacity charges translated into energy could be somewhat stable. However, with no effective price signal to reduce capacity there will likely be an upward progression in the total capacity required. Again, IPCAA suggests a PJM-style approach with cost-allocation determined a year ahead. Practicality High This can be easily implemented by the AESO as a $/MWh charge. 10. Please rank the Weighted Energy Allocation Option for each of the assessment criteria: Criterion Ranking Rationale Page 8

9 Economic Efficiency Equity Low. More data required to make an assessment. Low. More data required to make an assessment In order to make a fair assessment there needs to be more information about how this methodology would be structured. The DOE should consider sharing its cost models with stakeholders. If this was the chosen methodology, IPCAA would suggest that the weight simply be based upon the super-peak hours to send as much of a capacity price signal as possible. Consumers are more likely to respond if the price signal is strong in a small number of hours than if the price signal is weak in many hours. Some form of innovation by consumers may be possible to avoid the daily super peak times, which are well known ahead of time. This methodology ignores cost causation and simply assumes super peak is a proxy for the required capacity. IPCAA is concerned that such a methodology, while easily implementable and easily understood will not achieve the goal of minimizing future capacity required due to the price signal dilution. There will be cross-subsidisation between consumer groups as the costs will be incurred all days of the year (or perhaps all weekdays). Whereas, the cost of capacity (based upon the required auction demand) is determined in a few peak hours per year. In its report, the DOE illustrated that residential load is very peaky in the winter and creates a forecast demand that is not apparent throughout the rest of the year. Thus, in terms of cost allocation, flat loads, including many industrials, will be cross-subsidising residential consumers. This is not an equitable outcome. Page 9

10 Stability Low. More data required to make an assessment Again, IPCAA suggests a PJM-style approach with cost allocation determined a year ahead. Practicality Preferred Option 11. Which capacity cost allocation option do you think is most suitable for Alberta? Why have you selected that option? Medium. More data required to make an assessment While the determinant is again $/MWh the AESO would need to break those costs down into consumption by the various chosen time periods. If this methodology were chosen, IPCAA would suggest that costs be simply be placed on super-peak hours to provide as clear a capacity price signal as possible. Putting weight into peak and off-peak dilutes any benefits of providing a capacity price signal. Of the three options provided by the DOE, IPCAA submits that coincident peak cost allocation is most suitable for Alberta. More specifically, IPCAA is recommending an average of 3 monthly winter coincident peaks, because system demand is typically set in the winter months and using averaging will send a strong signal without basing all cost allocation on the events of a single hour. IPCAA submits that this methodology is consistent with criteria provided by the DOE and reflects cost causation. As an alternative, if the DOE is not satisfied with basing cost allocation on 3 winter hours, IPCAA suggests considering an average of 3 monthly winter coincident peaks and 3 monthly summer coincident peaks. This would better encompass industries that are seasonally based in the cost allocation. IPCAA also recommends: 1. A PJM-style approach with cost-allocation determined a year ahead, in order to promote stability and predictability and to enable better budgeting. 2. Using average load for the hour, not the 15 minute interval, in order to give customers Page 10

11 time to react. 3. Ultimately, Retailers, self-retailers and RRO Providers should be responsible for buying capacity, and where applicable settling with their customers Additional Input 12. Do you have additional input? While not discussed, many IPCAA members are concerned with how capacity costs will be allocated through distribution rates. Currently, distribution companies do not link their demand charges to the system coincident demand. IPCAA s concern is that distributors will deconstruct the capacity costs and will likely create within each of their rate classes a new capacity charge that would be linked to the maximum of billing demand or contract demand. This would effectively remove any capacity market price signals. The DOE should ensure that capacity costs pass through distribution rates with price signals intact, or pass directly from the AESO to the retailer as part of the ETS system billing without flowing through the WSP billing. As mentioned above, IPCAA commissioned BECL to conduct a review of capacity market cost allocation. A presentation and report from BECL are submitted along with this comment matrix in order to inform the DOE s decision making. Please feel free to contact us with any questions or concerns. Thank you for the opportunity to comment. 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 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 11