AESO Response to Stakeholders Feedback

Transcription

1 AESO Response to Stakeholders Feedback Designing Alberta s Capacity Market stakeholder sessions held January 12 and 16, 2017 To initiate stakeholder consultation on the capacity market design, the AESO hosted kick-off stakeholder sessions in Calgary and Edmonton on January 12 and 16, At these sessions the AESO presented a brief description of capacity markets, described our vision of the desired end state, and proposed an approach to undertaking the design and a potential roadmap for completing the work. In addition, the AESO presented a proposed approach to consultation, as well as a set of proposed criteria and assumptions to be used as tools to guide the capacity market design. The presentation can be found here. The AESO requested stakeholder feedback about the presented topics for the AESO to consider. All stakeholder comments received have been reviewed by the AESO and posted on the AESO website. This document contains the AESO s response to summarized stakeholder feedback received and highlights revisions made to the information presented at the January stakeholder sessions resulting from this feedback. The document is intended to address key themes that emerged in the stakeholder feedback and does not provide a line by line response to all comments received. After discussing the AESO s proposed changes at the stakeholder session to be held on April 25, 2017, the AESO intends to finalize the desired end state, criteria and assumptions as a bundled package of working assumptions that can be utilized to proceed to detailed technical design. Page 1 of 28

2 Capacity Market Design Approach Based on stakeholder feedback the AESO feels the proposed Capacity Market design approach requires further consideration Section Original presentation Proposed desired end state of capacity market development (Slide 7) Initially Proposed The desired end state is to develop a capacity market that utilizes competitive market forces, ensures continued supply adequacy and reliability at a reasonable cost and is flexible to reflect the unique aspects of Alberta s electricity industry. Revised Black-lined version of presentation The desired end state is a stable and transparent capacity market that relies on competitive market forces, and works efficiently with the energy and ancillary service markets, to achieve sufficient investment to maintain supply adequacy and reliability at the lowest cost for consumers, while working effectively within Alberta s unique electricity structure. (Slide 1) and The following themes emerged from stakeholders responses: - Uncertainty as to the definition of reasonable cost and suggestions that lowest cost should be the objective for the capacity market. - The need to recognize that the capacity market needs to work with the energy and ancillary service markets to result in the desired efficient outcome. - Suggestions that the objectives of the broader policy environment (e.g., environmental objectives or total cost objectives) should be reflected in the desired end statement. AESO Response The AESO evaluated all of the suggested wording changes and adopted the changes shown in the Revised column. The AESO views that the revised statement better recognizes the desire for a stable market design and reflects the importance of integration between the capacity, energy and ancillary service markets. In addition, the AESO recognizes that an objective for the market, as well as an expected benefit from relying on competitive forces, is lowest cost for consumers while acknowledging that a sustainable market must provide sufficient incentive to provide supply. Finally, the statement is intended to reflect the concept that the capacity market must integrate effectively with other aspects of the electricity policy framework. However, while the objectives and outcomes of the capacity market need to be compatible with the larger framework objectives, the Page 2 of 28

3 Section Original presentation Key design questions for capacity market development (Slides 8 11) Initially Proposed Preliminary list of key capacity market design questions: How much capacity needs to be procured? (Resource adequacy requirement) Who will buy the capacity? (Obligation to procure) When and how often will capacity be purchased? (Procurement timing and frequency) How long will the capacity delivery period be? (Term) Who can provide capacity? How much can they provide? (Eligibility) How do we know that capacity has been provided? (Performance assessments) How will the capacity market work? (Market mechanics) How will capacity providers be paid? How will capacity costs be allocated? (Capacity market settlement) How will the capacity market impact the energy and ancillary services markets? (Inter-operability implications) Revised Black-lined version of presentation Additional key design question: How will capacity costs be allocated? (Cost Allocation) (Slide 2) How is regulatory oversight applied (Governance or the role of the agencies and legislative changes that may be required) (Slide 4) and capacity market does not need to be the primary mechanism by which all of these objectives are achieved and certain objectives may be better achieved through other direct policy initiatives. Several stakeholders raised regulatory oversight or governance as a key question area that needs to be addressed in overall development of the capacity market. AESO Response The AESO agrees and has included the question on the list but notes that addressing this question is beyond the AESO s mandate. Further, the AESO notes that this question is expected to be addressed as part of the policy work the Government of Alberta (GOA) is currently leading. Stakeholders also placed great importance on determining capacity cost allocation. AESO Response As a result of stakeholder concern, capacity cost allocation was elevated to a stand-alone question. Stakeholders submitted many detailed questions that they believed should be addressed in the design of the capacity market. AESO Response Most of the questions raised by stakeholders related to the key questions the AESO presented at the January sessions and are expected to be addressed during technical design. Remaining questions were primarily related to governance and have been addressed as per above. Page 3 of 28

4 Section Original presentation Design dependencies and sequencing (Slide 12) Initially Proposed Please see Slide 12 from the January presentation. Revised Black-lined version of presentation Further detail to be provided and Stakeholders requested more detail on the interdependencies between design elements to better understand the thinking behind the sequencing. AESO Response The AESO reviewed each comment to ensure all interdependencies were captured and also made adjustments to its detailed market design plan as required. Capacity market development roadmap (Slide 13) Please see Slide 13 from the January presentation. Please see revised roadmap showing adjustments to January materials. (Slide 5) The AESO will provide further details about the plan after finalizing the desired end state, criteria, key questions, assumptions and stakeholder engagement approach. Stakeholders found the roadmap confusing. The roadmap was adjusted in an attempt to increase clarity. The AESO changed Implementation to Formalization to better reflect the activities within that stage. First delivery of capacity is targeted occur in 2021 following the first procurement. AESO Consultation Principles Slide 15 We will follow the AESO s existing consultation principles, but think the following are particularly relevant: Under Roles and participation in decision making The AESO uses the experience and expertise of stakeholders to improve the Further detail to be provided The timeframe in the roadmap was intended to show the length of time to run the first procurement and when first delivery of capacity was targeted to begin. It was not intended to indicate that a specific contract term or forward period of the capacity market has been determined as these details will be established in the design process. Stakeholders expressed interest in ensuring that the AESO s rationale for final design decisions is transparent. AESO Response The AESO will further consult with stakeholders to finalize the approach to engaging stakeholders in answering the key design questions. Page 4 of 28

5 Section Original presentation Proposed approach to answering key design questions Slides Initially Proposed quality and implementation of decisions All stakeholders have the right to comment on the AESO's plans, decisions and actions The AESO makes the decisions Under The process of making decisions The AESO's consultation process and the rationale for the AESO's decisions are transparent Under Informing stakeholders All stakeholders have the right to be informed of the AESO s direction, plans, the status of issues, and decisions in a timely manner In order to have a design outcome which is: Inclusive Timely Efficient Cohesive Comprehensive the AESO proposes a two-stage AESO led stakeholder engagement model to arrive at design and high-level implementation details for each element Once the design is determined, it will be implemented via incorporation into appropriate legal language (e.g. ISO Rules or Tariff, contracts or Legislation/Regulation) Revised Black-lined version of presentation Further detail to be provided and Many stakeholders suggested that an industry steering committee or working groups may be beneficial by providing more timely and efficient input into the design process. AESO Response The AESO will further consult with stakeholders to finalize the approach to engaging stakeholders in answering the key design questions. Page 5 of 28

6 Section Original presentation Design Alternatives Sheets Slide 18 Term Sheets Slide 19 Initially Proposed A Design Alternatives Sheet (DAS) is documentation produced by the AESO of the relevant options for an element of the capacity market Intended to be an objective and fulsome exploration of the range of options for design components and relevant considerations DASs would contain: Questions to be answered by the DAS (scope) Issue description Range of potential design solutions for each question Pros and cons of the options from the perspective of the criteria A term sheet would: Address stakeholder comments on the alternatives presented in the DAS Provide a clear decision on, and rationale for, the selected design choice Present implementation detail on the option chosen, including: An outline of the material terms and conditions of the element design choice and the details around its implementation Transactional requirements including timing Formulae and calculations Revised Black-lined version of presentation Further detail to be provided Further detail to be provided and Most stakeholders accepted the form of the DAS. Several stakeholders suggested that DASs be accompanied by workgroups or other forms of stakeholder meetings to allow for clarification of DAS content and other related stakeholder input. The AESO will further consult with stakeholders to finalize the approach to engaging stakeholders in answering the key design questions. Most stakeholders accepted the form of the term sheet and requested further clarification on the content of the document. AESO Response The AESO will further consult with stakeholders to finalize the approach to engaging stakeholders in answering the key design questions. As context, however, term sheets are intended to document a clear decision as to the final design approach taken and reasons why the final approach was decided on relative to alternatives. In addition, term sheets document design concepts that are consistent with the decided upon design approach. These concepts will guide implementation, during which the required rules, tariff, legislation, or regulation necessary to accommodate the change will be identified. One of the market design criteria is cost and risks and design alternatives Page 6 of 28

7 Section Original presentation Initially Proposed Revised Black-lined version of presentation and will be evaluated relative to the criteria in this category. However, the term sheet will not attempt to estimate implementation (i.e. IT and legal) costs of the recommended design as these are anticipated to be not materially different between options. Implementation costs will be estimated as part of the Formalization and Implementation stages. Design development steps (Slide 20) Please see Slide 20 from the January presentation. Further detail to be provided The AESO removed the term transactional requirements from the term sheet description and replaced it with go live activities in an attempt to provide further clarification. A wide range of stakeholder comments were received on various topics. One common theme that emerged was whether there will be an opportunity to review and comment on the complete package of design elements prior to moving to the Formalization stage. AESO Response The AESO expects that there will be an ongoing assessment by all stakeholders of the overall market design as Term Sheets for design elements are finalized. The AESO will attempt to add a more formal overall design review step before moving to the Formalization stage should timelines permit. Page 7 of 28

8 Capacity Market Criteria Section Initially Proposed Revised Criteria and supply adequacy and reliability (Slide 22) First criterion listed The capacity market should achieve desired reliability objectives by creating a real and measurable supply adequacy product. First criterion listed The capacity market should achieve desired reliability objectives by creating a real and measurable supply adequacy product designed to provide energy production or reduced consumption when needed. (Slide 7) Several stakeholders requested further clarification on the term real. The term real was intended to convey the notion that actual energy is made available to the system when it is required such that supply adequacy can be maintained. This could potentially happen through a number of mechanisms but the fundamental concept is that the capability of producing physical energy is procured through the capacity market and this energy must be available to be provided at some point. A number of stakeholders commented that environmental and other attributes should be included in the product to be procured. The AESO is of the view that environmental policy objectives and attributes are primarily driven and compensated for outside the capacity market (for example, via the REP program, through coal-emissions phase-out, through output based allocations and the carbon levy) while the capacity market is intended to maintain supply adequacy. The capacity market supports the overall policy objective of a transition to lower carbon resources but that objective should not be reflected in the description of how the capacity market should achieve desired reliability objectives. supply adequacy and reliability (Slide 22) Second criterion listed The capacity market should contribute to the reliable operation of the electricity grid and implementation should be consistent with, and complementary to, other measures aimed at ensuring reliability. Second criterion listed The capacity market should contribute to the reliable operation of the electricity grid and implementation should be consistent with, and complementary to, other existing measures aimed at ensuring reliability. The themes listed below emerged from stakeholder feedback on this criterion. The AESO s response follows the statement of each theme below.. 1. Theme: Reliability is not the only goal. This criterion intends to convey the idea that the capacity market should contribute to reliability, it is not intended to imply that Page 8 of 28

9 Section Initially Proposed Revised Criteria and (Slide 7) reliability will be achieved without consideration of costs. 2. Theme: Real time market price signal should be emphasized before turning to the capacity market to answer reliability questions and drive investment decisions. The interaction between the capacity market and the energy market and ancillary service market price signals, including potential changes to these markets, will be considered through the design process. 3. Capacity market should address the electricity policy framework currently being reviewed. The implementation of the capacity market is part of the overall electricity policy framework and needs to integrate effectively with other aspects of the electricity policy framework. However, while the objectives and outcomes of the capacity market need to be compatible with the larger framework objectives, the capacity market does not need to be the primary mechanism by which all of these objectives are achieved and certain objectives may be better achieved through other direct policy initiatives. 4. Other measures should be transparent. This criterion was intended primarily to indicate that the capacity market and products procured are not intended to be the sole method of maintaining reliability of the electricity grid. Other measures (e.g. transmission line limits, under-frequency products, ancillary services, real-time operator actions, etc.), many of which are addressed in Alberta Reliability Standards, are also measures aimed at ensuring reliability. Introduction of a capacity product is intended to be complimentary to these existing measures, not replace them or to otherwise alter them. Other measures may be needed as the grid continues to evolve; these would be developed using an open and transparent stakeholder process. Page 9 of 28

10 Section Initially Proposed Revised Criteria and supply adequacy and reliability (Slide 22) Are there additional criteria which should be included in this category? No additional criteria added. Stakeholders proposed additional criteria such as establishing reliability criteria, recognizing the importance of integration between the capacity market and the energy and ancillary services markets, the treatment of behind the fence load and resources, data transparency and continuous and regular capacity market assessment. the capacity market (Slide 23) First criterion listed The capacity market should be fair, efficient, and openly competitive. First criterion listed Same as initially proposed. (Slide 8) Second criteria listed Second criteria listed AESO Response Many of the suggestions are design details that will be addressed in the design phase. Some additional criteria proposed by stakeholders are beyond the scope of capacity market technical design and are likely to be addressed as part of broader policy discussions. Some stakeholders suggested that the AESO clearly distinguish supply adequacy and reliability as separate criteria. AESO Response The AESO does not agree that supply adequacy and reliability should be distinguished because the purpose of supply adequacy is reliability. Supply adequacy is one of many mechanisms that help the system meet reliability criterion. In addition, an important design consideration is the extent to which the capacity market may be used to incentivize supply with characteristics, such as ramp rate, which contribute to system reliability (please also see the discussion on changes to Assumption 5). As discussed for the criterion above, this is not intended to negate that there are also other mechanisms which are utilized to ensure system reliability is maintained. This criterion was supported by the majority of stakeholders. The AESO s view is that adjustments to this criterion are not necessary. Page 10 of 28

11 Section Initially Proposed Revised Criteria and the capacity market (Slide 23) The procurement of capacity should employ market-based mechanisms and a competitive market for capacity should be developed. Same as initially proposed. (Slide 8) This criterion was supported by the majority of stakeholders. AESO Response Several comments submitted by stakeholders on this criterion are already covered by separate assumptions or other criteria. For instance, the AESO agrees that implementing a market-based mechanism should result in the most cost-effective design for a capacity market, however, this concept is being addressed under Criteria for Costs and Risk on slide 24, third criterion (i.e. Effective balance between capacity cost and supply the capacity market (Slide 23) Third criterion listed A wide variety of technologies should be able to compete to provide capacity. Third criterion listed A wide variety of technologies should be able to compete to provide capacity provided they are qualified to meet the eligibility criteria. (Slide 8) adequacy. ) Several stakeholders proposed the caveat that technologies must meet eligibility criteria. AESO Response The AESO agrees with the clarification proposed. Meeting eligibility criteria, which will include technical requirements and the ability to contribute to meeting supply adequacy standard (i.e. sufficiently provide the capacity product as it is defined) is a prerequisite for participation in the capacity market and aligns with the intention of this criterion. the capacity market (Slide 23) Fourth criterion listed Capacity market mechanisms, outcomes and relevant data should be transparent. Fourth criterion listed Same as initially proposed. (Slide 8) This criterion was supported by the majority of stakeholders. AESO Response The AESO understands the concern of some of the stakeholders regarding limitations of data transparency in bilateral agreements but notes that some data reporting may still be required to maintain a fair, efficient and openly competitive (FEOC) market. Page 11 of 28

12 Section Initially Proposed Revised Criteria and the capacity market (Slide 23) the capacity market (Slide 23) Fifth criterion listed There should be a well-defined product and an effective and efficient capacity price signal. Are there additional criteria which should be included in this category? Fifth criterion listed There should be a well-defined product and an effective and efficient price capacity signal (Slide 8) Stakeholders indicated that it may be appropriate to have more than one capacity product and also that it is important to recognize the interaction of the capacity, energy and ancillary service (AS) markets in providing a price signal. The primary intention of this criterion was to emphasize that in order to function effectively the capacity market will require a specific and clear definition of capacity that is well understood by all participants. Exact characteristics of the capacity product or products will be defined as part of the detailed design process. (Note that the criterion did not intend to preclude the potential for more than one defined capacity product). The AESO removed the word capacity from the description to provide further recognition that the capacity, energy and ancillary service markets need to work in concert to provide effective and efficient price signals. No additional criteria have been added. The AESO reviewed all suggested additional criteria in this category and believes that they are either already covered in the initially proposed set of criteria or assumptions, or they extend beyond the scope of the AESO s technical design work. Some of the specific additional criteria proposed by stakeholders are listed below followed by the AESO s responses. Fairness concerns (i.e., ensuring a level playing field) Fairness concerns are covered under the first criterion on slide 23 Efficient investment Efficient investment is addressed in the second criterion under Costs and Risk on slide 23 Contribution towards climate targets This criterion is viewed by the AESO to be outside of the scope of capacity market design Transition mechanisms for existing forward contracts This criterion is viewed by the AESO as a policy issue that likely extends beyond the scope of capacity market technical design Page 12 of 28

13 Section Initially Proposed Revised Criteria and costs and risk (Slide 24) Criterion 1: Long-term investment risks should continue to be largely borne by investors rather than consumers. Criterion 1: Long-term Investment risks should continue to be largely borne by investors rather than consumers. (Slide 9) Stakeholders requested clarification about the difference between long term and short term. The AESO has removed the adjective long-term. While acknowledging that a capacity market does result in additional risk being borne by consumers relative to an energy only market (primarily due to forward contracting and resulting potential for load forecasting error) the intention of the criterion is to convey that the risk profile of Alberta s capacity market is intended to be closer in nature to the existing energy only market than to a long-term contract structure and should avoid shifting significant amounts of risk to consumers. The AESO recognizes that within this general statement a range of levels of risk allocation between parties is still possible and the ultimate determination of this will need to be established through the design process. costs and risk (Slide 24) Second criterion listed The capacity market should instill investor confidence and should result in private investment. Second criterion listed The market structure, which includes the capacity market, energy market and ancillary services market, should create conditions such that private investment can be reasonably expected. (Slide 9) A few stakeholders did not agree with this criterion because they thought it implied the following: long-term contracts; excessive costs for loads; additional private investment even when the market is over supplied; unfair treatment of existing and new investors; investors shedding investment risk; load excluded from participating. This criterion was meant to convey idea that conditions such as a stable, competitive and effectively functioning market would then allow investors to make decisions based on price signals rather than concern about market operation. It was not intended to imply that investors would be guaranteed a rate of return. The length of the contract term, the volume of capacity procured, treatment of resources and possible load participation will be determined through the design process. Page 13 of 28

14 Section Initially Proposed Revised Criteria and Some stakeholders expressed that the capacity market alone cannot instill investor confidence and must be considered in a broader context including energy and ancillary services markets. costs and risk (Slide 24) costs and risk (Slide 25) Third criterion listed There should be an effective balance between capacity cost and supply adequacy. First criterion listed The term of the capacity obligation should be as short as possible while ensuring supply adequacy objectives are achieved. Third criterion listed Same as initially proposed. (Slide 9) First criterion listed The term of the capacity obligation should be as short as possible while ensuring supply adequacy objectives are achieved through sufficient investment in new capacity supply. (Slide 10) The AESO clarifies that capacity, energy and ancillary service markets will need to function effectively together to ultimately drive appropriate investment (low cost, desired operating characteristics) in the market. Effectively functioning markets providing the right price signals would then be expected to result in competitive market outcomes. Stakeholders requested more clarity about how to assess the trade-off between cost and reliability. The intent of this criterion is to convey that supply adequacy is not intended to be achieved at any cost. Achieving a balance between cost and reliability implies the assessment of price caps and a downward sloping capacity demand curve. The AESO notes that the acceptable level of unserved energy risk may be established by government policy. Many of the stakeholder comments received about this criterion indicated that there may be a trade-off between obligation term and development cost and ability to support investment. This criterion was meant to be complimentary to the criterion that states risk is largely borne by investors (first criterion, slide 24) and that ultimately this will result in lowest cost for consumers. The AESO has modified the criterion to maintain the original intent of the criterion with respect to primary allocation of risk to investors while providing further recognition that the impact of the obligation term on investment decisions needs to be considered. Page 14 of 28

15 Section Initially Proposed Revised Criteria and Stakeholders suggested that the wording of this criterion could be misinterpreted. The criterion as short as possible while ensuring supply adequacy objectives are achieved does not mean the shortest term, and the AESO agrees that the choice of obligation term should balance the need for resource adequacy, cost and risk allocation considerations. costs and risk (Slide 25) Second criteria listed Reasonable capacity costs for consumers should be achieved through effective competition and administratively determined prices should be avoided. Second criteria listed Criterion removed (Slide 10) The capacity obligation term will be determined through the capacity market design process. Whether the same term should be applied to existing and new capacity will also be determined through the design process. Stakeholders are unclear about how price caps/floors and an administratively determined demand curve would not result in administratively determined prices. Some stakeholders proposed to change the criterion to read that the lowest possible capacity costs should be achieved or requested that the AESO define reasonable capacity costs. This criterion is being removed because the intention behind it is effectively covered by other criterion, especially FEOC, use of market based mechanisms and the assumption regarding market mechanics and regulatory oversight. Page 15 of 28

16 Section Initially Proposed Revised Criteria and costs and risk (Slide 25) Third criteria listed The design should provide mechanisms for consumers to hedge the cost of capacity if and where appropriate. Third criteria listed The design should provide allow mechanisms for consumers to manage hedge the cost of capacity if and where appropriate. (Slide 10) Stakeholders suggested that the verb hedge be changed to manage so that a variety of tools can be included. Stakeholders also felt that consumers should not be required to hedge. Stakeholders suggested that clarity was needed regarding whom hedging would be entered into with. Finally, stakeholders felt it was unclear what group(s) the AESO was referring to with the term consumers. The intent of this criterion is that the design of capacity market should not unduly hinder the consumers ability to manage capacity cost. Consumers in this context are ultimately the loads that pay for capacity costs. This criterion is not intended to convey that consumers will be required or forced to hedge their capacity costs; rather, the intent is to convey that an effort will be made to incorporate mechanisms that allow consumers to manage their costs if they so choose. The criterion is not meant to imply that there is a link to how consumers may wish to hedge their pool prices as independent mechanisms to hedge the energy component are expected to continue. Consumers should be able to use a variety of tools to manage their energy and capacity costs based on pool price and capacity price signals and products available in the marketplace. This criterion is not intended to imply that specific mechanisms for managing costs that can be identified at this point may or may not ultimately be compatible with the broader market framework. Mechanisms for managing cost will need to be compatible with the larger capacity market structure. Page 16 of 28

17 Section Initially Proposed Revised Criteria and costs and risk Are there additional criteria which should be included in this category? No additional criteria needed. Stakeholders suggested adding criteria related to valuing green attributes and optimizing the transmission system. (Slides 24 25) The AESO is not adopting such criteria because the criteria extend beyond the scope of capacity market development to the broader electricity policy framework. In particular, environmental criteria are viewed as being accounted for through existing renewable targets, output based allocation discussions and coal emissions phase-out. Transmission policy discussions also extend beyond capacity market development. In the AESO s view, there are criteria which recognize the fact that the capacity market needs to be developed to be compatible with these other policy areas but it does not need to adopt all of their specific objectives. Stakeholders suggested that generators should have a reasonable opportunity to earn a return on investment. In the AESO s view, the second criterion on slide 23 is sufficient (i.e. The procurement of capacity should employ market-based mechanisms and a competitive market for capacity should be developed ). A well-functioning market will provide investors with reasonable opportunity. However, the AESO also notes that this is different from stating that investors will be provided with a guarantee or certainty on their rate of return. The AESO is not supportive of that as a criterion as it is incompatible with the concept of risk being primarily borne by investors (first criterion, slide 24). The market should have the ability of industrial load to procure the level of reliability it values. Page 17 of 28

18 Section Initially Proposed Revised Criteria and The value of system reliability will be collectively and centrally determined with input from stakeholders. Whether grid-connected participants are allowed to opt out if they are willing to accept lower reliability levels (e.g. they get curtailed before others during scarcity) is a design issue that will be addressed in the design phase. Mechanisms should be provided to allow capacity providers to hedge downside risks. The creation of hedging mechanisms for suppliers to lock-in capacity or energy and ancillary service revenues on a forward basis outside of these markets is considered out of scope. flexibility (Slide 26) flexibility (Slide 26) First criterion listed Unique aspects of Alberta s electricity system should be considered in the design of the capacity market (e.g. nature of load/generation, levels of cogeneration, limited interties, large geographic area, etc.). Second criteria listed The capacity market should be compatible with other components of the electricity framework, and should be robust and adaptable to different government policy initiatives related to the electricity sector. First criterion listed Same as initially proposed. (Slide 11) Second criteria listed The capacity market should be compatible with other components of the electricity framework. and should be robust and adaptable to different government policy initiatives related to the electricity sector. (Slide 11) This criterion was supported by the majority of stakeholders. This criterion will be used mostly as guidance. After discussions with stakeholders, should a design option be not practicable to implement because of Alberta s unique characteristics this will be recognized. This criterion received mixed comments from stakeholders. In particular, multiple concerns were raised regarding this criterion leaving the possibility for government intervention and that this may be detrimental to investor confidence, market stability and ability for customers to hedge costs. The AESO has adjusted the criterion to better reflect the primary intention that the capacity market is intended to operate in a larger policy framework. While the objectives and outcomes of the capacity market need to be compatible with the larger framework objectives, the capacity market does not need to be the primary mechanism by which all of these objectives are Page 18 of 28

19 Section Initially Proposed Revised Criteria and achieved. flexibility Are there additional criteria which should be included in this category? No additional criteria have been included. The AESO received no additional criteria for this category. (Slide 26) timely development (Slide 27) First criterion listed Market should be targeted to open in 2019 for start of first capacity procurement. First criterion listed Market should be targeted to open in 2019 for start of first capacity procurement for delivery of capacity starting in (Slide 12) Stakeholders expressed the view that ensuring a well-designed market and achieving the long-term stability of the market was more important than meeting the 2019 target timeline. The AESO has revised this criterion to provide greater clarity that market opening in 2019 is to start the procurement process while first capacity obligation period (delivery of capacity) would start in Also, this is not intended to imply that the steady state forward period has already been decided upon as this will be determined through the design process. The AESO acknowledges that these are aggressive timelines and that getting the market right is also an important objective. However, reasons for the date include minimizing the uncertainty of a transition period and positioning the market to be able to manage through reliability risks that may otherwise arise in the early 2020 s as retirements start and load growth resumes. Several stakeholders raised questions regarding capacity cost allocation, frequency and forward time of the auctions. Capacity cost allocation, frequency and forward time of the auctions are considerations related to design elements and will be dealt with during the design phase. Page 19 of 28

20 Section Initially Proposed Revised Criteria and timely development Slide 27 Second criteria listed The initial degree of change to the current energy and ancillary service market should be minimized. Second criteria listed Changes to the energy and ancillary service markets required to achieve the most efficient steady state electricity market possible may need to be staged to ensure timely initial implementation. The initial degree of change to the current energy and ancillary service market should be minimized (Slide 12) Stakeholders generally did not support this criterion as written, indicating that it is important to recognize that changes should be made to either the energy or ancillary services markets if required to ensure that all of the markets operate efficiently together and provide effective price signals. A well-functioning electricity market will require capacity, energy and ancillary service components to work together to send appropriate price signals and result in efficient outcomes. The original criterion was meant to indicate that, in order to hit the initial start dates, changes to the energy and ancillary services markets may have to be limited to the highest priority items that have the greatest impact on ensuring that the three markets function effectively together. Further changes which may be required to further increase efficiency or better integrate intermittent generation (or other changes to the supply mix) over time, may need to be staged in post 2021 to ensure a manageable amount of change and successful implementation of the highest priority components. The intent of this criterion was not to convey that the necessary changes to energy and ancillary services market will be avoided. However, implementation of changes may need to be prioritized to those with the largest impact and most immediate need in order to enable successful implementation of the capacity market. In parallel to the capacity market design effort, the AESO will develop and communicate a roadmap of AS and energy market changes expected to occur through the 2021 to 2030 period as part of the overall market evolution. Please also see the criterion regarding staged implementation, which has also been re-ordered to better reflect the AESO s intention to provide sufficient market information to stakeholders prior to opening of the capacity market. Page 20 of 28

21 Section Initially Proposed Revised Criteria and Third criterion listed timely development Same as initially proposed. (Slide 27) timely development (Slide 28) Third criterion listed Simple and straightforward implementation should be a priority. First criterion listed To the extent a staged implementation is pursued, the expected timing and nature of future changes should be provided. (Slide 13) Third criterion listed To the extent a staged implementation of the overall electricity market is pursued, the expected timing and nature of future changes should be provided before opening the first procurement. (Slide 12) Stakeholders asserted that a capacity market is a complex electricity framework that will require complex solutions. The AESO agrees with this assertion. However, where practicable and optimal, and while meeting all other criteria such as FEOC market structure, the simplest solution should be preferred. Stakeholders were unclear about the meaning of staged implementation. The intent of this criterion was to align with the earlier criterion around initial change to existing markets (i.e. second criterion, slide 27), recognizing that practical realities may mean that it may not be possible to implement all desired changes to the energy and ancillary services markets by In this event, the AESO intends to provide a roadmap to the other market changes that would follow the capacity market implementation in order to allow stakeholders to better understand the expected energy and ancillary service market structures and future revenue opportunities. timely development (Slide 28) Second criterion listed The risks of regulatory delay and need for re-design should be minimized. Second criterion listed Same as initially proposed. (Slide 13) The changes required to the energy and ancillary service market structures and products, along with the timing for those changes, will be determined during the design phase. A theme which emerged from stakeholder comments on this issue was the potential for conflict between this criterion and the criterion to start procurement in This criterion expresses the desire to achieve alignment with stakeholders at the design stage in order to minimize future contention in the formalization stage of market design. Page 21 of 28

22 Section Initially Proposed Revised Criteria and timely development (Slide 28) Third criterion listed Best practices and lessons learned from other capacity market implementations should be leveraged as much as possible. Third criterion listed Best Common practices and lessons learned from other capacity market implementations should be leveraged as much as practicable and applicable. (Slide 13) Stakeholders suggested that not all common practices are applicable to Alberta and an assessment of whether common practices are suited to Alberta should take place during the design process. The AESO agrees with this point and to reflect this has replaced possible with practicable and applicable. The AESO has also modified the wording to reflect that best practices may be overly subjective or difficult to determine. As an alternative, the AESO has adopted the use of common practices to represent those design elements which are commonly found in other capacity markets. Further identification of these practices can be found in the report A Case Study in Capacity Market Design and Considerations for Alberta prepared by Charles River Associates and previous posted by the AESO. timely development Are there additional criteria which should be included in this category? No additional criteria have been included. Stakeholders did not propose additional criteria relevant to this category. (Slides 27 28) General feedback regarding criteria (Slides 21 28) Are there additional categories of criteria which should be considered? Do you require additional explanation or have questions regarding any of the categories or criteria? Do you think all criteria are equally important or should some take precedence over others? No additional criterion required. Many stakeholders suggested that the AESO provide a priority or ranking / weighting system for the criterion to aid the evaluation of potentially competing solutions/alternatives. Given the wide disparity in suggesting rankings from stakeholders we believe there would be little value and much debate in attempting to rank the criterion. The AESO will evaluate the options for each design element against all of the criteria, recognizing that there may be inherent trade-offs between the criteria. In general, options which better satisfy more of the criteria will be preferred relative to those which satisfy fewer of the criteria. Page 22 of 28

23 Section Initially Proposed Revised Criteria and Stakeholders suggested criteria related to policy certainty, efficient investment, competition in Alberta and impartiality/absence of political interference regarding decision-making in the development of the capacity market design. These are concepts which are better addressed through other avenues, such as Alberta Energy s policy engagement. Page 23 of 28

24 Starting Assumptions Section Initially Proposed Revised Assumption and AESO Response Assumption 1 (Slide 30) A capacity obligation is a forward physical obligation on capacity suppliers that requires the capacity sold in the capacity market to be available to provide energy when needed. This obligation is created when the supplier s offer is cleared in the capacity market. A capacity obligation is a forward obligation on capacity suppliers that requires the capacity sold in the capacity market to be available to provide energy production or reduced consumption when needed and is subject to financial penalty/incentive. (Slide 14) This assumption was supported by the majority of stakeholders however there was some uncertainty as to what physical meant or whether the statement was intended to preclude some technologies. The AESO has adjusted the assumption in order to clarify that the provision of energy may be possible through a variety of means and therefore capacity may be able to be provided by a variety of sources. The AESO intends to explore the questions of eligibility requirements (including defining when resources will need to be there) in the corresponding design. Assumption 2 (Slide 30) All existing capacity must offer their eligible capacity to the capacity market. Planned capacity must offer for the delivery year they are connected. Same as initially proposed. (Slide 14) Several questions regarding clarification of details of the application of the criterion were received including potential implications for the current must offer rule in the energy market, implications for the ability to self-supply, application to new resources and application with mothballing options in the capacity market, etc. A must offer requirement is intended to ensure liquidity in the market and helps prevent market power issues. Details of implementation will be determined during the design stage. This must offer assumption does not necessarily pre-suppose a market form as this requirement can exist under all forms of procurement obligation. Page 24 of 28

25 Section Initially Proposed Revised Assumption and AESO Response Assumption 3 (Slide 30) The capacity market will be designed as a single zone with the capability of adding zones should it is required due to a change in transmission policy or other factors. The capacity market will be designed as a single zone with the capability of adding zones should it is required due to a change in transmission policy or other factors. (Slide 14) on this criterion was mixed. Several stakeholders thought the criterion adequately reflected Alberta s current transmission policy and expectations that sufficient transmission exists to maintain a largely unconstrained system. Other stakeholders felt that locational considerations should be included in the capacity market as a method of signaling where capacity should be added or of recognizing transmission costs. The AESO believes that this assumption should be modified to strengthen the assumption that Alberta s initial capacity market design will be a province wide, single zone. This is based in part on Alberta Energy s recent clarification that review of the Transmission Policy is not intended to fundamentally move away from an unconstrained transmission policy. In addition, a single zone market will likely maximize the degree of competition in the capacity market. Adopting this assumption would mean that design details regarding the establishment of zonal prices could be removed from scope. This would not preclude zonal prices from being added to the market at a later date should the GOA decide to change the transmission policy. Assumption 4 (Slide 31) The resource adequacy requirement for Alberta will be centrally determined. The resource adequacy requirement and resulting volume of capacity for Alberta will be centrally determined prior to each procurement. A primary theme which emerged in stakeholder feedback on this criterion was clarification on the approval process for resource requirements and how checks and balances may be applied to this. (Slide 15) Based on stakeholder comments, the AESO viewed that the assumption needed clarity that both the reliability standard and the resulting volume of capacity required to be procured as implied by the reserve margin, will be calculated centrally. As in other capacity markets, the AESO anticipates that the annual volume for capacity procurement will be independently verified by another Page 25 of 28

26 Section Initially Proposed Revised Assumption and AESO Response government body. Assumption 5 (Slide 31) The capacity market is intended to ensure supply adequacy. Other attributes such as carbon output, total capacity factor, ramp flexibility, energy production costs, etc., are not considered within the capacity market. This assumption will be dropped and included as part of the design. (Slide 15) Some stakeholders expressed the view that carbon output should be considered to offset costs associated with REP or that this assumption may hinder the effort to achieve the vision of the Climate Leadership Plan. Some stakeholders commented that ramp flexibility should be considered as a criterion for providing capacity. Given the wide disparity of stakeholder positions on this assumption, the AESO believes it prudent to drop this assumption and examine these issues in greater detail in the design phase. In particular, the AESO views the question of whether ramping flexibility is best incented through the capacity, energy or ancillary services markets as a valuable design discussion. Assumption 6 (Slide 31) Assumption 7 (Slide 32) Capacity and energy/ancillary services are separate products, and are procured independently. Participants do not need to be successful in the capacity market to participate in the energy and ancillary service markets. Same as initially proposed. (Slide 15) Participants do not need to be successful have a capacity obligation in the capacity market to participate in the energy and ancillary service markets. (Slide 16) There was general agreement with this assumption among stakeholders. The AESO would like to reiterate that the interaction between capacity, energy and ancillary service markets is an important consideration in developing the capacity market. Stakeholders suggested that be successful should be changed to have a capacity obligation. This assumption was put forward to relieve the concern that resources that did not clear in the capacity market may be required to mothball or retire or will otherwise be precluded from participating in the energy or ancillary services markets. Page 26 of 28

27 Section Initially Proposed Revised Assumption and AESO Response Some stakeholders sought clarity about whether participants who were unsuccessful in the capacity market would have different obligations in the energy market. Assumption 8 (Slide 32) Assumption 9 (Slide 32) While receiving support payments, Renewable Electricity Program (REP) round 1 winners are not eligible to sell REP capacity in the capacity market owing to the Indexed REC payment mechanism chosen. Capacity market mechanics/behaviour will have regulatory oversight. Market outcomes will be the result of market clearing, unless otherwise demonstrated. While receiving support payments, Renewable Electricity Program (REP) round 1 winners are not eligible to sell REP capacity in the capacity market owing to the Indexed REC payment mechanism chosen; however their capacity contribution will be netted off the capacity requirement. (Slide 16) Capacity market mechanics/behaviour will have regulatory oversight. Capacity clearing price formed in the capacity procurement process is not subject to adjustment after the fact, unless it is demonstrated that the price outcome resulted from prohibited behaviors, technical failures or errors Market outcomes will be the result of market clearing, unless otherwise demonstrated. (Slide 16) The AESO agrees that further clarification is required to understand whether different obligations will exist in the energy market for those who were unsuccessful in the capacity market. This is a design element that will be established during the design phase. Most Stakeholders supported the principle of avoiding double paying providers under REP. Stakeholders expressed concerns about capacity over-procurement should the resource contribution from resources under REP not be netted off. The assumption has been modified to clarify that the intention is to account for any capacity value that a REP round 1 project may provide by reducing the amount of capacity procured within the capacity market. Stakeholders either sought clarification, or suggested reviewing or changing the current regulatory/market oversight, or developing mitigation measures. The assumption proposed by the AESO intends to convey the idea that while the market mechanics and participants behaviors are subject to regulatory oversight, capacity clearing price formed in the capacity procurement process is not subject to adjustment after the fact, unless it is demonstrated that the price outcome resulted from prohibited behaviors, technical failures or errors. The assumption is meant to convey that the capacity market is expected to operate similar to today s energy market in that prices formed through operation of the market are utilized for settlement etc. and are not subject to after the fact review or adjustment Page 27 of 28

28 Section Initially Proposed Revised Assumption and AESO Response unless it is established that there has been a rule violation, system failure, etc. General feedback regarding assumptions (Slides 30 32) Are there additional assumptions which should be considered? Do you require additional explanation or have questions regarding any of the assumptions? No assumptions added. No additional assumptions proposed by stakeholders. Page 28 of 28