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 Colin Robb Capital Power 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 The Alberta Department of Energy s (the Department ) policy guidance on the capacity market transition, Powering Alberta s Future: Policy Direction for Alberta s Capacity Market Framework (August 2017) (the Policy Direction Paper ), references four outcomes established by the Government of Alberta that would be achieved through policy and technical design of the capacity market. In addressing the issue of cost allocation in the Capacity Market Cost Allocation - Discussion Document (December 2017) (the Discussion Paper ), the Department determined that two of these outcomes are central to addressing the issue of cost allocation: ensuring reasonable costs to consumers; and maintaining a reliable and resilient system. To evaluate the methods of cost allocation, the Department selected criteria that were seen as critical metrics to assess the efficacy of each option and likelihood of achieving the desired outcomes. While the Bonbright criteria provide a well- Page 1

2 established framework for allocation and rate design, Capital Power believes that for cost allocation to reflect the unique characteristics of the Alberta market and achieve the broader objectives of the Alberta market transition, consideration of additional criteria/key principles are required. Capital Power recommends consideration of the following three key principles from the Policy Direction Paper in determining capacity cost allocation in Alberta : 1) competition will remain a key part of Alberta s electricity market ; 2) principles of fair, efficient, and open competition will apply ; and 3) consumers will [continue] to choose their electricity retailer. Capital Power believes that it is necessary to reinforce the importance of these principles in the development of a cost allocation method. While not strictly criteria by which methods can be assessed, the principles are central to any assessment of options related to the Alberta capacity market design, including cost allocation. Additionally, Capital Power is concerned with the Department s decision to exclude the issues of cost recovery, settlement, and billing from this consultation on cost allocation. Capital Power sees the issues of cost allocation and cost recovery as interdependent. To this end, Capital Power recommends adding cost recovery to the scope of this consultation or initiating consultation through a separate process to consider this issue. Capital Power supports a system of cost recovery which flows through wholesale settlement to retailers and service providers. Capital Power believes this method is the most consistent with the principles set out in the Department s Policy Direction Paper, and supports a continuation of consumer choice in Alberta. 2. Are there other criteria not included in the discussion document that should be considered? Y As stated above, additional criteria are required to reflect the unique Alberta context and the broader objectives of the market transition. There is also a need to apply weighting to the criteria in evaluating allocation methodologies. In addition to comments above, Capital Power provides the following. Page 2

3 In selecting additional criteria, maintaining competition and effective price signals should be a key consideration. In this respect, and as a complementary metric to economic efficiency, a distinct criteria that evaluates market outcomes and competition should be added. The criteria should include the following elements: results reflect competitive market outcomes; the methodology encourages competition among market participants; and the methodology supports retail choice for consumers. With the addition of market outcomes and competition and with reflection of the key principles noted above, there would be a complete set of criteria that can be used to evaluate the allocation options. It is also necessary to recognize the relative importance of each criteria through weighting. Capital Power submits that weighting of the criteria should recognize the primacy of Market Outcomes and Competition, Economic Efficiency, and Equity as key criteria. In weighting the criteria, and in line with the necessity of maintaining price signals, the Stability criteria should have a narrow application in this exercise. Capital Power recognizes the desire of consumers, particularly residential consumers, to have stability in their rates. Similarly, the elements described by the Department suggest the administrative process around rates should, to the extend possible, minimize the necessity of true-ups. While Capital Power supports these objectives, application of this criteria should not supersede the need for rates to reflect market outcomes and fundamentals. Capital Power submits that the Stability criteria should focus on stability of policy and methods, not on stability of price. Capital Power believes that should capacity price volatility be of concern to consumers, these risks can be reasonably managed through options and products available in a competitive retail market. As a key tenet of competitive retail markets, the ability for retailers to develop and design products that serve customers is essential. Page 3

4 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 In establishing a methodology for cost allocation, Capital Power submits that it would be valuable to engage experts in cost causation and rate design, specifically in respect to classification and functionalization of the costs of capacity in Alberta. This engagement would ensure that a system for cost allocation is developed that is defensible and robust. In addition, the results of such an engagement must be assessed with respect to unique characteristics of the Alberta market (i.e. small market size, high load factor, large industrial consumer base) and the broader objectives of the market transition. Ultimately, the Department should establish a framework that recognizes the two distinct services provided by capacity: the energy provided by capacity resources during adequacy events; and the ability to provide energy in all hours to maintain reliability. It follows that this distinction may require a rate structure that charges for a combination of the services that are provided by capacity resources. This may be achieved by some combination of energy-based ($/MWh) and demand-based ($- MW) charges. Some combination of the options considered in the report may be appropriate for allocating costs, however, Capital Power believes that greater detail is required to fully assess the options against the Department s criteria and the additional criteria proposed above. Page 4

5 4. Is there another viable option (methodology) to allocate capacity costs in Alberta that should be considered? Y As discussed above, Capital Power submits that expertise in cost causation and rate design should be engaged to determine the optimal design of an allocation methodology. This expertise should provide guidance on the most appropriate design, and determine whether all options have been considered by the Department. 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 In the current market, the consumption patterns of residential consumers are relatively inflexible. Capital Power would expect that this may limit the ability of residential consumers to avoid or mitigate capacity costs through real-time consumption decisions. Due to the limited deployment of advanced metering infrastructure, residential customers rarely receive the incentives to actively manage their exposure to prices. Similarly, demand charges based on peak consumption are allocated based on standard profiles, limiting the ability of individual consumers to lower their cost. Page 5

6 Farm/Irrigation? Capital Power has no comments. Small Commercial & Industrial? Large Commercial & Industrial? 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 Y N There is significant diversity in the behaviour of small commercial and industrial consumers in Alberta. With varying levels of sophistication there will be sites that are active in managing consumption and exposure to capacity costs. There are, however, a significant number of sites within this customer class that do not have metering infrastructure installed that would permit them to optimize their consumption to react to capacity charges and improve system reliability. Large commercial and industrial customers vary significantly in their sophistication and ability to manage their consumption. Those with higher levels of sophistication are able to significantly mitigate their exposure to costs through management of energy or peak consumption during key measurement periods. This mitigation occurs in response to price signals that are received directly from the cost allocation method chosen. Due to the high load factor in Alberta, there are significant opportunities through active management of consumption by this customer class to improve efficiency. This, however, also presents opportunities for cost avoidance and cost shifting to non-flexible loads. Capital Power is an active participant in the supply-side of the Alberta power market. Based on the information available, Capital Power can not reasonably assess the impact that different cost allocation options may have on it s power consumption. Capital Power generates power in the wholesale market which is delivered to the Alberta power pool. Capital Power also markets power to a diverse base of commercial and industrial clients who will bear the cost of capacity. Page 6

7 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 Capacity cost allocation should be designed to achieve the stated objectives of the Department: maintain a reliable and resilient system; and maintain reasonable costs to consumers. In Capital Power s view, an allocation based solely on coincident peak(s) would not achieve these objectives as it lacks the proper signals. A rate design should reflect cost causation, and should incent changes to behaviour through price signals. The use of coincident peaks for capacity cost allocation would be unsuccessful in achieving the Department s objectives because it fails to account for the unique nature of resource adequacy requirements in Alberta. With costs based on coincident peaks, loads are incented to mitigate their exposure by lowering their consumption during those periods. As the correlation between coincident peaks and system stress is low in Alberta, the method would likely not change the reliability requirements of the system for which the AESO will be procuring capacity to serve. Further analysis in this respect is required. Capital Power believes that loads receive the benefit of capacity primarily in two periods: during resource adequacy events; and in all hours when resources are available to maintain grid reliability. By allocating costs based on a period in which capacity resources are of lower value, there is an inherent disconnect between the costs and benefits of capacity. Page 7

8 Equity Low Coincident peak as a means of allocating capacity costs creates opportunities for cost avoidance which may lead to cross-subsidization between rates classes. Larger more sophisticated consumers are typically more able to avoid coincident peaks, leaving costs to be paid by less sophisticated and/or more inflexible consumers like residential loads Additionally, as a means of allocating capacity costs, coincident peak calculations are poorly suited to the unique nature of the Alberta market. As a small market with a high load factor, the cause of resource adequacy events are frequently driven by variables such as concurrent supply outages or intertie outages. This is a unique feature of the market in Alberta, which sets us apart from other markets in North America where capacity resources are primarily serving peak system load. While coincident peak methodologies may be appropriate for a market where strong correlation exists between system peak and resource adequacy requirements, that is simply not the case in Alberta. As a result, a method that uses a small number of coincident peaks (1 CP, 5 CP, 12 CP) as the sole method of allocation is flawed. Stability Medium Coincident peak as a means of allocating capacity costs would be stable in terms of the overall costs recovered, however the actual billing levels of customers may vary substantially based on actual consumption during these peaks. Long term stability of the market may be jeopardized under a method of allocation using coincident peaks as significant dislocations would arise over time due to crosssubsidization. Additionally, coincident peaks may shift over time as more consumers begin to respond to the price signal. This could result in coincident peaks being even further disconnected from the actual value of capacity to the system. Page 8

9 Practicality High Coincident peak allocation methods are common in markets across North America. Similarly, the method is used in a variety of ways under the current AESO tariff. Therefore, the practicality of implementing this approach is high. Though practical, there are reasons the application of this method may be complicated. Consideration in the current AESO general tariff application before the AUC suggests the 12CP method may be reconsidered as an appropriate means of allocating bulk system charges. Therefore, considering the method because of existing precedents in Alberta may be imprudent. 9. Please rank the Total Energy Allocation Option for each of the assessment criteria: Criterion Ranking Rationale Economic Efficiency Low A cost allocation method based on total energy consumption ranks low based on criteria of economic efficiency. By allocating costs in this manner, a load s use of capacity is assigned the same value in all hours. As a product that is intended to maintain system reliability, the value of capacity will increase as resource adequacy metrics decrease. Therefore, it follows that use of capacity in those hours where the system is stressed should be assigned higher costs. Allocation based on total energy will not have the desired effect of incenting changes in load behaviour that would shift consumption out of high stress periods. Similarly, the costs borne by loads would be a poor reflection of their total contribution to system stress. Such a method is unlikely to reduce the overall capacity requirement that the AESO will ultimately procure. Page 9

10 Equity Low With allocation based on total energy, the value of capacity is assumed to be constant across all megawatt-hours. As a result, a load with significant consumption during resource adequacy events underpays relative to a load with consumption skewed to periods where the supply cushion is adequate to remain reliability. Therefore, the costs these loads bear would not reflect the changing value of capacity during their time of use. Because the calculation produces a rate that is a poor reflection of the true cost/value of capacity, cross-subsidization between rate classes becomes a concern. For this reason, the use of total energy as the sole method for cost allocation would be inefficient and potentially discriminatory. Stability High Cost allocation based on total energy would remain stable. The inputs to the calculation would be consistent, and forecasts would produce accurate estimates. True-ups in settlement would be minimal. These characteristics, however, do not outweigh its shortcomings in respect of efficiency and equity. Practicality High The application of a method that uses total energy would be simple and understandable. It is expected that there would be minimal changes required to the current settlement systems. Regardless of how practical it might be to implement, this approach alone is deficient as it will not achieve efficiency and equity. 10. Please rank the Weighted Energy Allocation Option for each of the assessment criteria: Criterion Ranking Rationale Page 10

11 Economic Efficiency High to Medium Capital Power believes a method of cost allocation based on weighted energy could produce results that are fair and supportive of a long term sustainable market. There are, however, significant details of this proposed methodology that would require greater definition and analysis to fully understand the impacts and results. Because of the need for more detail, it is difficult to assess the method against the criteria of economic efficiency. Capital Power notes that the language used by the Department in describing the weighted energy method emphasizes the need for capacity in peak periods. It is through this assumed relationship that the concept of price discrimination for offpeak, on-peak, and super-peak is considered. While Capital Power supports a system of pricing based on cost causation, it is essential in this exercise to examine the data to determine an appropriate weighting methodology. Again, the unique nature of the Alberta market results in low correlation between system peaks and resource adequacy needs; weighting factors should reflect this feature. With proper weighting factors, the method described could produce results that are reflective of cost causation and provide appropriate price signals for energy consumption. However, if weighted energy is used as the sole method of allocation, the value of capacity as a standby resource is not accurately reflected. This could be resolved by adding a demand-based charge to accompany the weighted energy allocation. Page 11

12 Equity High to Medium Consistent with the comments above, proper weighting factors assigned to periods when capacity is most valued would produce a system that is equitable. Those loads that rely most heavily on capacity in high stress periods would be appropriately allocated a greater share of the costs. Stability Medium Stability of the weighted energy method would depend on the factors that were chosen. As the time of the measurement period increases, the variance in the data will likely decrease, improving the accuracy of forecasting. Similarly, as weighting factors are increased on volatile metrics, stability of the rates is likely to decline. Conversely, applying greater weight to low-volatility measurement periods will improve stability of rates. Practicality Medium to Low The practicality of the weighted energy approach is lower than competing methodologies. While an important consideration, this should not be a deterrent for pursuing this, or any other method, if it produces results that are supportive of the long-term sustainability of the market and most consistent with achieving the broader objectives of the market transition. As a key determinant of the long-term sustainability of the capacity market, capacity cost allocation is a critical piece of the market design. With the assumption that future changes to the methodology may be prohibitively difficult to make, it is essential that the Government create a system that is equitable and sustainable in it s first iteration. Preferred Option Page 12

13 11. Which capacity cost allocation option do you think is most suitable for Alberta? Why have you selected that option? Capital Power believes that based on this initial assessment the most appropriate option for Alberta to assign capacity costs is a methodology based on two charges: 1) an energy-based charge reflecting consumption during supply adequacy periods; and 2) a demand charge reflecting the value of standby capacity in all hours. Capital Power recommends that the Department engage experts in cost causation and rate making to assess the appropriateness of this method for the Alberta market For an energy-based charge, Capital Power supports a cost allocation method that employs a weighted energy approach. In establishing the weighting factors, it is essential that empirical evidence be used to establish the periods in which capacity is most valuable. Capital Power believes the results of an any exercise to classify and functionalize capacity costs must recognize the unique relationship in the Alberta market between capacity needs and resource adequacy periods. By establishing the need for a demand-charge, it can be determined whether it is appropriate to assign a portion of costs based on the standby value of capacity. Outside of supply adequacy periods, load receives assurances from capacity resources that they will be available. It is this expectation of reliability that provides significant benefit to loads. Additional Input Page 13

14 12. Do you have additional input? Capital Power believes a cost allocation method that produces results which are fair, equitable, and reflective of market outcomes is critical to the long-term sustainability of the Alberta market. As a component of market design that is likely to be challenged in future regulatory proceedings and may be difficult to change at a later stage, the Department should ensure the methodology that is chosen is supported by robust analysis and reflects the broad principles for Alberta s market redesign. Capital Power supports the Department s continued engagement on this issue, and looks forward to providing additional comments on a refined proposal prior to finalizing the design. 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 14