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 Matt Davis Manager, Regulatory & Policy ATCO Electricity, Power Generation 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) No. Explanation/Further Details The criteria presented covers the majority of elements required for a capacity cost allocation methodology. ATCO would assign higher importance to the elements of efficiency and equity; specifically ensuring that principles of cost causation are followed and that the methodology avoids unintended consequences, such as cross-subsidization or disparity among rate classes. Having said this, none of the criteria include explicit consideration of maintaining the competitive forces that are a cornerstone of the Alberta electricity market. Significant effort has been made to ensure that the existing energy only market and the future capacity market allow for Fair, Efficient, and Openly Competitive (FEOC) behavior. The principles of FEOC extend from generation investment, to offer behaviour, to the retail market where consumers have the ability to choose their retailer. Page 1

2 2. Are there other criteria not included in the discussion document that should be considered? Capacity Cost Allocation Options 3. Do the options presented in the discussion document accurately reflect the choices available for capacity cost allocation in Alberta? Yes. No. The Alberta Department of Energy s Powering Alberta s Future 1 policy direction framework outlines the Government s continued support for competitive forces determining outcomes, the principles of FEOC, and that consumers will continue to be able to choose their electricity retailer. In order to ensure that competitive forces are maintained throughout Alberta s electricity market, the criteria used to select a capacity cost allocation methodology should recognize the importance of competition and customer choice. ATCO recommends that a fifth criterion be added to consider the impact of a capacity cost allocation methodology on competitive forces. The criterion and elements could resemble the following: Criterion: Competition Elements: Follows the principles of FEOC Supports competitive market forces Enables competition in the retail electricity market The capacity cost allocation options presented in the discussion materials provide an acceptable set of bookends and an illustrative mid-point; however, there are other combinations of energy and demand charges that can be formulated to allocate costs. Government, industry stakeholders, and consumers are best served by a reliable and resilient electricity system with reasonable costs for electricity. It is paramount that the costs of the capacity market are recovered in a manner that produces the right signals for consumer behavior. When cost allocation methodologies are improperly established or compound improper price signals from other rates, there may be unintended consequences. Those able to defect from the grid or alter their operations to avoid tariffs will do so; Not only will this lead to increased costs and volatility to those who cannot change their behavior (residences and small business), it may not appropriately 1 Alberta Department of Energy. Powering Alberta s Future. Published online August 15, Page 2

3 encourage investments in efficiency that ultimately reduce the amount of capacity that needs to be procured. ATCO agrees with the Alberta Department of Energy that the introduction of a capacity market in Alberta provides the opportunity to define the right cost allocation approach. 2 The approach selected for capacity cost allocation should not be used to correct for other issues (such as coincident metered demand rate design), and should also not ignore the fact that cost allocation methodologies have the potential to compound signals that could incent physical or economic bypass. The development of the capacity cost allocation methodology cannot allow ineffective, pre-market wires cost allocation practices to influence it. In addition to this engagement process, the Alberta Utilities Commission (AUC) has recently determined that a review of the coincident metered demand rate design (12 CP method) will be undertaken as part of the Alberta Electric System Operator s (AESO s) 2018 Independent System Operator (ISO) Tariff Application 3. This decision provides an opportunity to independently evaluate a key element of the existing wires cost allocation methodology and price signals. 4. Is there another viable option (methodology) to allocate Yes. ATCO expects the DOE s evaluation will limit itself to capacity cost causation and allocation and consider separately monitoring the AUC s review of the wires cost allocation method. ATCO also notes that given the potentially parallel process for these two cost allocation discussions, there may be an need to evaluate the appropriateness and impact of the resulting price signals when both rates are combined. Overall, there is a need to ensure that when considered in the full context of a consumer s all-in electricity costs, the charges do not create unintended consequences or significant crosssubsidization across rate classes. ATCO would recommend the inclusion of a cost allocation methodology that represents an alternative mid-point to the weighted energy approach, where capacity costs are allocated across a combination of a measure of demand and energy consumption. The 2 Alberta Department of Energy. Capacity Market Cost Allocation Discussion Document. December 4 th, AUC Proceeding Exhibit X0089. AUC letter Ruling on the ADC s motion to exclude AltaLink and on the scope of the application. November 27 th, Page 3

4 capacity costs in Alberta that should be considered? measure of demand could be linked to coincident peak, or an alternative would be to assess consumption during capacity market performance periods so that in the same period when a supplier is being assessed for performance, the demand side is being allocated costs. This alternative would support the principles of cost causation by creating synergies between the periods of tight supply and how consumers are charged. This methodology would require some assessment of practical and transparent weighting of the two billing determinants, demand and energy, resulting in a methodology no more complex than the weighted energy approach. If the performance period is used for determining the demand charge, depending on the metric used for supply side performance periods, this approach could be more difficult to predict as tight supply hours have the potential to be more random. This would be a downside to this approach, as not all consumers monitor system conditions in real-time. Having said this, it would encourage changes in behavior at precisely the times that they system needs it the most, and could lead to investments in efficiencies that would ultimately reduce the amount of capacity that has to be procured without shifting costs to other rate classes. Using an allocation method that incorporates a mixture of both demand and energy charges meets the policy and technical criteria outlined in the discussion document. Specifically, this methodology would have a high ranking for characteristics of efficiency and equity as it reflects cost causation, encourages meaningful changes in behavior without cross-subsidization, and recognizes the relationship between supply and demand. In terms of stability, this allocation method would rank medium as initial forecasts and true-ups may be large, but could be managed in an annual process that would be expected to be less impactful over time as stakeholders adjust to the methodology. Given the somewhat random nature of system stress events, this methodology would rank medium for practicality, as the average consumer may have challenges understanding this calculation. This practicality ranking is not uncommon for most allocation methods, as can be seen below. Finally, this methodology would support competitive forces driving market based outcomes by directly aligning aspects of supply and demand. When assessing which methodology is used, it is important to remember that the benefits of a capacity product are not solely realized during times of stress or peak demand, but Page 4

5 Consumer Behaviour capacity is also necessary for the hour-to-hour regular operation of the Alberta electricity market. Inclusion of an energy charge component performs this function, allowing for a cost allocation methodology that reflects both characteristics of the capacity product. 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? Not at this time. Farm/Irrigation? Not at this time. At present, cumulative meters are used to measure electrical load for the vast majority of residential consumers. Consequently, actual electrical consumption patterns are not directly related to demand based charges, instead behavior is assumed based on standardized profiles. Without the ability to monitor and measure consumption based on time of use, price signals cannot be designed to encourage most residential consumers to dramatically change their behaviour. Once interval or smart meters are available at the residential level, it is anticipated that residential demand will become more price responsive, though true responsiveness may be limited to prosumers those willing to invest in electricity generation at the residential level to offset consumption from the grid (i.e. residential rooftop solar). For similar reasons as above, electrical demand from Farm/Irrigation sources is not anticipated to change until the appropriate price signals reach consumers. In addition, electrical load profiles for Farm/Irrigation consumers will continue to be influenced by factors external to the electricity market, such as seasonal conditions and rainfall. Small Commercial & Industrial? Yes. It is anticipated that Small Commercial & Industrial consumers, with interval meters, will have an opportunity to change their electrical consumption to mitigate their exposure to capacity, energy, and wires charges. The uptake of this may vary though depending on the complexity of the cost allocation methodology, how sophisticated the consumer is, and the nature of their operations. For some, this change in behavior has already occurred and has included strategies such as load shifting to avoid on-peak prices, to installing on-site generation to self-supply all or a portion of their electrical demand. Page 5

6 Having said this, there are factors external to the electricity market, such as hours open to the general public or upstream/downstream processes, that will prevent some consumers from changing their behavior regardless of electricity market price signals. 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? Yes. Yes. To a greater extent than with the Small Commercial & Industrial consumers, it is anticipated that Large Commercial & Industrial consumers will change their electrical consumption profiles based on price signals from the electricity market. Already we have seen examples of this behavior, most notably involving demand that responds to the realtime energy price signal. Additionally, other consumers could (and do) respond to the price signal through investments in on-site generation. Again, external factors will prevent some consumers from changing their behaviour, regardless of electricity market price signals. With broad and diverse operations across the province, ATCO will look to improve efficiencies and optimize our electricity consumption across our organization as a result of changes to the Alberta electricity market framework and the method in which capacity costs are allocated. ATCO has a wide variety of operations in Alberta, including industrial loads. Further, ATCO is a diversified energy company with investments in generation, regulated wires, along with being an energy retailer. 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 Medium Capacity is required in all hours, not just those with higher electricity demand. Allocating costs over only a few hours in the year does not accurately reflect this need. Peak avoidance does not necessarily incent more efficient energy use. As noted in the discussion document, coincident peak allocation methodologies may not result in a commensurate decrease in capacity costs. Equity Low Discriminates against consumers with cumulative meters (i.e. residential, farm/irrigation, and some small businesses) whose changes in behavior would not be captured in how their electricity is billed. Will be strongly favoured by consumers with interval meters (over those with cumulative). Can create unintended consequences as load profiles shift to avoid certain hours. The ISO s wires tariff includes a number of charges based on various measures of demand. Allocating capacity costs over the same set of hours could lead to compounding rates. Stability Low While an experienced market participant will be able to forecast and calculate charges based on a coincident peak method, the average consumer would not. Allocating costs over a few hours, with significant incentives for large industrials to change behaviour, may result in the need for larger and more frequent true-ups. Practicality Medium Relatively simple for consumer to calculate charges based on a coincident peak method. Questions may exist as to detail such as the number of periods to measure, and whether costs are allocated on an hourly peak or 15-minute interval. A similar allocation method is used for the ISO s wires tariff simplifying implementation. Page 7

8 9. Please rank the Total Energy Allocation Option for each of the assessment criteria: Criterion Ranking Rationale Economic Efficiency Low Could encourage more energy efficient operations. Alternatively, could encourage investment in on-site generation as a means to avoid all or a portion of charges. Potential to result in over procurement of capacity, especially off-peak hours as consumers change their behaviour. Equity Low Will be strongly opposed by those with interval meters as there are fewer opportunities to avoid charges, without materially changing electrical consumption (i.e. invest in efficiency). Will result in greater charges for commercial and industrial processes with higher load factors. Prevents consumers from responding to price signals without significant changes to their load profiles or investment in efficiency. Stability Medium Recognizes that capacity is needed in all hours. Limits the ability to avoid charges, somewhat simplifying the forecasting process and reducing year-over-year variability. Practicality Medium Simple and understandable. Challenging to reduce charges without significant changes or investment. 10. Please rank the Weighted Energy Allocation Option for each of the assessment criteria: Criterion Ranking Rationale Economic Efficiency Medium It is assumed that load profiles would have to be used to allocate charges for consumers with cumulative meters. This does not accurately reflect actual electricity usage. This disconnect between charges and electricity usage may not incent changes in behaviour or investment in energy efficiency. Page 8

9 For those with interval meters, this method will encourage changes in behavior and investment in efficiency in a manner that does not simply shift demand to different hours. A methodology that differentiates charges over different seasons does not necessarily align with the results of the AESO Working Groups which have supported procuring capacity annually. Equity Medium Of the three proposed methodologies, this method is the most aligned with principles of cost causation. Incents more efficient electricity use and limits the ability to fully avoid charges, potentially reducing the amount of capacity that has to be procured while still supporting consumption from the grid. Most fair allocation methodology across the rate classes (one rate class is not advantaged over another). Stability Medium As outlined in the discussion document, this methodology is based on a number of real-time variables and would be susceptible to, likely frequent, true-ups. Practicality Medium The average consumer will have the same challenges understanding this allocation methodology and calculating their charges as the Coincident Peak allocation option. Preferred Option 11. Which capacity cost allocation option do you think is most suitable for Alberta? Why have you selected that option? ATCO would support the alternative capacity cost allocation methodology proposed in response to Question 4 as it creates a direct linkage between the capacity product being procured and electricity consumption. In terms of the policy and technical criteria, the proposed alternative methodology scores an equivalent or higher ranking when compared with the alternatives presented in the discussion document, as well as meeting the proposed fifth criterion of competition. At this time, there is not enough detailed information to fully support any of the methodologies proposed in earnest. The coincident peak and total energy methods in our view, clearly favor one rate class over another and do not send the appropriate electricity market price signals required to change behavior, incent efficiencies, and ultimately reduce the amount of capacity that must be procured. The weighted energy approach, while intended to be a mid-point, has a number of outstanding questions including the weighting factors, applicable time periods, and frequency of rate changes, that Page 9

10 Additional Input prevent ATCO from fully supporting this concept. In practice some mid-point approach is preferred, but the details matter in terms of its efficiency, equity, and stability. 12. Do you have additional input? ATCO is appreciative of the opportunity to provide comment on the capacity cost allocation methodology and looks forward to further discussion on this and other topics related to the electricity market. ATCO is of the view that the capacity cost allocation methodology must be efficient (based on principles of cost causation), equitable (avoids unintended consequences and cross-subsidization across rate groups), and support competition (in the wholesale energy and retail markets). In terms of capacity cost recovery, ATCO strongly supports capacity costs being recovered through the retailer. To ensure that competitive forces are maintained throughout Alberta s electricity market, the capacity cost recovery method should recognize the importance of competition and customer choice. Through retail recovery, consumers will be able to choose options that meet their needs for both capacity and energy costs. This position is further supported by the policy directives provided by Alberta Energy 4, specifically that competitive forces will determine outcomes and that consumers will continue to be able to choose their electricity retailer. The Government is clear that the introduction of the capacity market should promote retail choice; therefore, capacity costs must be recovered through the retailer to ensure that competitive retail products remain a part of the Alberta electricity market. 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) Alberta Department of Energy. Powering Alberta s Future. Published online August 15 th, Page 10