In July 2019, shortly after the United Conservative Party won the general election, the province’s new energy minister announced the government would cancel a planned overhaul by the NDP, which would have introduced a capacity market to Alberta’s energy system.
Instead, it would stick with what the province has today, and has had in place since 1996 — an “energy-only” system. That’s a market where electricity providers are paid only for the energy they produce and sell, based on real-time market prices. By contrast, a capacity market would see providers paid not only for the energy they produce, but also to maintain additional capacity.
That could involve a fixed, monthly or daily charge for being available to generate power — essentially functioning as a reward to a generator for being available, even if not needed, explained economist Andrew Leach.
“You can think of the firefighter model — I want infrastructure, I want capacity there when I need it. I’m going to pay for it to be on standby,” Leach said.
In 2016, the proposal to change to a capacity market was announced by the NDP after being recommended by the Alberta Electric System Operator (AESO), which cited concerns at the time that Alberta would not have a stable source of electricity as it closed down coal-fired plants, and that the current structure wouldn’t incentivize investment in the system.
In choosing to stick with the energy-only model in 2019, Sonya Savage, then the province’s energy minister, said it provided more affordability and a simpler structure. But in the wake of any major weather event like Albertans saw this past weekend — which included an emergency alert and warnings of rotating power outages due to pressure from extreme cold on the grid — postmortems are inevitable.
One of the questions posed to Alberta Affordability and Utilities Minister Nathan Neudorf by reporters on Tuesday was whether or not a capacity system would have saved the province from what took place over the past week.
“It’s possible. It’s hard to go back in time and see what would’ve come about that way,” Neudorf said.
So had Alberta chosen to go a different route in 2019 with a capacity market, might the threatening conditions that enveloped the province on the weekend been avoided? And what might the future look like?
The big challenge that emerged amid last weekend’s weather event had to do with peak demands coming close to exceeding all of the resources available — in the short term, essentially functioning like economics in that supply was barely able to meet demand, noted Leach.
“The capacity market, depending on how you design it, might have led there to be more resources available in total in the market before last weekend,” Leach said.
But Leach said not all capacity markets are created equal — it varies depending on how one structures the payments and how long the payments are fixed for, among other factors.
The previously proposed capacity market model for Alberta varied in its payment structure, offering different compensation based on a plant’s availability during peak demand, Leach noted. For instance, renewable sources like wind and solar would receive less or zero capacity payments compared to gas-fired plants.
But the model’s challenge, in Leach’s view, was the short-term guarantee of these payments, which could impact investment decisions. In building a power plant, companies would need to decide if the financial incentive was worth it if it included only a one-year guaranteed payment and energy revenues, versus just receiving energy revenues alone.
So would there be a capacity model that would work in Alberta?
It depends, Leach said.
“If what you mean by ‘work’ is we’re never going to be short electricity, then that’s going to lead you to an overbuilt system, 99 per cent of the time, and a more expensive system,” Leach said.
“So that’s more of a trade-off that I think people need to be considering, is a capacity market is adding a little bit of reliability insurance. But that insurance isn’t going to be free.”
What comes next?
The whole thing is a balancing act, takes a lot of construction and involves a lot of forecasting into what might happen into the future, said Tim Weis, a professor in the University of Alberta’s engineering faculty.
“If you get it wrong [on the oversupply side], you end up paying too much money,” he said.
“If you get it wrong on the undersupply side, you end up with closed situations, maybe worse than what we had on the weekend. So it’s a tough situation for governments and for regulators.”
Electrical engineer Duane Reid-Carlson, president and CEO of EDC Associates Ltd., a group of electrical system consultants, said the energy-only market has been in a tight spot that has been exacerbated over the past couple of years.
But it is expected to stabilize with increased renewables and natural gas supply, which he said should lead to lower prices and fewer extreme price fluctuations.
“Some tweaks could enhance the market, yes, so we might see some of that come out of the government’s reviews. But I don’t see a full-scale movement towards the capacity market,” Reid-Carlson said.
WATCH | Alberta’s power use spiked during cold snap:
Both Weis and Leach pointed to the potential of the Cascade plant, located near Edson, which when it soon comes online will be capable of supplying around eight per cent of the province’s average electricity demand. Had that plant been online, last weekend’s crisis may have been averted.
Moving forward, there is consensus that the future energy landscape will be different in Alberta — it involves a rapid increase in renewables coming on to the system.
Whether or not a capacity market is part of those future plans will be one of the pieces to consider as debate over ongoing reforms to Alberta’s electricity market continue.
“The long and the short of it is, I think you can make industry players happy with it. But really, the devil’s in the details in terms of how it’s designed,” Weis said.
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