Varcoe: AESO head says Alberta electricity system set for 'biggest shift' in 25 years

The new reforms could include new elements like negative wholesale power pricing and a day-ahead market

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Alberta’s electricity market has been through a series of topsy-turvy changes over the past decade.

Think about the mandatory phase-out of coal-fired power generation, large losses at Alberta’s Balancing Pool, the rise of renewables, or the abandoned attempt to replace the energy-only market structure.

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Today, another shift is coming — and it’s the largest revamp since the province deregulated the electricity market more than two decades ago, according to the head of the Alberta Electric System Operator (AESO).

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AESO chief executive Michael Law rolled out the conceptual elements of the overhaul this week, with reforms expected to be in place by the end of 2026. It could include new elements like negative wholesale power pricing and a day-ahead market.

The moves are designed to ensure Alberta’s electricity system is reliable and affordable, while decarbonizing the grid by 2050 — no easy feat.

“The realities of our power system are changing,” Law said in an interview Tuesday after speaking at the Independent Power Producers Society of Alberta (IPPSA) annual conference in Banff.

“We need to make some changes in order to have a stable market structure that can facilitate investment, but also ensure appropriate pricing and protect consumers … This is, without a doubt, the biggest shift that we had over 25 years.”

For Alberta’s power system, that’s saying something.

Alberta Power Pool prices have been volatile, jumping from an average of less than $47 per megawatt-hour (MWh) in 2020, to $162 two years later, before dipping to $134 per MWh last year.

Demand has increased coming out of the pandemic and several grid alerts have underscored the bumpy transition.

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The AESO, which manages and administers Alberta’s power system, is proposing a series of market reforms, part of what Law calls a “high-level blueprint.”

It’s not abandoning the current energy-only system for a capacity market — an idea proposed by the former NDP government, but later halted by the UCP in 2019 — where generators are paid for having electricity available, regardless of how much is sent into the grid.

(In the energy-only market, generators are only paid for electricity produced and sold.)

Calgary power lines Alberta electricity market
Power lines are seen with Calgary skyline as a backdrop on Tuesday, August 16, 2022. Gavin Young/Postmedia file

In the short term, the province unveiled changes Monday to limit the current policy that allows economic withholding by generators. The shift is slated to take effect in July and remain in place until 2027.

The longer-term reform will include day-ahead pricing in the wholesale market to reduce price volatility, locking in prices before the operating day.

“We will know well in advance of the actual real-time which generation is available, how much of it is required, so we won’t find ourselves in situations where units that are needed are not actually online,” Law said.

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“And it creates a much more stable price.”

If proposed changes are adopted, the Alberta Power Pool will also permit negative pricing, meaning “generators would actually pay to continue to generate and consumers would actually get paid for using,” Law noted.

It would also allow for pricing above the current wholesale price cap of $999 per megawatt-hour (MWh) in Alberta during limited periods of scarcity.

The idea of economic withholding — a feature of the current market that allows generators to offer electricity at prices “sufficiently above marginal cost that the generator is not dispatched, and the pool price is increased as a result,” according to the Market Surveillance Administrator — will also change.

With the proposed longer-term overhaul, higher prices during moments of scarcity will be set administratively by the AESO, “not left to market participants,” Law noted.

But in the complex world of electricity markets, details matter.

The impact on consumers, as well as companies looking to build new power generation as electrification continues, will be key.

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The proposed changes are large and will add more uncertainty to Alberta’s power market, said Vittoria Bellissimo, CEO of the Canadian Renewable Energy Association.

“There’s confusion about what this means, not just for the renewable developers, but generators in general,” Bellissimo said in an interview Tuesday.

“It would be very difficult to go to an investment committee right now and say, ‘Alberta looks attractive,’ because we don’t know what it looks like.”

Edmonton-based Capital Power said it was encouraged by the government’s commitment to the energy-only market, while noting the details will be critical.

Shares in both Capital Power and TransAlta Corp, two of the province’s largest generators, both fell on Tuesday.

The temporary changes to economic withholding rules could crimp the ability of generators to recoup their capital costs and potentially affect future investment decisions, said Duane Reid-Carlson, CEO of electricity consultancy EDC Associates.

For consumers, he noted power prices are expected to fall in the next three to five years as a surge of new gas-fired electricity generation and renewable energy arrives on the scene.

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The longer-term proposed changes are generally positive for generators, he said.

“Industry is eager to invest and get on with all of this. They just want to see some certainty,” Reid-Carlson said.

Adding a day-ahead market should help the system by allowing for better co-ordination and helping smooth out last-minute spikes — to a degree, said University of Calgary economist Blake Shaffer, an electricity industry expert.

Exploring negative power prices is a common feature in other electricity markets, he noted.

“We don’t have an investment problem for the next several years. But in the five-to-10-year period and beyond, the question marks will remain on how are we going to get the things built that we need,” Shaffer added.

Law said the AESO feels “reasonably comfortable” that supply levels will be adequate into the middle of the next decade, based on the new generation that is expected to come online. It also wants to ensure it compensates generating units that are flexible and dispatchable, ensuring the lights stay on.

The AESO will seek feedback on the proposed design changes, with the market’s technical design completed by year’s end and implemented by the end of 2026.

“This is a substantial change,” Law added.

Indeed, change is the one constant in the province’s ever-shifting power system.

Chris Varcoe is a Calgary Herald columnist.

[email protected]

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