INTRODUCTION

Alberta was the first Canadian jurisdiction to implement a restructured electrical power market. Structuring the electricity sector for competition led to policy determinations and reforms that unbundled generation and retailing functions and turned them over to competitive markets. Other aspects of the sector were kept as monopoly functions, particularly the transmission and distribution systems.

For a variety of reasons that will be discussed below, Alberta is reshaping the role of market forces in the wholesale electricity market through the introduction of an administered capacity market, while the Alberta Utilities Commission (AUC) is examining whether and how market forces can be brought to bear in the, traditionally monopolistic, distribution infrastructure function.

CONTEXT

Electricity involves many complex functions that can theoretically be kept as monopolies or turned over to competitive forces. Virtually any of the functions, even those with clear monopoly characteristics, could be turned over to competition.

Forcing competition in a natural monopoly function however can be costly as the economies of scale and scope that define reasonably efficient infrastructure monopolies could be lost and replaced by duplicative and inefficient competitors.

The promise of turning functions over to competitive markets is that, by having private investors, rather than governments or regulators, determine investment and resource decisions and take the associated commercial risk, efficiencies will be gained and consumer costs reduced. While planning, including technology choice, is left to the market, key inputs to those decisions are still required from the regulator, such as the value of reliability (the energy price cap) or the amount of reliability needed (the capacity procurement volume).

Non-market structures operate differently. All of the complexity of operating, planning and coordinating the electric system is left with monopoly providers. Investors are insulated from investment revenue risk through durable, frequent rate reviews and return awards.

INTRODUCTION OF A CAPACITY MARKET

Since the mid 90’s, Alberta has stood alone in consistently pursuing a competitive wholesale market through an “energy only” market design. In energy only markets, generators are only paid for the actual electricity sold in the wholesale or ancillary services markets. There is no payment for having their capacity available to supply electricity.

Although there have been some refinements, the energy only market design has remained relatively stable with the consensus view that investors were financially willing and able to build new generation capacity. Simply put, the energy only market design provided sufficient revenue certainty or upside potential to attract investment.

Similarly, the transmission and distribution functions, with limited exceptions, have largely remained as natural monopolies. The Alberta Electric System Operator (AESO) has, on a limited basis, introduced competitive forces through the use of competitive procurement for transmission projects.

With the election of the NDP government in 2015, a new policy objective for the electricity sector emerged. Achieving a lower-carbon sustainable electricity system is now policy. Specific measures to achieve this objective were included in the Climate Leadership Plan (CLP), announced in November 2015. The CLP contains policy measures that will have a substantial impact on Alberta’s mix of generation supply by 2030, as emissions from coal units are eliminated and significant amounts of renewable generation are added.

This changing supply mix will materially impact electricity market dynamics and, in turn, the ability of the energy only market structure to continue to deliver on the objectives of reliability and reasonable cost, in the long run.

As a result, in 2016 the AESO recommended to government that Alberta would be best served by the addition of a capacity market. A capacity market was determined to be the change required to ensure objectives were met, in particular because the market design will ensure reliability and specifically compensate investors for firm generation through a more stable revenue stream.

The evolved market design will include three markets: capacity, energy and ancillary services. In this new system the AESO, a government appointed entity, will determine and procure the capacity required to meet expected demand. By purchasing capacity ahead of delivery, consumers take on short term forecast risk. By paying suppliers for capacity to ensure they are in place if needed, rather than only when needed, for equivalent levels of reliability, consumers pay and suppliers receive a more stable revenue stream that potentially reduces risk premiums and thus consumer cost. The nature of the capacity arrangements can also be leveraged to address market power concerns.

Various legislative and regulatory changes were enacted to enable this market transition, including Bill 13 which amended the Electric Utilities Act¹ and the Capacity Market Regulation², passed in December 2018.

In this new regulatory process, the AESO applies to the AUC for provisional approval of the rules required to implement and operate the capacity market. The capacity market rules will be developed in two stages. First, a set of provisional rules essential for the AESO to implement and operate the first capacity market auction will be reviewed by the AUC, with a decision due by July 31, 2019. The goal is to have the preparation for first auction beginning in late 2019 and a subsequent auction in mid-2020.

Additionally, the AUC must consider and decide on the first set of rules under its normal process no later than 18 months from July 31, 2019.

The two stage process will allow for a complete examination of the capacity market rules that might not have been afforded due to time constraints in the initial provisional rule proceeding.

The AUC’s public hearing to consider the provisional rules is scheduled to commence April 22 and conclude on June 7.

On April 16 the United Conservative Party led by Jason Kenny won a majority government, resulting in a change from the previous New Democratic Party government led by Premier Notley. The UCP is expected to advance a number of changes to the energy sector and power market and, in particular, intends to consult on whether Alberta should return to an energy only market or create a capacity market – reporting back to Albertans within 90 days.

The movement to directly procure the amount of capacity needed in a capacity market reduces reliance on competitive forces to guide the timing of market entry. The decision to introduce a capacity market design in conjunction with the “low carbon policy” structure was driven by the uncertainty that the pure “energy-only market “approach would deliver sufficient revenue certainty and supply adequacy at reasonable cost while accommodating climate change objectives.

COMPETITION IN A MONOPOLY FUNCTION?

While the Alberta government moves to regain some control in the wholesale generation sector, the potential introduction of market forces in the monopoly distribution system function is being contemplated by the AUC.

Spurred by advancements in technology, including advances in energy efficiency, demand response, distributed energy resources and energy storage, among others, the AUC has spearheaded a proceeding to comprehensively assess the implications this modernization march will have for the Alberta distribution grid.

The regulator is interested in understanding how the potential changes to the distribution system could impact rate and market structures.

Historically, the AUC has seen new technology introduced, but it has been largely reviewed on a piecemeal basis through various one off applications. Rather than reviewing technologies on a siloed basis, the inquiry will assess the potential for new technologies, whether and how competitive markets could deliver those technologies to consumers and whether current rate structures will need to evolve to support the technology transition.

The AUC inquiry announced late last year, and further delineated and scoped on March 29, 2019, is intended to better understand and seek advice on how these potential new investments and operating changes will impact the traditional regulatory approach, including, grid planning, rate structures, cost recovery mechanisms and incentives, among others.

Interestingly, the Commission has expanded the original scope of the inquiry from an examination of the electric distribution grid alone to include an examination of impacts on the natural gas distribution grid.

The inquiry has been divided into three modules: an examination of technology, an examination of delivery models and market structures and lastly, implications for rate structures. The AUC will complete the first module in the fall of 2019, and expects to issue its inquiry report in early 2020.

Importantly, the Commission will not be making any final determinations in this process. Rather, the work will lead to a series of future proceedings to consider changes to the utilities’ rate structures, rate designs and terms of service.

CONCLUSION

The electricity system in Alberta is evolving. Key to the evolution is understanding which functional elements of the system can be turned over to competitive markets and which should be regarded as monopoly functions. Somewhat paradoxically, the evolution in Alberta is moving to introduce more central control in what was once an inherently competitive function, while potentially introducing competitive forces into what was an inherently monopoly function.

1. Electric Utilities Act, SA 2003, c E-5.1.
2. Capacity Market Regulation, Alta Reg 260/2018.