Written By Jessica Kennedy, David Macaulay, Larissa Lees and Nathan Murray

On December 10, 2024, the Minister of Affordability and Utilities (Minister) issued a direction letter to the Alberta Electric System Operator (AESO) outlining the Government of Alberta’s (Government) decisions regarding certain key electricity market and transmission policy and regulatory changes. While the directions largely align with industry expectations and provide further clarity in respect of previous announcements, they also introduce several important new elements. Notably, the government intends to remove regulatory oversight on the initial ISO Rules for the Restructured Energy Market (REM), allowing the REM to be implemented by the AESO without the typical oversight of the Alberta Utilities Commission (AUC). Similarly, the AESO is directed to consult and implement the transmission policy changes, with a view to “expeditious implementation”.

This blog provides an overview of (1) the Minister’s direction letter; (2) how we got here (for context); (3) our initial observations; and (4) next steps in the engagement and implementation processes.

December 2024 Policy Announcements

A summary of the key market and transmission policy announcements from the December direction letter are below.

Restructured Energy Market Design

The direction letter affirms the AESO's continued development of the REM design and provides clarifications and directions as follows:

• Market-based Congestion Management: The AESO is tasked with creating a congestion management mechanism that recognizes incumbency; provides generators with tools to mitigate dispatch risks from congestion constraints; and integrates controllable load and energy storage. While the concept of a “congestion avoidance market” had previously been raised by the AESO during stakeholder engagement, the requirement to “recognize incumbency” is new. Any revenue generated through this mechanism will be directed towards funding transmission projects prioritizing congested areas of the province.
• Implementation of REM: The AESO will be designing a bespoke consultation process (to be announced in January) to bring the initial set of REM ISO Rules through to finalization by September 2025. Following this engagement process, these ISO Rules will be implemented through legislation by the end of 2025. An interim period will then commence, during which the AESO may correct any technical deficiencies with the REM ISO Rules. After the interim period, any proposed amendments to the REM ISO Rules would require approval from the AUC in accordance with the normal process. The length of the interim period remains unclear.
• Energy Pricing Framework: The Government intends to provide guidance for the AESO’s pricing framework in legislation. The Minister did not specify what aspects of the pricing framework the Government will address via legislation or when it will do so. Currently, the AESO has the discretion to develop the pricing framework, subject to these and prior directions from the Minister.
• Shorter Settlement: The AESO must collaborate in an AUC-led initiative to implement five-minute settlement intervals for transmission-connected loads, generators, and interties by 2032, and for all loads by 2040. The current settlement interval is 60 minutes, with the most recent REM design proposal contemplating 15-minute intervals. Hence, this direction signals a likely shift to shorter settlement intervals apart from and following implementation of the REM.

Transmission Policy

The December direction letter also builds on the transmission reforms announced in the July direction letter and requires the AESO to commence stakeholder consultation on the transmission policy changes with “a view to expeditious implementation”. Key requirements include:

• Replacing the Generating Unit Owner’s Contribution (GUOC): Generators will be required to contribute, based on cost causation principles, to new transmission infrastructure through an upfront and non-refundable Transmission Reinforcement Payment (TRP). The TRPs will have no upper limit, a floor of $0/MW and will apply to both transmission- and distribution-connected generation. TRP rates are to be based on proximity to transmission capacity, a generator’s “technical attributes and characteristics” (e.g., presumably whether they are intermittent renewable sources), and the cost of system reinforcement.
• Line Losses: Starting January 1, 2027, line losses will be recovered through a system-wide average. This change was previously signaled by the Government.
• Intertie Requirements: The Minister issued four directions to the AESO in respect of interties:

1. File a Needs Identification Document (NID) for the Alberta-British Columbia intertie restoration by December 31, 2026, to restore it to or near 950 MW;
2. Procure and maintain high levels of ancillary services to support full import flows on the Alberta-British Columbia intertie and Montana-Alberta Tie Line (MATL);
3. Increase the path rating of the Alberta-Saskatchewan intertie as part of the McNeill Converter’s end-of-life replacement to leverage the use of existing transmission capacity in the region; and
4. Remove the competitive procurement requirement for upgrades or enhancements to interties.

How We Got Here

The Government has been considering several policy options to modernize the electricity framework in Alberta over the past few years. Key announcements and developments have included:

• In October 2023, the Government released a "Green Paper" discussing potential changes in respect of transmission policy.
• In March 2024, the Minister announced interim market measures to address electricity market power concerns, and signaled future market reforms that would promote grid reliability and affordability.¹ At the same time, the Minister announced the public release of AESO and MSA reports which, among other things, recommended the government implement a REM to achieve “stronger incentives for dispatchable generation, lessen the impacts of market power, and provide long-term signals for investment to promote grid reliability within the province.”
• In July 2024, the Minister provide a July direction letter to the AESO in respect of key details regarding the REM design elements and forthcoming changes to transmission policy.
• The July direction letter required the AESO to advance the REM design to include: a mandatory day-ahead market; market-based pricing with market power mitigation measures; a province-wide uniform price; shorter settlement intervals; a review of  the price floor and ceiling; and Security Constrained Economic Dispatch with co-optimization of energy and ancillary services.
• The July direction letter also outlined the government’s intention to move away from zero-congestion transmission planning to optimally planned transmission planning; and allocate new transmission costs and all ancillary services costs based on cost causation principles.
• On July 11, 2024, the AESO established a framework to develop the REM design including through various workstreams. On July 18, 2024, the AESO released an options paper for the Shorter Settlement and the Intertie Participation workstreams. On August 16, 2024 the AESO released options papers for the Day Ahead Market, Market Clearing, Pricing and Reserve Market, and Market Power Mitigation workstreams.

Initial feedback from market participants has been mixed, with many suggesting that the various changes underway represent an entire overhaul of Alberta’s “energy only” market framework. Market participants have expressed concern that the AESO's approach to the REM is needlessly complex, that it challenges the principles of free, fair, and open competition, and that it may undermine investor confidence in Alberta's electricity market. Notably, the MSA published comments on the REM that criticized the AESO's approach to create bespoke market design elements rather than to adopt modern electricity market design elements and best practices from comparable jurisdictions. The MSA is also critical of the AESO's approach to strategic reserves, suggesting that the AESO has not provided sufficient evidence to support its proposed approach, and that it is therefore "without merit."

Key Observations and Conclusions

The December direction letter marks another significant milestone in Alberta's electricity policy modernization efforts, particularly in relation to congestion management, transmission cost allocation, and ISO rule development. While providing some clarity and direction, the letter also introduces new concepts that may introduce uncertainty and risk for market participants.

In particular, the Minister did not specify when the new TRP model will replace the previous GUOC model or how it will apply to in-flight projects. Beyond the high-level factors mentioned in the letter, there are no details about how the TRP rates will be calculated or their potential quantum. In comparison to the GUOC, which is subject to a cap set in regulation and is refundable, the AESO will be determining the rate for TRPs, with no upper limit on the non-refundable payment. This is a marked shift from the position communicated in the Green Paper, wherein the Government indicated it would maintain refundability of the GUOC going forward. It is also not fully consistent with the current rationale for the GUOC refund process, which the AESO has indicated is necessary to promote accurate system planning through incentivizing timely project execution. Given that GUOC payments are often in the millions of dollars for utility-scale projects, the announced TRP introduces considerable uncertainty for new generation connections, along with the addition of a new sunk cost.

Similarly, there is little detail regarding how the congestion management mechanism will work in practice, including the revenue model to generate funds that “will be directed towards funding transmission projects prioritizing congested areas of the province.”  The AESO has indicated that a congestion avoidance market that “recognizes incumbency” will meet the policy direction (for example, through capping the bids of non-incumbent assets), but has also acknowledged that such a market does not exist elsewhere in the world. The requirement to recognize incumbency is new and adds an additional layer of complexity to the AESO’s management of the recently-announced shift toward enduring congestion on the Alberta Interconnected Electric System. Significant uncertainty remains with respect to the congestion avoidance market, including how storage assets may fit within the new framework and how “incumbency” will be determined.

The removal of AUC oversight of the REM ISO Rules announced in the direction letter was a material change from the status-quo. Under existing legislation, ISO Rules are generally subject to AUC approval before they are implemented, and the AUC typically conducts a transparent and inclusive hearing process to adjudicate ISO Rule applications, followed by comprehensive written decisions. Prior iterations of the REM development process contemplated an AUC process to review and approve the REM ISO Rules in 2025. The AESO, which conducts extensive stakeholder consultation prior to formulating market rules, is now working on a bespoke process for the development of the REM ISO Rules that accounts (at least in part) for the features of a typical AUC process that will no longer apply, such as an opportunity for affected parties to submit expert reports.

Directionally, the Government is taking a hands-on approach to the redesign of the energy market and transmission policy decisions by removing much of the discretion the AESO and AUC would typically have. While these announcements provide much needed certainty to market participants, stakeholders’ ability to influence the detailed policy design through the typical engagement and regulatory processes is diminished, and transparency in decision-making (much of which is happening inside the Government) is reduced.

Next Steps

On December 13, 2024, the AESO released a High-Level Design document that provides more details on the REM design as it currently stands. The deadline to provide feedback on the high-level design document is January 17, 2024. Detailed consultation on the REM design is expected to begin in late February 2025, with ISO rule development to occur from June to September, 2025. The AESO has indicated that a September completion for the REM ISO Rules will allow the rules to be “in effect” under yet-to-be enacted legislation by January 1, 2026.

Given that AUC approval will not be required for the REM ISO Rules, the AESO has signaled a need to ensure that there can be an objective assessment of whether the REM design is in the public interest and meets the stated objectives around affordability, reliability, investability and sustainability. Whether an “objective assessment” will occur and what it will entail remains unclear.

Bennett Jones will continue to monitor these regulatory and policy advancements and how the changes may impact market participants. Should you wish to discuss any of the information in this post, please contact the authors of this post or the Bennett Jones Energy Regulatory and Power & Renewables teams.

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