Written By Martin Ignasiak, Jessica Kennedy, David Macaulay, Larissa Lees and Siobain Quinton

Introduction

At the Independent Power Producers Society of Alberta Annual Conference (IPPSA Conference) this March, the Minister of Affordability and Utilities (the Minister) announced interim measures to address recent electricity market concerns, while also signaling future market reforms will take place to address grid volatility and affordability.

As highlighted in Bennett Jones’ November 2023, blog: Change on the Horizon for Alberta's Electricity Regulatory Regime in 2024, significant changes to Alberta’s transmission policy and market frameworks were expected in 2024. Early indications of what some of these changes may entail were announced at the recent IPPSA Conference.

The announcement of two new regulations, and the subsequent release of several key reports from the Alberta Electric System Operator (AESO), the Market Surveillance Administrator (MSA) and the Alberta Utilities Commission (AUC) provide some insight into what the market can expect for the rest of the year and onward.

Despite these recent announcements, significant questions remain regarding the scope, timeline, and impacts of these potential changes. Bennett Jones summarizes these updates below.

Government of Alberta Announcements

The Minister kicked off the IPPSA Conference by announcing two new interim regulations that could have a significant impact on market participants offer strategies. The new regulations, detailed below, address both economic and physical withholding by natural gas generators. The regulations are set to expire on November 30, 2027.

The Minister also announced the public release of the AESO¹ and MSA² reports (agency reports), which among other things, provide recommendations to the Minister on the energy-only market framework and renewable energy development in the province. In their respective reports, detailed below, both agencies recommend changes to Alberta’s market framework. The government has signaled that it intends to direct the AESO to implement its recommended “Restructured Energy Market” (REM) as discussed in the AESO report.

In making these announcements, the Minister reinforced the government’s commitment to an energy-only market but acknowledged that the market must evolve to provide certainty to the industry and a strong investment signal for dispatchable generation while at the same time addressing affordability concerns.

New Regulations Addressing Economic and Physical Withholding

In their report to the Minister, explained below, the MSA recommended the government address economic and physical withholding, as these practices can increase consumer energy costs. Acting on this recommendation, on March 11, 2024, the Minister announced the Market Power Mitigation Regulation, Alta Reg 43/2024 and the Supply Cushion Regulation, Alta Reg 42/2024. Although announced on March 11, 2024, the AESO has until July 1, 2024, to create relevant rules to support these regulations.

Market Power Mitigation Regulation

Prior to the enactment of this regulation, generators were permitted to engage in economic withholding: holding back all or part of their supply by offering it into the market at a higher price. The Market Power Mitigation Regulation would mitigate this practice by only permitting economic withholding up to a certain offer threshold by creating an “offer price limit” applicable in certain circumstances and set at a value the greater of $125 per megawatt hour or an amount equal to 25 times the day ahead price for natural gas. 

This offer price limit would not apply to those market participants with an offer control of less than 5 percent maximum capacity of all generating units in Alberta; to renewable energy resources; or to an energy storage resource.

The offer price limit would apply to market participants for the remainder of the month when the hypothetical reference generator earns a monthly cumulative net revenue exceeding 1/6 of the annualized unavoidable costs of the reference generator. The AESO is responsible for calculating the annualized unavoidable costs of the reference generator in accordance with the formulas set out in the regulation; monitoring whether the 1/6 limit is achieved in any given month; and notifying market participants when the offer price limit will apply for the remainder of the month.

By enforcing an offer price limit this regulation, in theory, will allow generators to engage in some level of scarcity pricing while also keeping costs lower for consumers.

Supply Cushion Regulation

The Market Power Mitigation Regulation may incentivize some generators to engage in physical withholding: the practice of physically holding back all or part of their supply by opting not to offer it into the market. This practice could result in less power being available when needed, which may impact grid reliability. The Supply Cushion Regulation seeks to mitigate this risk by directing the AESO to manage anticipated capacity on a forward-looking basis.

This regulation specifically targets long lead assets, which are assets that take one hour or longer to ramp up and connect to the system. Pursuant to the regulation, long lead assets are now required to provide the AESO with accurate and up to date information on their estimated cost parameters and physical constraints; and are subject to unit commitment directives if the AESO determines in any given settlement interval that the anticipated supply cushion will be less than a supply cushion threshold of 932 MW. A unit commitment directive issued by the AESO will require a long lead asset to either synchronize to the grid and ramp up by a specific time, or if already synchronized, continue to operate for a period of time specified by the AESO. Market participants are then able to recover their incremental costs from the AESO associated with its response to a unit commitment directive.

Agency Reports

In August of 2023, the Minister directed the AESO and the MSA to study and provide recommendations regarding Alberta’s current market framework. Specifically, the AESO was asked to provide recommendations on the following:

• market incentives that could be used to mitigate the impacts of the intermittency of supply and promote grid reliability within the province;
• market design and legislative changes required to deliver those required market incentives affordably; and
• the current and future role and potential of different dispatchable technologies, such as carbon-abated natural gas power, full-scale nuclear, small modular reactors, hydrogen-fueled generation, hydroelectric power and energy storage resources in supporting this reliability objective.

The MSA was asked to study “whether any… legislative or regulatory reforms are required to support more effective competition in our electricity market in order to support affordability and other outcomes in the consumer interest."³

Changes to the Market Framework

While the MSA and AESO recommendations differ in some areas, both agencies agreed that the current market framework needed reform to account for the significant changes to the provincial power market, including substantial growth of renewables and retirement of coal-fired generation. While there are indications that the government will be proceeding with the AESO’s recommendations, which largely mirror the MSA’s recommendations, it remains unclear which components of the recommendations will proceed, how those would be implemented and what impacts may be encountered by market participants.

AESO Recommendation: Restructured Energy Market

The AESO’s key recommendation is that the government implement a Restructured Energy Market (REM). This restructuring is intended to “result in 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.” Although specifics have not been determined, the AESO report recommends the REM include the following:

• establish an interim market power mitigation framework focused on limiting the offer prices of large generation firms when they have substantial market power once sufficient revenue has been earned to recover fixed costs;
• procure additional ancillary services and enhance technical requirements to address supply intermittency and promote reliability by ensuring controllable resources provide needed frequency and flexibility, and support system strength;
• increasing intertie capability through the procurement of services to enable further access to neighbouring jurisdictions;
• if necessary, procure strategic reserves to maintain controllable capacity to protect against supply shortfall;
• co-optimize dispatch of energy and ancillary services to minimize costs and enable additional reliability;
• shorten settlement intervals and implement negative pricing to improve price signals for flexible generation, controllable demand, intertie transactions and storage;
• introduce a day-ahead market to provide additional certainty for generation and to incentivize the availability of controllable generation;
• modifications to the Transmission Regulation and the ISO tariff to send improved locational signals for siting generation, and allocating costs based on cost causation;
• implement improved dispatching tools, such as Security Constrained Economic Dispatch, to ensure efficient dispatch of resources reflecting various constraints on the system and minimizing cost;
• implement an administrative scarcity pricing curve with a higher price cap and mitigated offers to replace the economic withholding feature in Alberta’s electricity market design. This would increase the price above $1,000/MWh during limited situations (supply scarcity). A higher price cap is required to allow generation to recover investment costs. With a higher price cap, economic withholding can be limited through market power mitigation to prevent excessively high prices in the energy market;
• develop a mechanism where the price cap is lowered once reasonable fixed cost recovery is achieved to protect consumers against excessive cost; and
• if needed, procure new controllable capacity through Long Term Contracts. Current forecasts indicate that the earliest the contracting process would need to start would be the late 2020s.

Recognizing the uncertainty and risks associated with a market redesign, the AESO report states that the REM would be implemented in several phases over a minimum of three years. However, the Chief Executive Officer of the AESO, Mike Law, announced at the IPPSA Conference that the government requires that the AESO complete its detailed design for the REM by the fall of 2024 in order to implement the REM prior to the expiry of the interim regulations in 2027. To enable this aggressive timeline, the AESO plans to file an application for approval of the ISO rules to enable the REM with the AUC in late 2024 or early 2025.

MSA Recommendation: Enhanced Energy Market

Along with ways to address economic and physical withholding, the MSA recommended the implementation of an Enhanced Energy Market (EEM), which would incorporate the following recommendations:

• introduction of a day ahead market;
• replace the recommended interim Market Power Mitigation Regulation with a market power mitigation framework tailored to the day-ahead market (that is, suited for multiple part offers) and run with the day ahead market;
• load obligations to forward contract for generation;
• negative price floor and administrative scarcity pricing / operating reserve demand curve;
• congestion management through locational marginal pricing, security constrained economic dispatch, and system tools;
• extended unit commitment market with co-optimization of energy and ancillary services;
• five-minute real-time settlement intervals;
• enhanced role for demand response; and
• new technical standards for intermittent generation and energy storage.

Conclusion

Various policy advancements were made in the power sector over the past few weeks which provided insight into the high-level policy changes to be expected, including:

• the future of economic and physical withholding, with two new regulations published to address this practice, which will be followed by supporting ISO rules in the coming months; and
• information from the AESO and the MSA on what could be included in a new market design.

However, there remains considerable uncertainty with respect to the implementation of the above policy changes for the power market, including:

• the scope, implementation timeline, and stakeholder engagement activities associated with components of the REM, including the introduction of a day-ahead market and potential changes to the price floor and ceiling; and
• the scope of changes to Alberta’s Transmission Policy, which are expected to be finalized and announced in 2024.

Bennett Jones will continue to monitor these 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 Bennett Jones Energy Regulatory team.

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