Background
Earlier this year, the Market Surveillance Administrator (MSA) published its recommendation for an interim market power mitigation measure for implementation by July 1, 2024. The Alberta government accepted this recommendation and passed the Market Power Mitigation Regulation (“the Regulation”) which applies a secondary offer cap (SOC) to all non-storage, non-renewable generators owned by market participants with offer control above 5% once certain revenue conditions are met. Market participants subject to mitigation are TransAlta (14.7%), Capital Power (13.3%), Heartland Generation (10.9%), Suncor (7.8%), and ENMAX (7.0%).
Under the Regulation, the AESO must calculate and post 1/6 of the annualized unavoidable costs for a hypothetical combined cycle generator by the start of each month. The AESO then calculates the monthly cumulative settlement interval net revenue (MCSINR) earned by this unit. Once the MCSINR reaches the revenue threshold associated with 1/6 of unavoidable costs, the SOC will be in effect for the remainder of the month. When in effect, the SOC limits daily offers of certain assets to the greater of $125/MWh or 25 times the day-ahead gas price.
This measure came into effect on July 1, 2024. In its first month, the SOC was triggered on July 22, between 8PM and 9PM. This was communicated generally to market participants through the AESO’s MCSINR report in ETS (shown in Figure 1) and specifically to the five parties subject to the SOC through an Automated Dispatch and Message System (ADaMS) message. For assets subject to the SOC, parties were required to restate their offers outside of T-2 to comply with the daily offer cap.
As the offer cap is the higher of $125/MWh or 25 times the day-ahead gas price, the AESO publishes the applicable cap daily. Thus far, the offer cap has been posted around 4pm each day for the following day and each “day” starts at 9am MST. Since July 22, the gas price has been non-binding and the cap has been set at $125/MWh.
Pre-Trigger Conditions
The average pool price in July pre-trigger was $111.00/MWh. As shown in Figure 2, periods of higher pool prices caused the MCSINR to accumulate significantly faster and reach the cost threshold. These prices were driven in part by higher load from hot weather, shown in Figure 3. A new record for peak summer load was set on July 22 at 12,221 MW, which is 500 MW higher than the previous summer record set in June 2021. Average load and peak load were higher in July 2024 than previous Julys. There also tends to be an inverse correlation between wind generation and pool price, and average hourly wind generation in July 2024 was higher than in previous years (Table 1).
Post-Trigger
As noted above, the daily offer cap has been set daily at $125/MWh; however, it only applies to thermal assets owned by TransAlta, Capital Power, Heartland Generation, Suncor, and ENMAX. Other participants and renewable and storage assets owned by these five market participants can, and likely did, offer above the SOC.
Since the SOC triggered on July 22, there were 92 consecutive minutes from 7:25pm to 8:56pm on July 23 where the system marginal price (SMP) cleared above $125/MWh. This can be compared to over 76 hours (15% percent of the time) between the start of the month and the trigger of the SOC. However, this should not be considered in isolation of the circumstances on the grid. As shown in Figure 3, peak load was higher between July 8 and 11 and between July 15 to 24. On July 24 the maximum daily temperature reached 32.7°C in Calgary but fell sharply on July 25 and then remained below 30°C for the rest of the month.
Accordingly, while the SOC was in effect starting on July 22, peak load was lower for much of the balance of the month starting on July 25, which would be likely to result in lower pool prices organically without the Regulation. Meanwhile, on July 23, the SMP was able to clear above the $125/MWh SOC due to the ability of certain assets to continue to offer above this price. It is also noteworthy that the SMP was never $125/MWh exactly following the SOC trigger. It is unclear at this time if the Regulation had any effect on pool prices. Energy merit order data becomes available 60 days after real time, at which point it will become clear how the Regulation changed the shape of the merit order.
Looking Forward
In the MSA’s advice to the minister, it determined that a similar SOC mechanism would have impacted 12% and 14% of hours in 2022 and 2023 (to September), respectively. Accordingly, this mechanism is not expected to bind frequently even in the years when system conditions allowed for more effective economic withholding. July 2024 was an exceptionally hot month with high load, resulting in prices that contributed to the triggering of the SOC, but there will likely be months ahead where offer mitigation measures do not trigger. System conditions have also changed since the MSA’s historical analysis. The recent and pending additions of thermal generation will continue contributing to lower prices unless they are offset by thermal retirements.
During the stakeholder consultation on the ISO Rule associated with the Regulation, the companies subject to the SOC raised concerns that they would be required to manually re-submit all of their offers to comply with the SOC rather than having the AESO simply automatically re-state any offers above the SOC to be equal to the SOC. There were concerns that compliance violations could result from market participants simply not having enough time to complete their offer restatements. Having now had the experience of the first SOC trigger, time will tell if and how those market participants decide to outline those concerns to the Commission.
Typically, an ISO Rule would not take effect until after a regulatory proceeding. However, in this case, the Regulation specified that it must take effect by July 1. With the regulation only passed in early March, this limited time period provided the AESO with justification to move through an expedited approval process. Under this process, the ISO Rule was approved on filing and is currently in effect despite the fact that a regulatory process has not yet occurred. A regulatory process will now follow, starting with information requests to the AESO due in early August and ending with oral argument and reply in late November. A decision is expected from the Commission by March. In the event the Commission does not approve the ISO Rules as filed, there may be changes to the already active rules on a go forward basis; however, those changes will not apply retroactively. This means that anything that happens under this rule from July 2024 until some point in 2025 when new rule language can be approved, will stand and there will not be any review or financial compensation for any issues during that time.