On March 11, 2024, the Alberta government allowed the release of the AESO report submitted to government on January 31, 2024 and the MSA report submitted to government on December 21, 2024. These releases were accompanied by two response letters from Minister Neudorf to each of the AESO and MSA. The AUC report on Module A was released on March 13. More information about the government’s actions following Module A can be found in Power Advisory’s client note.
Market Power Mitigation
The MSA recommended implementation of two interim measures by July 1, 2024. First, they recommended a secondary offer price cap that limits offers for natural gas-fired generators for the balance of a month after they have earned two-twelfths of their annualized capital cost to the greater of (i) 25 times the day-ahead natural gas price (approximately 3 times marginal cost) or (ii) $100/MWh. If this policy had been in place, it would have been binding in 0%, 5%, 12% and 14% of hours in 2020-2023, respectively, and lowered average annual pool prices by 0%, 8%, 21%, and 26%, respectively, to a four-year average of $94/MWh instead of the observed four-year average of $113/MWh.
The Alberta government has accepted this recommendation and passed the Market Power Mitigation Regulation, applying a secondary offer price cap of $125/MWh or 25x gas price to all non-renewable and non-storage generators with 5% or more total market share. Per the regulation, the AESO will determine the value of annualized capital investment costs and fixed operating costs of a hypothetical generator based on a formula specifically listed in the regulation. Further, the AESO must publish daily the monthly cumulative net revenue, which will provide market participants with information regarding how close the market is to triggering the secondary offer price cap.
Second, the MSA recommended that the AESO develop an ISO rule that implements a unit commitment mechanism and start-up cost guarantee program whereby the AESO would evaluate, on a continuous rolling basis, whether to direct long lead time generators online as needed for reliability. In the event a directed generator does not breakeven, it would receive an out-of-market reliability payment in compensation.
The Alberta government has also accepted this recommendation, passing the Supply Cushion Regulation. The regulation requires long lead time generators to submit specific estimated cost parameters and physical constraints to the AESO; these are subject to MSA audit. The regulation requires the AESO to issue unit commitment directives when it forecasts a supply cushion below the threshold of 932 MW. The regulation also prevents price reconstitution resulting from AESO directives.
Pool price was already expected to drop in 2024 due to the significant new gas-fired generation capacity additions. Accordingly, the impact of the Market Power Mitigation Regulation is likely to be less than the MSA back-tested impact to 2022 and 2023.
An implementation requirement of July 1, 2024 means that AESO stakeholder consultation will be either limited or non-existent and the AUC is likely to expedite approval without any due process. That being said, this is a limited issue as the regulations are extremely detailed and prescriptive, leaving little space for the AESO to make any decisions or changes in ISO rule development. The more contentions issues will be managed outside of the ISO rules; these being the AESO’s calculation of fixed and capital costs for a reference generator and any specific disputes regarding their estimated start-up costs to be used in compensation.
Both regulations are set to expire on November 30, 2027.
Restructured Energy Market
To solve long-run issues with wholesale market design, the AESO has recommended a holistic “restructured energy market” (REM) which is based, in part, on what it heard during stakeholder consultations in late 2023 with the executive working group (EWG). The AESO hopes this restructuring “will 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.” The MSA similarly recommended its “enhanced energy market” (EEM). Details of each recommendation are shown in the table below. Minister Neudorf’s letter to the MSA noted a decision to move forward with the REM and directed the MSA to work with the AESO on its development.
Based on Mike Law’s (AESO President and CEO) comments at the recent IPPSA conference, the AESO is planning to move quickly on the REM with plans to engage in stakeholder consultations throughout summer of 2024 to meet Minister Neudorf’s requirement of a draft proposed REM by fall 2024. To have a new market design in place before the interm regulations expire in 2027, the AESO is planning to file an application with the AUC late this year or early next, have its application reviewed in a condensed six-month AUC process, support IT system changes concurrently, and reach rule implementation in 2026. These are aggressive timelines as the AESO’s report suggested market reform would take at least three years and the MSA’s report suggested at least five. However, similar to the capacity market stakeholder consultations in the past, the timelines for wholesle market design will be driven by Alberta government direction and the agencies will need to move at an accelerated pace.
The proposed changes, including a DAM and co-optimization of energy and ancillary services, are a significant departure from Alberta’s current wholesale market design, but are likely less jarring to stakeholders than the previous attempt to create a capacity market.
Unlike the capacity market stakeholder consultations, where industry and the AESO worked together starting with a relatively blank page to develop SAM 1.0 and move through iterations of SAM followed by iterations of the CMD, in this case the AESO has presented a fairly comprehensive starting point. To some extent this was necessary given the limited timelines to create a completed first draft of the REM; however, stakeholders not involved in the EWG will undoubtedly find themselves concerned with any minimization of stakeholder consultation. At IPPSA, Mike Law communicated that while the AESO does plan to move forward with some of the listed items more or less regardless of stakeholder comments, not all aspects of the proposed REM are set in stone and numerous details are yet to be determined.
Long-Term Contracts
In addition to the proposed REM, the AESO’s report to government also discussed consideration for establishing long-term contracts. Contracts would be for new low carbon emission dispatchable technologies and would be procured through a competitive process. However, the AESO also noted that use of such contracts represents a significant market intervention and is an action that would only be used if the REM changes fail to adequately incent investment to maintain sufficient supply adequacy.
The Near Term
To address issues prior to 2026, the AESO will establish the directed interim market power mitigation framework and pursue options to commit generation units for reliability (as discussed above), as well as create technical requirements for intermittent supply, procure additional ancillary services, and increase intertie capability.