Canada: The Regulations Powering Change: Alberta's Restructured Energy Market

On March 11, 2024, the Alberta Government released two Regulations: the Market Power Mitigation Regulation (MPM Regulation) and the Supply Cushion Regulation (the Supply Cushion Regulation and the MPM Regulation collectively referred to as the Regulations). These Regulations are introduced to support the Alberta Electric System Operator's (AESO) transition to a Restructured Energy Market (REM).

We previously provided an overview of the rationale behind REM, informed by the insights and recommendations from the Alberta Market Surveillance Administrator (MSA) and AESO Reports, which can be read here.

Legislative changes are required to implement the REM. The MPM Regulation and Supply Cushion Regulations are being implemented on an interim basis under the Electric Utilities Act (EUA) and the Alberta Utilities Commission Act.

This post provides an overview of both Regulations. In general, the MPM Regulation implements a secondary offer cap on thermal offers of market participants with a 5% or greater market share once a certain net revenue threshold has been reached in a month. The Supply Cushion Regulation requires the AESO to direct long lead time assets online when the AESO's supply cushion is forecasted to be below the specified threshold.

To facilitate implementation of the Regulations, the AESO, as the Independent System Operator (or ISO) is directed within the Regulations to make rules to facilitate the requirements and the objectives of both Regulations. Such ISO rules must be in effect by July 1, 2024. Both Regulations expire on November 30, 2027.

The Market Power Mitigation Regulation

The MPM Regulation is an interim measure, intended to be replaced with a different mitigation approach following the consultation and implementation of the REM design.

The MPM Regulation applies to any "reference generating unit" holding control over more than 5% of Alberta's total peak generation capacity, as determined by the MSA under section 5(3) and (4) of the Fair, Efficient and Open Competition Regulation (FEOC Regulation). A "reference generating unit" is defined as a "generating unit possessing the operating variables and values listed in the Schedule with a monthly cumulative settlement interval net revenue and annualized unavoidable costs."

For reference, the variables listed with the Schedule to the MPM Regulation are reproduced below:

Schedule to MPM Regulation - Reference Generating Unit Operating Variables and Values

Modeling the reference generating unit

Under section 3 of the MPM Regulation, each year, the AESO must determine the unavoidable costs as the summation of the annualized capital investment costs and the annual fixed operating costs associated with operating the reference generating unit. This involves the calculation and summation of two types of costs:

1. Annualized Capital Investment Costs: These are the costs spread out over the lifetime of the generating unit's initial investment.
2. Annual Fixed Operating Costs: These are the regular, ongoing costs required to keep the generating unit operational throughout the year.

The MPM Regulation prescribes the specific formulas to combine these two types of costs into a single annual total. The formulas are detailed in sections 3(2) and 3(3) of the MPM Regulation.

On a monthly basis, the AESO will calculate the net revenue earned by the reference generating unit for all the settlement intervals that have occurred up to that point in the month. The formula to calculate the net revenue is prescribed in section 3(4) of the MPM Regulation.

Should the calculation of the reference generating unit's monthly cumulative settlement interval net revenue, result in a negative figure, the tax rate applied to that particular settlement interval should be adjusted to zero. This adjustment is necessary to accurately determine the monthly cumulative settlement interval net revenue.

Threshold Event

For a reference generating unit, the secondary offer price cap is triggered when, in any month, the value of the monthly cumulative settlement interval net revenue exceeds one-sixth (1/6^th) of the unit's annualized unavoidable costs of the reference generating unit (see section 3(6) of the MPM Regulation).

Requirements upon Meeting the Threshold

Pursuant to subsections 3(6)(a) through (c), in any month when the value of the monthly cumulative settlement interval net revenue of the reference generating unit exceeds the threshold, the AESO must:

• notify the electricity market participant that it cannot submit offer prices exceeding the greater of:
  • $125 per megawatt hour; or
  • an amount equal to 25 times the ICE NGX AB-NIT DAY AHEAD natural gas price, and
• communicate, on a daily basis, the offer price limit determined pursuant to subsection 3(6)(b) to electricity market participants.

Once notified, the reference generating unit must also restate all previously submitted offer prices, with the exception of those for the next two settlement periods. The revised offer prices must comply with the established offer price cap. This requirement to adjust the offer prices will remain in effect until the start of the first settlement period on the first day of the following month.

MPM Regulation Exemptions

The monthly net revenue secondary offer price cap within section 2 of the MPM Regulation does not apply to:

• An electricity market participant that has offer control of less than 5% of the total maximum capability of generating units in Alberta as determined by the MSA in accordance with sections 5(3) and 5(4) of FEOC Regulation;
• Any generating unit that produces electric energy from a renewable energy resource as defined by the Renewable Electricity Act; or
• An energy storage resource (as defined by the newly amended EUA) that:
  • is controlled by an electricity market participant that has offer control of less than 5% of the total maximum capability of generating units in Alberta as determined by the MSA in accordance with sections 5(3) and 5(4) of FEOC Regulation;
  • derives its electricity from a renewable energy resources as defined by the Renewable Electricity Act; or
  • derives its electric energy input from the power pool.

Supply Cushion Regulation

As noted above, the Supply Cushion Regulation requires the AESO to direct long lead time assets online when the AESO's supply cushion is forecasted to be below prescribed supply cushion threshold. The supply cushion threshold is prescribed and requires the AESO to maintain a baseline reserve of at least 932 megawatts. Long lead time assets are defined as source assets requiring more than one hour to synchronize to the interconnected electric system.

The stated purpose of the supply cushion is to ensure reliability by maintaining an appropriate reserve margin of supply adequacy for the interconnected electric system. The supply cushion is intended to enhance system reliability within the grid by requiring advance commitments from generating units with long lead times when there is an anticipated risk of market power threatening system reliability.

Required Information

Under section 3(1) of the Supply Cushion Regulation, a pool participant responsible for a long lead time asset is required to provide the AESO with estimated cost parameters for each of its long lead time assets. These parameters include variable charges under the ISO tariff, variable operational and maintenance costs, fuel costs, emission costs, and any other information the AESO may request. Additionally, the pool participant, pursuant to section 3(2), must submit accurate data on the physical constraints of the asset, such as start-up time, minimum off time, ramp rate, stable generation level, maximum run-up time, and minimum on time, as specified in the ISO rules. This information will be used by the AESO when determining the priority order of directives issued in accordance with section 5 of the Supply Cushion Regulation.

Establishing the Supply Cushion

Section 4 of the Supply Cushion Regulation stipulates that the AESO must determine the supply cushion threshold for a settlement interval by assessing the following factors:

• estimated output from aggregated generating units;
• estimated output from wind and solar generating units;
• estimated total net imports and exports on all interties;
• estimated Alberta internal load; and
• any other relevant variable as determined by the AESO.

Issuance of Directives

When the forecasted supply cushion dips below the supply cushion threshold, the AESO will issue unit commitment directives to pool participants to manage long lead time generators. Directives are prioritized based on relative economic merit and operational constraints. Such a directive is obligatory for pool participants and will remain in effect for the duration specified by the AESO. The AESO must ensure that any unit commitment directive is issued within the startup timeframe specified by the pool participant for their long lead time generator and the period of time the unit is required to operate.

Once the pool participant for a long lead time generator receives the unit commitment directive, they must adhere to the following:

• If the generator is not already synchronized with the grid, it must ramp up to the minimum stable generation level by the time stipulated in the AESO directive. The generator must continue to operate until the directive's specified end time.
• If the generator is already synchronized with the grid, it must maintain operation until the end time specified in the directive.

Payment

Pool participants of long lead time generators which are directed by the AESO to run pursuant to the directive will be entitled to a cost guarantee pursuant to section 7 of the Supply Cushion Regulation. Specifically, the AESO must pay the pool participant for a long lead time asset, the incremental and prudent generation costs incurred in response to the directive. The pool participant will be compensated for operating the unit at the minimum stable output level mandated by the directive, but not beyond it. This compensation will be net, meaning it will be provided after subtracting the income generated from selling electricity at the market pool price during the times when the unit was operational due to the directive.

The AESO's obligation to make payment is contingent upon receiving a claim from the owner of the long lead time generating unit, who must also provide documentation of the actual costs incurred due to the directive. These costs may include variable charges under the ISO tariff, operational and maintenance expenses, fuel costs for starting and operating the unit, and costs associated with emissions. Pool participants must ensure that the estimated cost parameters and physical constraints for each of their long lead time assets remain accurate and up to date.

The MSA has the authority to audit the costs reported. If the audit reveals inaccuracies in the reported costs, the MSA can instruct the AESO to adjust payments to the participant accordingly, to rectify any overpayments or underpayments.

Subsection 7(6) of the Supply Cushion Regulation directs the AESO to recover, pursuant to section 21 of the EUA, all incremental costs paid to a pool participant for the operation of a long lead time asset through a pro rata fee charged to every pool participant with energy consumption and production during the settlement intervals in which the unit commitment directive was issued. It is intended that the fee charged to each pool participant will be based on their respective energy consumption and production during those intervals, ensuring a fair distribution of the extra costs among all involved parties.

Supply Cushion Exemptions

There are no exemptions under the Supply Cushion. Any pool participant responsible for a long lead time asset is eligible to receive a commitment directive.

Implications of REM and the Regulations

As noted in our previous REM post, the overarching implications of the REM on Alberta's energy sector are multifaceted. With a sunset clause slated for 2027, the long-term impact on the market will depend on the effectiveness of these Regulations in achieving their intended objectives and the potential for future legislative adjustments based on the evolving energy landscape affected by the REM. The unintended impact of these Regulations on broader economic signals and investment within the Alberta power market will also require careful assessment by all market participants.

Next Steps

The AESO is hosting a virtual information session for stakeholders to discuss market changes related to the new Regulations. This session will provide an overview of the plan and design details for the AESO to implement the changes required to support the Regulations, effective by July 1, 2024. There will be opportunity for stakeholders to ask questions during the session. For registration details, please visit the AESO's website found here.

To view the original article click here

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.