In addition to halting implementation of a capacity electricity market, on June 25, 2019, the Government of Alberta directed the Alberta Electric System Operator (AESO) to provide an analysis and recommendations with respect to whether changes are needed to the price floor and ceiling and shortage pricing in Alberta's energy-only market. The AESO's report is due on July 31, 2020 with a status update on or before February 1, 2020.
Alberta's decision to halt implementation of the capacity market resulted from the new Government's 90-day review (90-day review) where it consulted with the AESO and stakeholders on whether Alberta should return to an energy-only market or create a capacity market.
In Alberta, power is regulated and delivered under a different system than other provinces. The generation and retail sale of electricity is open to competition while the transmission and distribution lines are regulated. The electricity market has no payment for capacity, only for energy. As such, it is a real-time, energy-only equilibrium market or power pool.
Since its inception, Alberta's energy-only market has had a price ceiling of $1000/MWh and a floor of $0/MWh. As stated by the AESO:
In the vast majority of circumstances, the price cap is really an offer and bid cap because SMP is set at the highest dispatched block and offers and bids must be $0/MWh or greater and less than $1000/MWh, as articulated in ISO Rule 3.9(a). ISO Rule 18.104.22.168(a) sets out the price setting mechanism that translates the offer cap into the $999.99 price cap for normal operations.
This real-time energy market establishes a price for electricity on a minute-by-minute basis by matching supply and demand. The minute-by-minute prices are averaged across an hour to create an hourly price for settlement. As set out in the ISO Rule 203.1: Offers and Bids for Energy, market participants submit offers or bids to sell electricity to the AESO no earlier than 7 days and not after 12:00 on the day before the day that offer or bid is effective. Such offers or bids may be adjusted for acceptable reasons articulated within the ISO rules up to two hours before the actual settlement interval. After collating the offers, the AESO creates the supply merit order by ranking the offers or bids from lowest to highest. The AESO then dispatches offers from lowest to highest bid price until demand is met. The offer price for the last quantity of dispatched electricity sets the system marginal price.
As described in a paper prepared for the AESO, the concept of shortage pricing in an energy-only market refers to a mechanism for increasing energy and ancillary services market prices during times of supply shortage to enhance market price signals for the need and value of quick-start and fast-ramping resources. Shortage pricing is one of the tools the AESO has looked at to provide efficient market signals for operational flexibility.
The Government of Alberta indicated that a review of the price ceiling and floor and shortage pricing is a direct response to concerns regarding certainty and stability in market design and the need to secure future investment in Alberta and its electricity system.
The fundamental tenet of Alberta's energy-only market is to provide an efficient market based on fair and open competition. The price floor and ceiling relates to the concept of a fair, efficient and openly competitive market since the cap does not allow supply and demand to set price under certain circumstances. Concerns over price volatility and the degree of market power have been and continue to remain hot topics in the debate over Alberta's electricity market design.
In response, the Government of Alberta asked Alberta Energy to complete a policy review for both the energy-only and ancillary services markets. To complement Alberta Energy's review, the AESO will provide advice on these issues by November 29, 2019.
We will continue to monitor and provide updates as Alberta Energy and the AESO release reports and recommendations.
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