Alberta Announces a Consumer Electricity Price Ceiling and Major Changes to Electricity Market
The government of Alberta has had a busy month with several significant announcements relating to electricity in the province. At the beginning of November, the government released details of its Renewable Electricity Program (see our previous post). In the last week, the government has made two more announcements of significant changes to Alberta's electricity market - a four-year price cap on consumer electricity rates and the creation of a capacity market.
Consumer Price Cap
Starting June 1, 2017, consumer electricity rates will be capped at a maximum of 6.8 cents per KWh until June 2021. In Alberta, customers who have not entered into contracts pay a fluctuating rate based on short-term market prices, known as the Regulated Rate Option (RRO). Under the new model, RRO customers will pay either the market rate (currently 4.36 cents/kWh for residential customers) or the price ceiling amount, whichever is lower. If electricity rates exceed the price ceiling, the government will pay the RRO provider the difference. The price ceiling will only apply to the commodity charges and not distribution and transmission charges.
Premier Notley stated that the price ceiling was the first step toward moving Alberta away from the deregulated electricity market implemented in the 1990s. Public consultations are set to start next month with distributors, RRO providers, retailers and consumers.
Figure 1: Regulated electricity rate volatility in Alberta[1]
Average Regulated Rate Option: 2002-Present (C/KWH)
Capacity Market for Electricity
Another shift away from the deregulated electricity market was the announcement that the government will create a capacity market for electricity. The Alberta Electric System Operator (AESO), which oversees the province's electricity system, recently recommended that the province make the transition from an energy-only market to include a capacity market. The AESO will be responsible for designing and implementing the capacity market over the next three years. AESO describes a capacity market as follows:
A capacity market is actually two markets in one: a market for providing capacity, or the ability to produce energy, and a market for the actual production and delivery of energy. A capacity market pays electricity generators for having the ability to reliably make power available regardless of how often they sell energy onto the grid. The purpose of the capacity market is to ensure there will be an adequate supply of electricity to meet the province's demand.[2]
The expectation is that the capacity market will moderate price volatility and incentivize investment in new generation. In making its recommendation, the AESO studied Alberta's existing electricity market structure and concluded that it will not ensure investment in new generation to meet current and future demand, particularly in the context of creating a lower-carbon electricity system through the retirement of coal generation:
The AESO modelled future economic and financial conditions and determined that adding high volumes of intermittent renewable generation to Alberta's market through the Renewable Electricity Program will decrease the revenue available for all generators. As a result, revenue sufficiency (i.e. the amount of revenue needed to recoup an investment and earn a profit) for investors and developers will decrease and investment may be deterred.[3]
Consultation with stakeholders will commence in early 2017 and the new structure is expected to be in place by 2021.
Figure 2: Timeline for Implementation of Alberta's Capacity Market[4]
[1] Government of Alberta, Electricity price protection: http://www.alberta.ca/electricity-price-protection.aspx
[2] Alberta Electric System Operator, Capacity Market Questions and Answers: https://www.aeso.ca/market/capacity-market-transition/
[3] Alberta Electricity System Operator, Alberta's Wholesale Electricity Market Transition Recommendation at pg. 2: https://www.aeso.ca/assets/Uploads/Albertas-Wholesale-Electricity-Market-Transition.pdf
[4] Alberta Electricity System Operator: https://www.aeso.ca/market/capacity-market-transition/