At the Independent Power Producers Society of Alberta Annual Conference (IPPSA Conference) this March, the Minister of Affordability and Utilities (the Minister) announced interim measures to address recent electricity market concerns, while also signaling future market reforms will take place to address grid volatility and affordability.
As highlighted in Bennett Jones’ November 2023, blog: Change on the Horizon for Alberta's Electricity Regulatory Regime in 2024, significant changes to Alberta’s transmission policy and market frameworks were expected in 2024. Early indications of what some of these changes may entail were announced at the recent IPPSA Conference.
The announcement of two new regulations, and the subsequent release of several key reports from the Alberta Electric System Operator (AESO), the Market Surveillance Administrator (MSA) and the Alberta Utilities Commission (AUC) provide some insight into what the market can expect for the rest of the year and onward.
Despite these recent announcements, significant questions remain regarding the scope, timeline, and impacts of these potential changes. Bennett Jones summarizes these updates below.
The Minister kicked off the IPPSA Conference by announcing two new interim regulations that could have a significant impact on market participants offer strategies. The new regulations, detailed below, address both economic and physical withholding by natural gas generators. The regulations are set to expire on November 30, 2027.
The Minister also announced the public release of the AESO1 and MSA2 reports (agency reports), which among other things, provide recommendations to the Minister on the energy-only market framework and renewable energy development in the province. In their respective reports, detailed below, both agencies recommend changes to Alberta’s market framework. The government has signaled that it intends to direct the AESO to implement its recommended “Restructured Energy Market” (REM) as discussed in the AESO report.
In making these announcements, the Minister reinforced the government’s commitment to an energy-only market but acknowledged that the market must evolve to provide certainty to the industry and a strong investment signal for dispatchable generation while at the same time addressing affordability concerns.
In their report to the Minister, explained below, the MSA recommended the government address economic and physical withholding, as these practices can increase consumer energy costs. Acting on this recommendation, on March 11, 2024, the Minister announced the Market Power Mitigation Regulation, Alta Reg 43/2024 and the Supply Cushion Regulation, Alta Reg 42/2024. Although announced on March 11, 2024, the AESO has until July 1, 2024, to create relevant rules to support these regulations.
Prior to the enactment of this regulation, generators were permitted to engage in economic withholding: holding back all or part of their supply by offering it into the market at a higher price. The Market Power Mitigation Regulation would mitigate this practice by only permitting economic withholding up to a certain offer threshold by creating an “offer price limit” applicable in certain circumstances and set at a value the greater of $125 per megawatt hour or an amount equal to 25 times the day ahead price for natural gas.
This offer price limit would not apply to those market participants with an offer control of less than 5 percent maximum capacity of all generating units in Alberta; to renewable energy resources; or to an energy storage resource.
The offer price limit would apply to market participants for the remainder of the month when the hypothetical reference generator earns a monthly cumulative net revenue exceeding 1/6 of the annualized unavoidable costs of the reference generator. The AESO is responsible for calculating the annualized unavoidable costs of the reference generator in accordance with the formulas set out in the regulation; monitoring whether the 1/6 limit is achieved in any given month; and notifying market participants when the offer price limit will apply for the remainder of the month.
By enforcing an offer price limit this regulation, in theory, will allow generators to engage in some level of scarcity pricing while also keeping costs lower for consumers.
The Market Power Mitigation Regulation may incentivize some generators to engage in physical withholding: the practice of physically holding back all or part of their supply by opting not to offer it into the market. This practice could result in less power being available when needed, which may impact grid reliability. The Supply Cushion Regulation seeks to mitigate this risk by directing the AESO to manage anticipated capacity on a forward-looking basis.
This regulation specifically targets long lead assets, which are assets that take one hour or longer to ramp up and connect to the system. Pursuant to the regulation, long lead assets are now required to provide the AESO with accurate and up to date information on their estimated cost parameters and physical constraints; and are subject to unit commitment directives if the AESO determines in any given settlement interval that the anticipated supply cushion will be less than a supply cushion threshold of 932 MW. A unit commitment directive issued by the AESO will require a long lead asset to either synchronize to the grid and ramp up by a specific time, or if already synchronized, continue to operate for a period of time specified by the AESO. Market participants are then able to recover their incremental costs from the AESO associated with its response to a unit commitment directive.
In August of 2023, the Minister directed the AESO and the MSA to study and provide recommendations regarding Alberta’s current market framework. Specifically, the AESO was asked to provide recommendations on the following:
The MSA was asked to study “whether any… legislative or regulatory reforms are required to support more effective competition in our electricity market in order to support affordability and other outcomes in the consumer interest."3
While the MSA and AESO recommendations differ in some areas, both agencies agreed that the current market framework needed reform to account for the significant changes to the provincial power market, including substantial growth of renewables and retirement of coal-fired generation. While there are indications that the government will be proceeding with the AESO’s recommendations, which largely mirror the MSA’s recommendations, it remains unclear which components of the recommendations will proceed, how those would be implemented and what impacts may be encountered by market participants.
The AESO’s key recommendation is that the government implement a Restructured Energy Market (REM). This restructuring is intended to “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.” Although specifics have not been determined, the AESO report recommends the REM include the following:
Recognizing the uncertainty and risks associated with a market redesign, the AESO report states that the REM would be implemented in several phases over a minimum of three years. However, the Chief Executive Officer of the AESO, Mike Law, announced at the IPPSA Conference that the government requires that the AESO complete its detailed design for the REM by the fall of 2024 in order to implement the REM prior to the expiry of the interim regulations in 2027. To enable this aggressive timeline, the AESO plans to file an application for approval of the ISO rules to enable the REM with the AUC in late 2024 or early 2025.
Along with ways to address economic and physical withholding, the MSA recommended the implementation of an Enhanced Energy Market (EEM), which would incorporate the following recommendations:
Various policy advancements were made in the power sector over the past few weeks which provided insight into the high-level policy changes to be expected, including:
However, there remains considerable uncertainty with respect to the implementation of the above policy changes for the power market, including:
Bennett Jones will continue to monitor these policy advancements and how the changes may impact market participants. Should you wish to discuss any of the information in this post, please contact the Bennett Jones Energy Regulatory team.
1AESO Report—Alberta's Restructured Energy Market: AESO Recommendation to the Minister of Affordability and Utilities (January 31, 2024).
3Market Surveillance Administrator, “Advice to support more effective competition in the electricity market: Interim action and Enhanced Energy Market for Alberta, (21 Dec 2023), at 3.