Energy Expo: What is a Capacity Market and What Does It Mean for Alberta?
- Samantha Hoffman
- Sep 25, 2017
- 3 min read
These posts are intended for everyone. The purpose is to explain some of the technical concepts behind the power news in Alberta.
The Question
What is a Capacity Market and what does
it mean for Alberta?
The Government has decided to implement the new market in Alberta to encourage investment into new generating facilities which are needed to move Alberta away from coal fired generation (part of the government's Climate Leadership Plan).
Coal currently produces the bulk of Alberta’s power (roughly half of the available generation in Alberta is coal).
The government announced its decision to implement this new model in November 23rd, 2016. The Alberta Electric System Operator (AESO) was charged with implementing the new auction.
How Does the New Market work?
Presently, there is one whole-sale energy market for purchasing electricity in Alberta. Generators are paid on an hourly basis for the power that they produce in real time.
Check out the example on economic dispatch for more information on this.
The Capacity Market is a second auction where
existing and new generating facilities bid to commit
power in the future (capacity).
In Alberta's case, the current plant are for auctions to be held three years in advance to provide power over a one year period.
In addition to generating facilities, interties (imported power from British Columbia, Saskatchewan and Montana), storage and demand response (commitments to reduce power consumption when called upon) can also bid in.
The auctions follow the same structure as the existing whole-sale energy market (the last price bid to meet the required capacity sets the price paid for all accepted bids).
Two re-balancing auctions will be held so that bidders can resell or purchase new commitments should their planned capacity change.
How Does It Encourage Investment?
The Capacity Market encourages investment by reducing risk for organizations interested in building new generating, storage or import facilities.
Since future energy prices are unknown and fluctuate depending on the market conditions, new investors are forced to rely on price forecasts. And forecasts may not be accurate.
Investors take on the risk of unknown future
prices in the current model.
But, by paying generators for future capacity:
Investors are guaranteed a return in
the Capacity Market model.
This is true provided they indeed provide the committed capacity, otherwise they're subject to financial penalties.
What does this mean for Alberta?
The AESO is currently in the process of developing the new system and has held stakeholder engagement sessions to get feedback on the transition. I discussed some of the developments discussed the latest stakeholder session here.
Some of the potential benefits of a Capacity Market include:
Increased investment in new generating facilities by providing guaranteed income and reducing the risk of investing in high upfront construction costs.
As solar and wind drive wholesale energy prices down, existing generating facilities may no longer be economically profitable. The Capacity Market provides these facilities with an additional income stream. Potentially avoiding stranded assets.
By encouraging a more diverse mix of generating facilities, the grid will be more flexible and thus more resilient to outages and power price spikes.
Some of the potential drawbacks of a Capacity Market include:
Demand for power may fall as Alberta becomes more energy efficient. This could reduce the need for new generating facilities and potentially result in oversupply in the province.
Future Questions
Do you have any other burning questions about electricity or power generation for future Energy Expos?
Send them to info@skhoffman.com
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