Economists at The Brattle Group have released an update to a 2011 report for the Alberta Electric System Operator (AESO) that reviews the long-term challenges to resource adequacy in Alberta's electricity market and assesses the sustainability of the energy-only market design from a resource adequacy perspective. The updated analysis confirms the conclusions drawn from the 2011 review and finds that the Alberta electricity market is generally well-functioning based on current market conditions and policies.
The updated report analyzes the recent changes to the market fundamentals and resource adequacy challenges facing Alberta, many of which were present during the 2011 review. They include: (1) low gas prices; (2) the expiration of purchase power agreements (PPAs); (3) previously impending environmental regulations that could lead to the accelerated retirement of aging coal plants; (4) increasing wind penetration; and (5) expanded interties with neighboring markets.
"To maintain resource adequacy and keep pace with plant retirements and load growth, the Alberta market will require generation investments of approximately 530 MW per year between 2013 and 2029," noted Brattle principal Johannes Pfeifenberger, a co-author of the study. "Although an investment of this size is a challenge for smaller markets, Alberta has successfully attracted enough merchant investment to sustain resource adequacy over the past decade. Our review of the current and projected market conditions documents continued favorable investment conditions for natural gas-fired power plants."
While the updated report reiterates the conclusions drawn from the 2011 review, the authors note that because Alberta's power market is an energy-only market, it cannot guarantee that a specific reserve margin will be maintained in the short or long term. This lack of a reserve margin requirement means that Alberta will likely have periodic shortage events, where the market may experience lower reserves, lower reliability, and higher prices, leading to renewed interest in investment.
The report contains several recommendations to ensure the continued stability of Alberta's market from a resource adequacy perspective, including: (1) monitor physical resource adequacy metrics; (2) monitor the market's ability to attract needed investments; (3) evaluate whether the province's regulated rate option results in inefficiently low levels of forward contracting; (4) avoid policies that could create large simultaneous generation retirements; and (5) increase the price cap, reduce the price floor, and introduce more gradual scarcity pricing during operating reserve depletion events.
The report, "Evaluation of Market Fundamentals and Challenges to Long-Term System Adequacy in Alberta's Electricity Market: 2013 Update," was authored by Pfeifenberger, senior associate Kathleen Spees, and research analyst Michael DeLucia. It is available for download at www.brattle.com.