Energy Storage Canada discusses the significant regulatory redesign of Alberta’s electricity market and the potential for these reforms to address challenges in the existing system by adapting to evolving market needs.
In the last year, much has changed in the Alberta electricity sector. Numerous proposals for reforms have culminated in the most significant regulatory redesign of Alberta’s electricity market since its inception over two decades ago.
New technologies butting up against legacy market constructs are creating pressures on the system’s ability to meet provincial objectives of assuring reliability and affordability while decarbonising, in anticipation of Alberta’s commitment to reach economy-wide net-zero by 2050. Additionally, congestion management and administering an ever-increasing connection queue is becoming more and more challenging.
Alberta’s remarkable investability has historically been derived from its market’s consistency – read certainty – but the lack of changeability in a sector that is currently centred on change and innovation, presents its own set of challenges.
AESO: Identifying Alberta’s energy market needs
In March 2023, the Alberta Electricity System Operator (AESO) published the Reliability Requirements Roadmap report. The report outlined a variety of forecasted reliability needs, from frequency stability to oversupply management to short and long-term supply adequacy. Recent supply shortfalls in January and April, including the first brownouts since the 2013 floods, have only reinforced the need for change in how Alberta’s electricity system works to ensure supply shortfalls don’t become more regular occurrences.
Evolution of the Alberta market was identified as the best path forward. Implementing a market that incentivises firm and flexible supply is needed, which, incidentally, is a great market for energy storage resources, as confirmed by a recent report from Alberta’s Market Surveillance Administrator.
While traditionally, the AESO has served as an administrator of the Alberta market more than a broker of change, following the re-election of the governing United Conservatives in the province last year, the AESO has been directed by the province’s new government to advise and implement a myriad of reforms.
With strong drivers for change and the system operator empowered to begin work on updating the market, there are a range of possible outcomes for the market with commensurate risk and reward, especially for relatively new technologies like energy storage that are still drafting the blueprint for how they engage with the market.
Adopting a day-ahead market
Some of the key changes under consideration are the adoption of a day-ahead market, enhancing price fidelity, and building a new approach to congestion management. Alberta’s energy-only market currently operates an exclusively real-time market that is settled hourly. This means that electricity is traded solely as a unit of energy at an hourly resolution. The value placed on capacity is translated to higher energy prices during times of tight supply and high load.
However, as more variable generation and intermittent load come online, conditions can change more quickly and in less predictable ways. This is challenging at both longer time scales, where the lack of a firm forward price signal means slow ramping generators are ill-prepared to power up to meet unexpectedly high net demand, and at shorter time scales, where flexible supply, like storage, is not incentivised to ramp up and down in response to variability at time scales much shorter than one hour. To mitigate the impact of these challenges on the Alberta market, the AESO is proposing the move to a day-ahead market that would work in concert with the existing real-time market, settling prices at five-minute or fifteen-minute intervals.
Regarding energy storage resources, the proposed market change will help to better signal both short and long-duration storage, when to charge, and when to discharge. It will also place a higher value on firm and flexible supply. Shorter settlements will provide price signals for flexibility, and day-ahead commitments will place a value on firmness of supply. The details of how the obligation to meet commitment for bids in the day-ahead market will matter. However, the AESO is also proposing additional ancillary services for needs such as ramping and uncertainty to provide firm capacity for unplanned outages or under-forecasted renewables, which could present new revenue streams for storage to provide reliable and firm energy when needed.
Addressing Alberta’s price cap
A second challenge in Alberta’s current market is a relatively low price cap of one thousand Canadian dollars per megawatt-hour and a price floor set to zero dollars. The ceiling has been static for over two decades, slowly eroding away to inflation, meaning that the signal for investment in firm capacity is lower than it ever has been. Notably, these price bounds are significantly lower than comparable energy-only markets in Texas or Australia, with price ceilings of five thousand and sixteen thousand dollars, respectively, and significant negative price floors.
Alberta’s price cap is also lower than neighbouring jurisdictions. In extreme situations, Alberta can struggle to attract imports. Such was the case during this year’s January reliability event, where high demand across the Pacific Northwest meant Alberta struggled to secure exports from BC Hydro when the utility had competing opportunities to sell to the United States for prices higher than possible in Alberta.
Moreover, the zero-dollar price floor is not well suited to reflect the increasingly common supply surplus events driven by renewables and significant amounts of cogeneration. When the price can’t go below zero, the market fails, and out-of-market action is needed to manage the supply surplus. A recent inquiry by the Alberta Utilities Commission into the ability of the market to provide reliability found that more than a quarter of the hours in the market may be at zero dollars.
The province’s market is increasingly operating at the upper and lower bounds of where the price is allowed to go, indicating that the price bounds are failing to fit the physical realities of the electricity system the market is meant to coordinate. In the case of energy storage, a greater range between the price ceiling combined with the ability to price negatively in times of surplus generation would provide additional incentive for energy storage to turn on, storing the excess energy at low cost, to then feed back to the system during times of high demand when the compensation for the energy is higher.
This shift in the Alberta market would provide a more accurate reflection of the value of energy storage. Storage can shift energy from times of surplus to times of more limited supply, but only with sufficient price signals. Expanding the price bounds of the province’s market would enable just that.
Managing congestion
The last key opportunity for change in Alberta’s energy market is related to the management of congestion. Currently, energy pricing is uniform across the province, and Minister of Affordability and Utilities Nathan Nuedorf indicates it is going to stay.
In theory, generators are meant to compete across an open and congestion-free transmission system to provide the lowest cost energy to consumers. However, in practice, the pace of project delivery for wind, solar, and gas has outpaced the ability of transmission planning to cope, leading to congestion or a bottleneck in the electricity system where energy isn’t able to get from the generators that produce the energy to the consumers that use the energy.
While there aren’t yet indications of how Alberta’s energy market may change to manage this system challenge, there are a range of opportunities. The solution will need sufficient locational signals and a robust suite of non-wires alternatives (NWAs) to enable potential contributors such as energy storage resources.
Alberta’s changing energy landscape: A wealth of opportunities
Regardless of the outcome, the ongoing evolution of Alberta’s energy market represents a rare opportunity to apply innovative solutions to the changing needs and behaviours of electricity grids worldwide, as provinces, states, and countries change when and how they consume energy, as well as where that energy comes from.
Providing new means of valuing energy to supply clear signals to the market, ensuring the parameters of the market are reflective of the changing energy landscape, and finding solutions to ensure energy is available when and where we need it will result in a radically changed market for Alberta and for all participants in the province’s markets. We look forward to seeing the result and the new opportunities for energy storage to play an important role in the province!
Please note, this article will also appear in the 19th edition of our quarterly publication.
