Electricity capacity market

Creating a reliable electricity system that is affordable for Albertans and attractive to investors.

Alberta’s electricity market today

There are different types of electricity markets. Alberta currently has an “energy-only” market. We're one of a few jurisdictions globally – and one of only two in North America – using this model.

In an energy-only market, generators are paid for the electricity they produce based solely on the wholesale price of electricity, which fluctuates. These companies decide on the type of generation they produce and on the location of facilities.

Electricity prices are based on supply and demand. Lowest-cost generators are dispatched first and the more expensive ones are only brought in as necessary to handle a higher load. These interconnected electric systems are known as a power pool. Power distributors take energy from the power pool and pay the declared hourly Pool price for the energy they buy.

Electricity retailers purchase wholesale blocks of energy and then repackage it into offers for Albertans.

Current challenges

Alberta’s electricity system must change to serve Albertans in the 21st century. .

Alberta's current energy-only market does not:

• protect consumers from volatile price swings
• ensure a stable, reliable electricity supply
• keep pace with the global transition to low-carbon electricity
• provide the price stability or revenue certainty needed to attract investment

Over the next 14 years, Alberta will need up to an estimated $25 billion of new investment in electricity generation to support the transition toward cleaner sources of energy and meet the electricity needs of a growing province.

Alberta’s current energy-only market relies on the volatility of the market to send price signals for new investment.  Effectively, investors rely on the ability to leverage a few high-priced hours to recover their invested capital.

This reliance on volatility and tighter supplies of power to drive investment is too high a price for consumers to pay and is not expected to result in a stable and reliable system in the future.

Moving to a capacity market

A “capacity market” for electricity will protect consumers from price volatility and provide a reliable supply of electricity at stable, affordable prices.

In a capacity market, private power generators are paid through a mix of competitively auctioned contracts which pay their fixed capital costs and revenue from the spot market.

This transition was recommended by current and potential energy investors, external experts, consumer groups, and the Alberta Electric System Operator (AESO), which oversees the province’s electricity system in the interest of the public.

Report: Alberta's Wholesale Electricity Market Transition Recommendation (4 MB)

Capacity markets are used throughout the world, including in the United States and United Kingdom. They currently serve over 137 million electricity consumers in more than 30 U.S. states.

Investors like the stability, predictability and familiarity of capacity markets. Implementing a capacity market in Alberta’s will help attract investment to facilitate the transition away from coal-fired generation and ensure Albertans have reliable, affordable electricity in the future.

A capacity market will allow Alberta’s current generators, along with investors from outside the province, to compete to provide generation at the lowest cost

A capacity market also reduces wholesale price volatility, including reducing the likelihood of price spikes as a result of capacity shortages. Alberta’s capacity market will also maintain consumer choice and provide flexibility for industrial consumers to choose whether they produce or receive electricity.

Generation profile by energy produced

Source: Information provided by AUC and the Government of Alberta

Benefits of a capacity market

A capacity market:

• reduces price volatility and market uncertainty
• drives efficient use of the existing transmission system rather than building new transmission before it is needed
• ensures stable, sufficient electricity supply
• provides investors with a stable revenue stream while preserving key market characteristics such as incentives that drive innovation, cost discipline and investors bearing investment risk
• enables a smooth transition to cleaner power

How a capacity market works

A capacity market has two separate markets:

• a market in which generators compete to sell their produced energy
• a market in which generators compete for payments to keep generation capacity available to produce electricity when required

Generators receive two revenue streams:

• energy payments, which are paid to the generator for the electricity sold
• capacity payments, which are paid to the generator for making generation capacity available on demand

A capacity market requires a government-appointed entity – the AESO, in Alberta’s case – to plan, determine, approve, and administer the contracts to procure the capacity required to meet expected demand. This procurement will be managed through a competitive process to ensure lowest cost and the best possible prices for Albertans.

Next steps

The government announced that it was place a ceiling on electricity prices as the province makes necessary reforms to the electricity system. When fully implemented in June 2017, the government's rate ceiling will ensure that Albertans pay no more than 6.8 cents per kilowatt hour – an available long-term contract rate – for electricity over 4 years. This rate ceiling will be automatically applied to the bills of consumers on the regulated rate. Albertans may also choose to continue to take advantage of an offer from any private supplier they believe better suits their needs.

The government will work closely with the province’s various electricity agencies, electricity generators, consumer groups, industry, and other stakeholders to implement a capacity market that will best serve Albertans. The new framework will be in place by 2021.