Electricity capacity market

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

Overview

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, consumers experience price volatility as electricity prices are based on supply and demand. Generators are only paid for the electricity they generate and sell to the market.

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

Alberta will need up to an estimated $25 billion of new investment in electricity generation by 2030 to support the transition toward cleaner sources of energy and meet the electricity needs of a growing province.

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

Moving to a capacity market

A "capacity market" is a proven system that allows for competition, innovation and price stability.

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

Alberta announced in November 2016 that it would transition to a capacity market, to be operational in 2021, to:

  • protect consumers from volatile price swings
  • ensure Albertans continue to have a stable, reliable electricity supply
  • provide the price stability and revenue certainty needed to attract private investment
  • support Alberta’s transition from coal generation to renewable energy

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.

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.

Investors like the stability, predictability and familiarity of capacity markets. Implementing a capacity market in Alberta 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 also reduces wholesale price volatility, including reducing the likelihood of price spikes as a result of capacity shortages. Additionally, Alberta's capacity market will maintain consumer choice and provide flexibility for industrial consumers to choose whether they produce or receive electricity.

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 (PDF, 4 MB)

Capacity, as it relates to electricity, means there is adequate electricity generation available on the grid to ensure that demand can always be met.

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.

New legislation

An Act to Secure Alberta’s Electricity Future was passed in June 2018 to support Alberta’s transition to a capacity market. It will:

  • establish and enable the capacity market
  • clarify duties, expectations and responsibilities
  • enhance public interest oversight of the rules review process
  • ensure adequate stakeholder involvement

Fact sheet: Establishing a capacity market (PDF, 63 KB)

Next steps

We will continue to 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 first capacity procurement will begin in late 2019, with the capacity market operational in 2021.

We’re protecting consumers from volatile electricity prices while Alberta transitions to its new market system with a 4-year electricity price cap on the Regulated Rate Option (RRO).

The price cap, which took effect June 1, 2017, ensures Albertans on the RRO will pay no more than 6.8 cents per kilowatt hour for electricity.

Electricity generation: 2015 vs. 2030

Generation profile of energy produced

Type 2015 2030
Renewables 9% 30%
Natural Gas 40% 70%
Coal 51% 0%

Source: Information provided by AUC and the Government of Alberta

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