Alberta announces details of restructured electricity market

On August 27, following 18 months of consultation with policymakers and industry participants, the Alberta Electric System Operator (“AESO”) announced its new electric energy market design for Alberta.

The existing commodity market, consisting of a deregulated generation and wholesale market, with an hourly market price set by price offers, has been in place largely unchanged for nearly 25 years.  Following ministerial direction, the AESO started consultation in early 2024 on market redesign. The initial objectives of the redesign were reliability, affordability, decarbonization by 2020, and reasonable implementation. It was later clarified that reasonable implementation included minimizing investment risk through steps such as minimizing negative impacts on existing asset investment.

The anticipated implementation date for the restructured energy market, or “REM”, is mid 2027. 

The information published to date outlines the forward strategy at the highest level, enabling stakeholders to assess the guiding principles of the revised market. It also clarifies what will be excluded from the market going forward (e.g. the implementation of a capacity market, or the implementation of a day-ahead energy market). While it has always been good practice in the electric energy market to ensure that power purchase arrangements contain robust change-of-law clauses, stakeholders can also now begin to ensure that their arrangements are sufficiently flexible and resilient to accommodate the new REM structure.

There is still an enormous amount of rulemaking, consultation, and detail to be worked out among Alberta Energy, the AESO, the Market Surveillance Administrator, and other stakeholders.

The key elements of the REM are as follows:

Implementation of locational marginal pricing

The current market is based on a single province-wide pool price, regardless of the location of the generator or the load. In order to respond to real-time grid conditions and provide price signals to encourage investment in uncongested areas, location-based pricing will be available to generators and to transmission-connected customers. In addition to the province-wide pool price (to be known as the “Alberta Load Price” or “ALP”), location-based marginal pricing (“LMP”) will be determined for a number of nodes in the province based on the load-weighted average of the energy price at all pricing nodes. LMP will also include a cost component for congestion and losses particular to that node. 

Generators and eligible large customers will have a one-time right during the first year of market redesign (2027) to elect to keep transacting with the market based on the ALP, or to elect to transact based on the LMP. New generators will transact based on the LMP. Under the existing market design, generators were largely indifferent to the location at which their energy was delivered into the system. Going forward, existing generators that are determining whether to elect into LMP, as well new generators that are considering the economics of their proposed location, will have to carefully consider the pricing signals and location discount associated with the location of their generation.

Load customers will continue to pay a single province-wide price.

Revised price caps

The pool price currently cannot exceed $1000/MWh. This cap has been in place since the early 2000s and has not kept pace with market conditions or inflation. 

Under the REM, the limit on the price for energy offers will increase to $1500 in 2027, and to $2000 in 2032. 

There will also be an ultimate price cap of $3000, which will apply to the ramping product (see below).

Energy also currently cannot be offered at less than $0. In 2032, the floor on energy offers will be reduced to -$100. The AESO has forecasted that up to 25 percent of hours may be priced below $0, primarily due to low price offers from renewables and cogeneration during low demand hours.

Ramping reserves

The AESO identified the need for a generation product which could respond quickly to changing market conditions. This new product is called the R30. The R30 product is a reserve product (either generation, or dispatchable load) that must be available within 30 minutes of instruction from the AESO. The AESO will procure R30 product separately from energy. The purpose of the R30 is to allow the AESO to respond to changing demand profiles, such as those caused by extreme weather, thereby securing reliability of supply.

There are a number of technical qualifications for generators and dispatchable loads in order to be qualified to offer and provide the R30 product, including that assets that are offline must be available to be brought online within ten minutes.

The AESO will prepare a demand curve for the R30 product which will be used to determine the volume of R30 product to be procured (and thus the price of the product).   

Market power mitigation

The principles underlying market power mitigation have been published. The AESO will however continue to develop local market power mitigation rules as well as broader market power mitigation rules.

Under the local market power mitigation rules, the AESO will identify generation assets in areas where transmission constraints require that units run in order to meet local reliability criteria. In these areas, the AESO will test the local energy supply offers against a simulated offer for those units based on hypothetical costs to run the units. If the offer price exceeds the hypothetical cost by a factor (variable according to the type of generation), a “mitigated” price is substituted for the actual offered price.

Under broader market power mitigation rules, thermal, hydroelectric or storage generation assets having more than a five percent share of the energy market will be monitored and if their revenues exceed a predetermined amount with reference to their costs, a secondary cap on energy prices will be applied to their offers.

Day-ahead market for operating reserves

As discussed, the Alberta market has traditionally operated as an hourly energy-only market. This market structure has at times resulted in unpredictability with regard to both pricing and supply adequacy. To support stability of supply the AESO will be procuring additional operating reserves (including regulating reserves, spinning reserves, and supplemental reserves) on a day-ahead basis in addition to current procurement.

Reliability unit commitment

The existing market relies on generators committing generation to the market. While the existing system of voluntary commitment will continue, reliability will be enhanced by allowing generators to “commit” their assets to the AESO in supply shortfall situations. If, based on 48-hour forecasts, a supply cushion of 0 MW or less is forecasted, generators which have a long lead time to provide energy will have the option of accepting dispatch directives from the AESO at a guaranteed price, instead of bidding energy into the system hourly. 

For an overview of the REM you may read the following AESO publications: Alberta’s Restructured Energy Market: A Modernized Market for Alberta’s Evolving Grid and Restructured Energy Market: Final Design.