Alberta introduces electricity market reforms to cap electricity rates and establish a capacity market

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Alberta’s government has introduced new reforms that are meant to overhaul the province’s electricity market to encourage investment into new generation capacity while protecting consumers from price volatility as the market evolves as a result of the NDP’s Climate Leadership Plan.

Electricity Capacity Market

In announcements earlier this week, the Honourable Margaret McCuaig-Boyd, Alberta’s Minister of Energy, outlined that the province will overhaul its electricity market to shift from the current ‘energy-only’ structure, within which generators are paid solely on the fluctuating wholesale price of electricity, to a ‘capacity’ structure, where generators are paid through a mix of firm payments (under a set contract structure with the Alberta Government) as well as revenues from the spot market.

While the energy-only market, introduced in the late 1990s, has helped to keep electricity prices low for consumers these same low prices have not provided a price signal to encourage investment into new generating facilities over the past few years.  As a result, in order to support the transition to cleaner sources of energy (which the government estimates will require over $25 billion in private sector capital invested over the next 14 years) it was determined that reducing price volatility and market uncertainty was a key priority for the government.  More details on the government’s announcement as well as the AESO’s report on the transition is available here.

The AESO will work to design and implement the new capacity market, working collaboratively with interested stakeholders over the coming months. The new market framework is planned to be in place by 2021.

Electricity Price Protection

Recognizing that, as the province’s economy stabilizes and major reforms take place in its electricity market structure and supply mix, consumers will be vulnerable to significant price volatility, the government has also announced plans to implement a four-year cap on power prices. This cap, referred to as a price ceiling, will be implemented in June 2017 and will ensure that Alberta’s ratepayers pay no more than $0.068 per kilowatt hour (kWh). The price ceiling will apply to the Regulated Rate Option (RRO) for electricity and is set at the same rate as current long-term retail prices in the province. Consumers on the RRO, i.e. the majority of Albertans, will pay the electricity market price or the government’s price ceiling, whichever is lower, between June 2017 and June 2021.

Details on the rationale for setting a price ceiling as well as how it will be structured can be found here.

Consultations will being in December 2016 on how to implement the price ceiling. Information and next steps on this consultation will be provided in the coming days.

Sussex, and its affiliate Prairie Sky Consulting, continue to monitor these developments and will provide updates as more information becomes available on next steps.

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