Guide to understanding Alberta’s electricity market
The electricity industry structure in Alberta is unique in North America, as it developed from a distinct set of circumstances. This guide provides a brief history of how the Alberta electricity market developed, an overview of the Alberta Electric System Operator (AESO) and its operations, and an introduction to the electricity market framework.
Evolution of Alberta’s electricity market
Unlike most provinces in Canada, the Alberta government has never owned and operated a utility company. Historically, Alberta was primarily served by three vertically integrated utilities, covering the province in defined service territories. Electricity rates were set by a central regulator using a cost-of-service model.
The evolution to a deregulated market began in 1996, when the Power Pool of Alberta was created to dispatch energy across Alberta through a real-time energy market. The goal of this market was to encourage efficiencies by introducing competition in the electricity generation sector. The market was set up for energy to be dispatched through an economic merit order with a single equilibrium price.
The market evolved to full deregulation in 2001, following the auction of Power Purchase Arrangements (PPAs) in 2000. PPAs allowed the existing utility owners to continue to own and operate their facilities, but auctioned the dispatch rights of the associated energy to new buyers. This framework provided a competitive landscape by immediately introducing new players into the market.
There were a number of changes to energy agencies in the early days of deregulation as roles and responsibilities were reviewed and realigned to support the new industry structure. This included the merging of the Transmission Administrator with the Power Pool of Alberta in 2003 to form the AESO, and the separation of the Market Surveillance Administrator (MSA) from the Power Pool of Alberta.
Today’s agencies and their roles
The AESO provides the function of the Independent System Operator, and is tasked with providing for the safe, reliable and economic operation of the Alberta Interconnected Electric System (AIES) and promoting a fair, efficient and openly competitive market for electricity.
The Balancing Pool manages the PPA auction proceeds on behalf of consumers, and acts to backstop certain risks inherent in the PPAs.
The Alberta Utilities Commission (AUC) has evolved from the former Electric Utilities Board (EUB) to provide adjudication on ISO rules, transmission applications, penalties and any other related market challenges.
The Market Surveillance Administrator (MSA) provides the surveillance function for the market. While the AESO has a role to collect information and recommend areas for evaluation, only the MSA can recommend penalties or fines to the AUC.
Legislative and policy framework
The industry framework is guided by the following legislation and supporting government policies, which define the roles of agencies such as the AESO, Balancing Pool, AUC and MSA for the development, operation and management of the markets and transmission infrastructure, as well as surveillance over behaviour.
Electric Utilities Act (EUA) (2003)
Part 1, Section 5 of the EUA outlines the vision for the wholesale electricity market including a competitive power pool, with rules that govern fair, efficient and openly competitive markets and competitive investment in generation.
Part 1, Section 6 of the EUA creates an obligation for market participants to conduct themselves in a manner that supports the “fair, efficient and openly competitive” operation of the market – commonly referred to as FEOC.
Part 2, Division 4 of the EUA outlines the duties of the independent system operator with respect to the market and transmission.
Transmission Development Policy (TDP) (2003)
The TDP provides a vision for transmission in the market to facilitate competition, and an obligation for the AESO to plan and develop transmission in advance of need in order to ensure an unconstrained system.
Transmission Regulation (T-Reg) (2004, 2007, 2012)
The T-Reg provides detailed obligations for transmission planning, with criteria ensuring that all anticipated in-merit energy can access the market 100 per cent of the time under normal operating conditions, and 95 per cent of the time during abnormal conditions.
This same regulation also provides details related to loss factor calculations, development of long-term transmission plans, and criteria for system access.
Alberta’s Electricity Policy Framework (Market Policy) (2005)
The Market Policy is the result of extensive consultation confirming that the wholesale markets are to remain competitive, reliable and sustainable, while instilling investor confidence and providing fair access, resulting in competitive prices.
The Market Policy supports an “energy-only” market, where generators are paid only for the energy they supply to the market. Some other jurisdictions in North America have a “capacity” market model—meaning generators are paid for their capacity to supply energy in the future.
As a result of this policy, specific rules were developed for both short-term adequacy and price fidelity, as well as for long-term adequacy or reserve margins. Further, the policy provides accommodation for intermittent resources and guidance for placing interties on a level playing field with other generation.
Provincial Energy Strategy (PES) (2008)
The PES supports investment in a reliable and efficient transmission system that encourages the addition of new generation to meet long-term load growth. Similar to the Market Policy, the PES encourages strengthening the transmission system to support the development of wind generation and other renewable sources, and to build interties to other markets.
Fair, Efficient and Open Competition Regulation (FEOC Regulation) (2009)
The FEOC Regulation provides guidance to participants on competitive behaviour, outlines limits for investment (i.e., holding restrictions) and provides for an information-rich environment.
Taken together, the essence of this policy framework is that transmission continues to be operated with only a few transmission facility owners (TFOs), and the AESO has the obligation to plan transmission to ensure system access to customers in advance of need. This “unconstrained” transmission model forms the backbone of the Alberta market model—which provides for competitive prices by having all generation, no matter its fuel type or location, compete in a single pool for energy.
About the Alberta Electric System Operator
The AESO is a not-for-profit corporate entity created under the Electric Utilities Act to operate in the best interests of all Albertans. The AESO’s mandate consists of four primary functions:
- Operate an open and competitive wholesale market
- Direct the safe and reliable operation of Alberta’s electric system
- Plan and develop the transmission system
- Provide customer access to the transmission system
In addition to these four primary functions, the AESO administers financial settlement for the power pool. All these functions are supported by Corporate Services departments including IT, Settlement & Risk, Accounting, Human Resources, Corporate Communications and Legal.
Transmission system and access
Transmission is the backbone of the wholesale electricity market. As such, transmission development is a facilitator of economic development in the province. Overall market efficiencies are achieved with an uncongested transmission system, thereby supporting a competitive electricity price that provides long-term value to Albertans.
The power grid in Alberta includes approximately 26,000 kilometres of transmission lines and connects approximately 235 generating units and 200 market participants to the wholesale market. Transmission is designated a monopoly service in Alberta, with planning conducted by the AESO, and development and operation by transmission facility owners (TFOs). Transmission development is directly assigned to TFOs by service territory with the exception of specific competitive process projects.
The Transmission Regulation requires the AESO to develop long-term plans identifying transmission developments required to ensure that transmission is sufficient to support a competitive electricity market. Transmission is to be unconstrained in Alberta as there are no transmission rights assigned to participants. Instead, transmission is allocated upon dispatch to participants and operated as an injection-withdrawal model.
Accordingly, the AESO plans for transmission to meet system needs. The regulation is clear that the use of non-wires solutions is to be limited, and that transmission should be planned to be unconstrained.
The AESO issues a long-term transmission plan a minimum of every two years. The plan reflects the AESO’s long-term vision of how Alberta’s transmission grid needs to be developed to secure continued provincial economic growth. It incorporates the most recent forecasts of load, generation and overall economic activity in the province, and recommends solutions to reinforce the system and ensure the continued delivery of safe and reliable power.
Transmission needs and proposed projects are reviewed and approved by the AUC through an open, transparent public process.
The wholesale electricity market in Alberta is unique. Firstly, because it is an “energy-only” model, meaning that generators are only paid for the energy they produce, not how much they are capable of producing, as in a capacity market model. Secondly, ancillary services are procured on a day-ahead basis through a separate market operated on an independent third party platform. And thirdly, there are no transmission rights. System access is provided to all market participants on a non-discriminatory basis, and transmission is allocated on dispatch.
The prices in Alberta’s competitive wholesale market for electricity are set at the intersection of supply and demand in real time, and range between the price floor of $0/MWh and the offer cap of $999.99/MWh. The AESO accepts offers to sell power from generators and accepts bids to buy power from loads through the Energy Trading System (ETS). Generators above a certain minimum threshold (5 MW) “must offer, must comply,” which means they are required to offer all of their power to the grid unless they have an acceptable operational reason (AOR) for not being able to do so.
Suppliers enter offers (in price-quantity pairs of their available capability) seven days ahead of the delivery hour, or settlement interval (T). Suppliers are able to change volumes at any time with an AOR, and can change the price up to two hours before the settlement interval. Suppliers cannot make any changes to their offered price after this point (T-2).
Using the price-quantity offers, a merit order is created by sorting offers from the lowest-priced to the highest-priced for each hour of the day. The AESO’s system controllers dispatch the lowest-priced offers from the bottom of the merit order first, and move up towards the higher-priced offers until all electricity required to meet demand has been dispatched. The last offer dispatched to meet demand sets the system marginal price (SMP) for electricity. For example, if offers in the merit order are priced from $0 to $100 and the last offer dispatched to meet demand is priced at $40, the SMP is $40.
The SMP is an equilibrium price that reflects the intersection of supply and demand in real time in the electricity market. The SMP is set on a minute-to-minute basis, and is used in the calculation of the hourly settlement price, also known as the pool price. The pool price is calculated as the average of all 60 one-minute SMPs in each hour, and is posted at the end of the hour (ex poste). Both the SMP and the resulting pool price reflect the economic and orderly dispatch of the merit order, and accordingly reflect market economics.
Interties are dispatched similarly to other types of generation, but there are differences in terms of timing and the use of transmission tags. Imports currently offer at $0/MWh and exports offer at $999.99/MWh, and transmission access across the interties must be coordinated with other jurisdictions that currently dispatch hourly. Intertie participants must tag their transactions and have them approved by impacted control areas.
Ancillary services markets
The AESO is the sole provider of system access in Alberta and is also the sole purchaser of ancillary services (AS), which are fundamental to the reliable operation of the market. The Electric Utilities Act defines ancillary services as “those services required to ensure that the interconnected electric system is operated in a manner that provides a satisfactory level of service with acceptable levels of voltage and frequency.”
Ancillary services products are procured through a separate market operated on an independent third-party platform. AS costs are recovered from load customers through the AESO tariff as part of their transmission costs.
The current ancillary services in place include:
The AESO procures Operating Reserve (OR) from generators or loads to maintain system reliability when there is an unexpected imbalance between supply and demand. Generation and load providers that provide Operating Reserve can be dispatched or curtailed on short notice to ensure electricity is available when it is most needed.
OR is categorized as regulating, spinning or supplemental reserve. Spinning and supplemental reserves are collectively referred to as contingency reserves.
Regulating reserves respond to the instantaneous differences between supply and demand and help keep the system in balance. Generators that provide regulating reserve are controlled by an automatic generation control (AGC) system that adjusts generator output levels to compensate for moment-to-moment changes in load and generation.
Contingency reserves are used to maintain the balance of supply and demand when an unexpected system event occurs. There are two types of contingency reserves: spinning and supplemental. Spinning reserves are the fastest acting because generators that provide this service are synchronized to the grid, allowing the reserve to be provided immediately. Supplemental reserves may not be synchronized to the grid, but generators and load providers can supply reserve power or reduce load within 10 minutes when required.
Active and standby reserves
The AESO procures active and standby volumes of each type of operating reserve from a competitive market. Active operating reserves provide energy to the grid under normal operating conditions to maintain system reliability. Standby operating reserves provide additional reserve capability when all active reserves have been dispatched, or if active operating reserves are unavailable for any reason. The price of active operating reserves is based on an index to the pool price, while standby pricing involves both a premium price and an activation price. The premium price paid to the provider of operating reserves gives the AESO the option to call on the reserve if required. The activation price is the price paid to the provider if the option is called upon.
Active and standby operating reserves are purchased day-ahead. All active reserves purchased through the external platform are dispatched. Standby reserves are dispatched in the event of an active reserve shortfall. Participants are expected to submit their offers for energy in a fashion that reflects their ancillary services obligations.
In the event of constraints on the transmission system, System Controllers follow prescribed rules and procedures and use tools to manage the system. Transmission Must-Run (TMR) is a service that requires generation to be online and operating at a specified output level in particular areas of the province to compensate for insufficient transmission infrastructure relative to the local demand. The use of TMR as a non-wires solution is limited by regulation and is managed by transmission development.
TMR is in place to ensure system reliability until adequate transmission infrastructure is built. The AESO is responsible for procuring this service when the need for TMR is determined. The AESO can also conscript TMR in situations where the need is temporary or unexpected.
Load Shed Services for imports
Load Shed Services for imports (LSSi) are control systems that allow the AESO to instantly reduce demand on the system when an unexpected system event occurs. The AESO contracts with large consumers of electricity to provide LSSi. When required, the AESO can automatically trip off or curtail these consumers in order to balance supply and demand.
Black Start services
The AESO contracts for Black Start services with generators that are able to start their generation facility with no outside source of power. In the unlikely event of a system-wide blackout, Black Start providers are called upon to re-energize the transmission system and provide start-up power to generators that cannot self-start.
The AESO is committed to transparency and an information-rich environment. All current and historical market data can be found on the AESO’s Market & System Reporting page.
For more information
Please contact AESOfirstcall at 1-888-588-AESO (2376) or email firstname.lastname@example.org