Opinion: Five things you should know to understand electricity capacity market

Mike Hogan shares capacity market design basics and lessons Alberta can learn from other jurisdictions in this blog published by the Pembina Institute on June 11 2018.

AESO finalizes rules for new electricity capacity market

By Sarah Hastings-Simon

As the Alberta Electricity System Operator (AESO) finalizes rules for the new electricity capacity market, it’s a perfect time to revisit electricity market expert Mike Hogan’s advice from our “Capacity Markets 101” webinar last year.

Based on his work at the Regulatory Assistance Project and his experience with a number of electricity markets, Mike shares capacity market design basics and lessons Alberta can learn from other jurisdictions.

We’ve compiled a quick breakdown of what you need to know about the intricate world of capacity markets. If you’d like to learn more, check out the webinar here.

1. In a capacity market, electricity generators are paid based on both the ability to produce electricity, as well as the electricity produced, rather than just selling the electricity itself – with a risk of higher costs to consumers if the cheapest capacity isn’t able to participate or if more capacity is procured than needed.
2. With capacity market design, keep your eyes on the prize: having adequate energy resources to deliver reliable electricity. The best way to address the challenge is to continually perfect real-time energy price information to show us how much and what kinds of resources are needed to meet the demand for reliable service.
3. Including resources like energy efficiency and renewables in the market reduces the costs for consumers. It’s also the only way to make the capacity market meet the requirement to be resource-neutral, (i.e. not preferring one type of resource over another).
4. A capacity market is not meant to be a long-term contract (power purchase agreement) or to change the fundamentals of the deregulated electricity market. In fact, experience from other jurisdictions shows that longer contract terms in capacity markets often lead to too much capacity to supply electricity which means higher costs for consumers without any benefit. So we don’t need longer contracts because experience shows longer term contracts aren’t correlated to building more capacity when it’s needed.
5. Capacity market design is never finished. Markets with capacity market frameworks need regular fine-tuning to achieve the desired goal, which is always to deliver reliable electricity with adequate resources.

There’s no denying electricity markets are complex and not usually a part of dinner table conversations in most households. But, with Alberta deciding to switch to a new system, the time is ripe to get a better understanding of our electricity system  — something that affects everyone in the province.

Sara Hastings-Simon is the managing director of the Pembina Institute’s clean economy program in Alberta, and is based in Calgary.