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The case of Alberta Lessons and Reflections

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Raymond Lee

(July 6, 2014)

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Questions of “W”?

Why Alberta opened its markets? When Alberta de-regulated its

market? Who were involved in the market

de-regulation? What have happened since the

market opening? What did we learn? What could have done better in

Alberta if we can start it over?

The province of Alberta

(Alberta: 661,848 km2

Installed Capacity: 14,840 MWPeak demand: 10,609 MW

Consumption: 75,600 GW.hPopulation : 3.77 MkW.h/capita: 20,000Load factor: 81%)

(Israel: 20,770 km2

Installed capacity: 15,000 MWPeak demand: 11,920 MW

Consumption: 53,062 GW.hPopulation: 7.6 MkW.h/capita: 6,900Load factor: 61%)

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Why Alberta opens its market?• Pricing disparity between customers who

live in the northern part vs. southern part of the province:– Power companies (privately owned and crowned owned)

have their own turf to serve.– “Take it or leave it electricity service” - customers were

refrained from selecting a new provider unless customers move into other city or town.

• Better control/manage on generation addition costs – Historically, costs of new generation addition were borne

by all customers, utilities tend to over build.– Generation hearings took long time to complete and very

costly. – Market driven on generation addition rather than purely

rely on utilities’ decision – market prices to determine the need

Why Alberta opens its market (cont’d) ?

• Unbundled electricity prices to better reflect the cost of service – Transparency on electricity pricing (e.g. customer knows

more on cost components such as fuel cost and delivery cost).

– More billing information appears on the bill, e.g. peak demand and electricity consumption data.

• Enhance customer choice– More Options to select electricity supplier (similar to mobile

phone provider). – Flexibility of pricing plan for customer to select (e.g. lock-in

contract at fixed rate, e.g. 3, 4, 5 years term)– Contract is portable with the customer. – Customer without contract remain at the regulated rate

option, which is so called a “flow-through rate”.

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• Spinning off energy related business opportunities – Invest on retailing services to attract customers, creating

competition among retailers, e.g. furnace/AC upgrade program.

– More innovation for conservation and/or load management on energy use, e.g. light bulbs exchange/replacement program.

– New generation opportunities, e.g. distribution generation; micro-generation initiative (solar panel manufacturers).

– New technology used for meter data capturing to replace manual reads, more efficient, accurate and cost savings.

– Smart grid initiative.• Independent power producers and power marketers

wanted to participate both generation and retail – Selling exceed electricity to other customers and flexibility for

interconnection – Fair market prices for electricity generation.

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Why Alberta opens its market (cont’d) ?

When Alberta de-regulated its market? • De-regulation could not occur over-night!• The Government of Alberta has a long history of being

governed by the Progressive Conservative (PC) government.

• In early 90’s, the PC administration initiated a policy review of the Alberta’s electric industry and with stakeholder consultations for more than three years.

• In 1995, the government passed the Electric Utilities Act (EUA) through legislation.

• The inception of an independent agency called Power Pool provided a trading platform of selling and purchasing electricity.

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Steps to de-regulation (re-structuring) …

ElectricUtilitiesAct (EUA)Passed – energy traded through Power Pool

May 1995

June 1995

Jan 11996

June1998

Aug2000

Jan 12001

PowerPool (PP)Councilformed

EUAtakeseffectPower Poolbegins operation, wholesale market starts.

Amended EUA to allow retail competition. Appointed IndependentTransmissionAdministrator (TA) and MarketSurveillanceAdministrator (MSA)

Gov’t auctions Power Purchase Agreement (PPA) of the generation output

Open Retailcompetition

Summer2003

Alberta Electric System OperatorModel (AESO) –Combine TA and PP into one organization

Jan 12008

Alberta Utilities Commission (AUC) is formed, based on the Commission Act.

Who were involved in the market de-regulation?

• Electricity de-regulation is NOT a one-man show. • Government must take a leadership role.• Formation of independent agencies to

– setup clear market rules, clarify roles and responsibilities– administer and operate the markets– compliance monitor – rule enforcement

• Stakeholders’ involvement and collaboration.

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Alberta Market Players:

Government (Energy Department)

Through an Act/Regulation, forming an impartial regulatory body (e.g. Utilities Commission, Market

Surveillance Administrator) to oversee utilities business

Wire Companies Retailers

Customers

Transmission Companies

Generation Companies

ISO

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• Policies setting • Broad public consultations• Legislative Assembly debates• Royal consent to pass

Act/Regulations (Law)

Government’s Roles and Responsibilities:

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Utilities Commission Roles and Responsibilities:

1. Commission is an independent, impartial, quasi-judicial agency of the Government

2. Development and assurance of rules related to the operation of electricity retailing market

3. Oversight of ISO rule making process4. Adjudication of enforcement issues5. Review and approval of utilities’ facilities 6. Review and approval of General Rate Application

(GRA)7. Conduct negotiated settlement and public hearings, if

necessary8. Rule Making (e.g. Settlement System Code, Micro-

generation Rule) 9. Rule Enforcement (e.g. Impose penalties on

contraventions

Market Surveillance administrator (MSA)

• Monitor Alberta’s electricity and natural gas markets to ensure a fair, efficient and openly competitive manner

• Bring forward cases of “wrong doing”, “prices fixing”….etc. to the Commission for compliance enforcement.

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ISO’s Roles and Responsibilities

1. Transmission planning– New/upgrade of transmission lines – Sizing, location and timelines

2. System Operations– System reliability, including inter-connection tie – Energy management system (e.g. dispatching

sequence…)

3. Market operations– Pool price setting – Financially settling the energy market among

generators, distribution companies and retailers

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Generation Company– Resources planning– New plant addition

Transmission Company– Transmission planning (tower location/routing)– New lines addition

Wire Company– Distribution planning– Wire business– Metering functions– Load settlement agent functions

Retailing Company– Retailing electricity– Pricing scheme to attract customers– Billing customers

Other Market Players’ Roles and Responsibilities

What have happened since the market opening?

• 1996 to 2000, only wholesale market was opened. The bids and offers process took place allowing electricity to be traded on an hourly basis.

• Power companies were selling electricity and purchasing electricity for the customers within their own turf.

• In 2000, traditional vertically integrated utilities were segregated into domains of “generation, transmission, distribution and retail.”

• Most people hear the term “electricity de-regulation”, they assume that all aspects of electric utilities are un-regulated.

• In reality, only the generation and retail aspects are un-regulated. Transmission and Distribution companies are still regulated under the Commission.

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What have happened since the market opening?(Cont’d)

• On the generation side:– More than 2000 MW of new generation (mainly

gas fried) capacity were added to the province. – New wind generation capacity of 600 MW were

added and was concentrated in southern province.

– Several new transmission lines were added. A new 500-kV line running from north to south is under construction and expected to be fully operational in 2005.

– Renewable energy initiative (Micro-generation Regulation) allows customers to generate own electricity to meet their needs and sell back excessive electricity to the grid.

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What have happened since the market opening?(Cont’d)

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• On the retail side: – More than 60 new retailers were added to the province. – Consumers living in Alberta have choices to pick or switch

electricity supplier.– Around 46% of the total customers (1.3 million) has signed

electricity fixed rate contracts (e.g. 7 cents/kWh).– Retailers offer more energy service options: e.g. energy audits/

furnace cleaning/security monitoring, renewable energy equipment installations (e.g. solar panel rentals…etc.).

– Bundling gas and utilities to one energy supplier and receiving billing credit.

– Large consumers can purchase electricity directly through AESO

What have happened since the market opening? (Cont’d)

• During retail market opening, electricity prices were up significantly due to supply shortage. Government issued electricity subsidy ($40/month) instead of putting price caps.

• It was proven subsidy is more effective than price caps as no government direct intervention to the markets. Pool prices relatively stable thereafter.

• In a response to high electricity prices, new generators were added.

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Historical Pool Price ($/MWh)

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 

Average pool price

133.22 71.29 43.93 62.99 54.59 70.36 80.79 66.95 89.95 47.81 50.88 76.22 64.32 80.19

On-peak average pool price

72.52 53.14 28.47 46.88 64.03 85.35 101.41 84.37 112.97 58.04 62.99 102.22 84.72 106.13

Off-peak average pool price

181.08 85.51 56.04 64.53 35.72 40.37 39.54 32.11 43.92 27.36 26.67 24.22 23.51 28.29

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Alberta’s Electricity Markets Overview

Generation Facility Owner

(GFO)

AESO(ISO)

Transmission Facility Owners

(TFO)

DistributionFacility Owners

(DFO)

Retailers

Consumers

Pay generator for energy generated ($)

Electricity flow

Electricity flow

Electricity flow

Pay TFO for energy transported ($)

Pay AESO for energy purchased ($)

Pay DFO for T & D

Tariff ($)

Pay retailer for energy

consumed ($)

Pay transmission

Tariff ($)

AUC: rules making/enforcement

Invoice/bill for generation

Invoice/bill for Energy wheeling

Invoice/bill for Energy wheeling

Invoice/bill for T & D tariff

Invoice/bill for Energy consumed

Invoice/bill for Energy purchased

What did we learn?

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• Phase-in approach: – Start from wholesale market followed by opening retail

market. Do not open all markets at once.– Allow time for stakeholders to fix “bugs” and correct

issues. – Allow time for consumers to understand and absorb

changes over time.– Consumer awareness and education (web-site, TV

ads, booklets…etc.). Most consumers anticipate electricity price will drop significantly when the industry is de-regulated – an incorrect concept!

What did we learn? (Cont’d)

• Government takes leadership role.– Stakeholder consultations and dialogues. Set up task

force or working group to provide recommendations. – Pass act or legislation granting power to

implementation agencies.– Chart out a timeline and set goals for re-structuring

and the expected deliverables from agencies. No hidden agenda.

– Establish agencies to implement policies or regulation.– Don’t interfere agencies processes. Let the experts

handle all issues.– Don’t amend or change policies or regulations

frequently, stay on course.

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What did we learn? (Cont’d)

• Regulatory agencies (ISO,Commission..etc.) must understand the mandates and to:– write clear market rules and ensure rules are doable;– clarify roles and responsibilities for all market players;– take a leadership role and setup effective market

compliance monitoring and enforcement;– protect public interest and maintain same level playing

field for all players to ensure no gaming; – Consider how to meet the need of vulnerable

customers during the re-structuring process; – Impose penalty to contraventions.

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What did we learn? (Cont’d)

• Huge IT involvements– IT systems play a major role in electricity re-

structuring, especially on:• Electricity trading – offers and bids (merit order)• Customer and billing information• Metering data history• Load settlement calculations

• How to deal with customers with no interval meters?– Cost of replacing interval meters. – Load profiling approach with valid sampling.– Deemed profile for streetlights, traffic lights…etc.– Clear rules in running load settlement calculations.

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What did we learn? (Cont’d)

• Electricity re-structuring is NOT a “one-man” show project!– all stakeholders need to contribute and work

toward the set goals.– team approach is vital!– Not afraid of change and stay on course.

• No jurisdictions can be held up as “MODEL” of best practices. “Cookies cutter” approach is not recommended.– factors such as customer mix, political climate,

government in charge….etc. certainly drive different results of the de-regulation.

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What could have done better in Alberta if we can start it over?

• It would be more effective and efficient if we could – centralize load settlement functions into one zone– centralize metering data repository – centralize customer information in a single repository– phase-in smart meter installation– have more IT work done up front

• More consumer awareness and education programs during the re-structuring period.

• Get more on-going stakeholder dialogues and make sure rules are doable.

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External review of the Alberta’s market

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Brattle Economists Confirm Alberta's Electricity Market Is Sustainable From A Resource Adequacy Perspective CAMBRIDGE, Mass., March 21, 2013 /CNW/ - Economists at The Brattle Group have released an update to a 2011 report for the Alberta Electric System Operator (AESO) that reviews the long-term challenges to resource adequacy in Alberta's electricity market and assesses the sustainability of the energy-only market design from a resource adequacy perspective. The updated analysis confirms the conclusions drawn from the 2011 review and finds that the Alberta electricity market is generally well-functioning based on current market conditions and policies.

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Questions/comments?Raymond Lee, Senior Advisor,

email: raymond.lee@auc.ab.ca

Phone: +1-403-592-4442

Issues of electricity de-regulation!