Brattle Study Shows Positive Outlook for Long-Term Sustainability of Alberta's Energy-Only Electricity Market

CAMBRIDGE, Mass., April 28, 2011 /PRNewswire/ -- A Brattle Group report analyzing the efficiency and long-term sustainability of Alberta's electricity market was released yesterday during a stakeholder meeting hosted by the Alberta Electric System Operator (AESO).  The report analyzes a number of challenges to resource adequacy that the Alberta energy-only market will face over the coming decade, including: (1) the potential introduction of new environmental regulations that could force aging plants to retire; (2) the expiration of power purchase arrangements (PPAs); (3) the addition of wind generation capacity; (4) expanded interconnections with neighboring markets; and (5) the continued long-term outlook of low natural gas and power prices.  

"Based on the scale and timing of PPA expirations and environmental mandates, these challenges are projected to increase the rate of generation retirements in Alberta by 50 percent over the next two decades," noted Brattle principal Johannes Pfeifenberger, a co-author of the study.  These retirements, along with high anticipated load growth, will require the rate of investment in new capacity to nearly double to 740 MW per year over the next 20 years.  Of particular note are a number of PPA expirations that will occur simultaneously in 2020.

The study concludes, however, that the current market design is generally well-functioning and should be able to support this higher and more challenging rate of generation additions, as long as large simultaneous retirements can be avoided.  "Our projection of the financial viability of new generation shows that only modest increases in market prices, consistent with projected increases in natural gas and carbon emission costs, should be sufficient to prevent premature retirements and support new generation investments.  Projected market prices strongly favor a shift in the resource mix from coal generation to natural gas-fired power plants, which are more flexible and have lower capital costs," Pfeifenberger added.  "As a result, and perhaps contrary to our initial expectations, we currently see no compelling need for major changes in Alberta's electricity market design."

The report contains several recommendations to help sustain long-term system adequacy and improve market efficiency:

1. Monitor Market Outlook – The AESO should continue to monitor the outlook for resource adequacy over time based on a recommended set of indicators.
2. Prevent Simultaneous Retirements – Alberta policy-makers should consider relaxing or revising the current decommissioning cost recovery rule to reduce the risk of simultaneous plant retirements in 2020 when the last tranche of the existing PPAs expire.  More generally, policy-makers should avoid introducing regulations that could result in simultaneous retirements, which are difficult to coordinate in an energy-only market.
3. Increase Price Cap and Reduce Price Floor – The AESO should consider increasing the current price cap of $1,000/MWh and reducing the price floor below zero.  
4. Refine Scarcity Pricing Mechanisms – Simultaneous with the increase in its price cap, the AESO should consider revising its mechanism for setting administrative prices under emergency conditions when out-of-market reliability actions become necessary.  
5. Coordinate with Other Design Efforts – The AESO should continue its ongoing evolution of market design, including wind integration, demand response expansion, and expansion of intertie capability, and consider their resource adequacy implications.

The report, "Evaluation of Market Fundamentals and Challenges to Long-Term System Adequacy in Alberta's Electricity Market," was authored by Brattle consultants Johannes Pfeifenberger and Kathleen Spees, and is available for download at www.brattle.com.

The Brattle Group provides consulting services and expert testimony in economics and finance to corporations, law firms, and public agencies worldwide.   Areas of expertise include antitrust and competition, valuation and damages, utility regulatory policy and ratemaking, and regulation and planning in network industries.  For more information, please visit www.brattle.com.

SOURCE The Brattle Group