Planifesto: Power System Net Zero in Alberta Via Market-Driven Investment or Centralized Planning?

I offer this essay to stimulate discussion on how best to plan the power system in Alberta to achieve the aspirational Canadian federal net zero objectives.?The views I express in this discussion are mine alone and do not reflect the positions or perspectives of my current or past employers.?My objective with this essay is to generate discussion on a topic that I care deeply about – the reliability, resilience, and sustainability of the power system in Alberta.

Introduction

The deregulated market policy framework in Alberta has been extremely successful.?In my opinion, this is due to its transparent and clear policies, simple design, and minimal government intervention.?

Simple Design:?We use a single market clearing price for the entire province, we have one purchaser of ancillary services (the AESO), no transmission rights (equal access for all participants), and a commitment to building transmission in advance of need as an enabler of both reliability and market function.?

Transparent and Clear Policies: ?The Alberta Department of Energy published the 2003 Transmission Development Policy and the 2005 Electricity Market Policy Framework that clearly stated the policy objectives of the framework and codified these in statute and legislation.?I’ve provided the principles stated in both policy documents in the Appendix for reference.?

Minimal Government Intervention:?The policy framework we’ve chosen in Alberta results in two significant political risks that can make any government nervous and tempted to intervene – high wholesale market prices and high transmission costs, both of which are borne by the ratepayers who are also voters.?

Our market design relies on high wholesale prices as the build signal for new generation investment and for the market to function properly, politicians must have the patience and courage to allow prices to climb and resist the urge to intervene and “control” prices, and thereby undermine efficient market operation.?Similarly with transmission costs, the policy we’ve chosen necessarily results in overbuilding transmission relative to a vertically integrated centrally planned power system, and it takes political courage and restraint to avoid intervening and controlling those costs.

Now, we’ve had some interventions over the years that have impacted market outcomes, but overall governments in Alberta have generally resisted the urge to “control” market prices and transmission costs, and this is a key factor in the success of the market framework in Alberta in delivering the reliability, generating resource diversity, and relative economic efficiency we currently enjoy.

Today’s Context

This brings us to today.?The power system has become the epicenter of the drive to decarbonize through the electrification of the majority of consumer products that emit GHG, such as vehicles, public transit, appliances, and HVAC.?Even bicycles are now being electrified, which ironically increases their environmental impacts relative to a human powered bicycle.?This has created increasing complexity for power system planners and operators.?For example:?

·????????Coupling power system operations to the operational characteristics of other complex systems (such as the transportation system) creates new challenges for system operators?

·????????The proliferation of inverter based renewable resources (wind and solar) creates operational challenges for power systems planned on the availability of synchronous generating resources for frequency control and contingency response

·????????Government incentives for renewable energy and disincentives for GHG emitting generating resources skew generator economics and investment decisions in market-based jurisdictions

·????????Increasing levels of distribution system connected inverter based renewable generating resources present significant operational and planning challenges for distribution systems that were only planned to transfer power from the transmission system to power consumers

In addition to these technical factors, the policy objectives and societal expectations have evolved to add additional complexity for power system planners and operators.

In Alberta, our electricity policy framework has succeeded precisely because the framework enabled participants to make investment decisions about when, where, and what generation to build based on market economics.?The objective of our framework was to let markets decide outcomes based on economics and environmental regulations.?The type of generator was not restricted, the technology choices for managing emissions were not mandated, and investors only had to ensure they could comply with the environmental regulatory requirements while making an economically viable generation investment. ?Transmission was built in advance of need, where possible, to ensure transmission access was not an impediment to competition.?A carbon tax was implemented to price the GHG externality and enable appropriate economic decision making. But things have changed.

The current market is struggling to provide a proper merit order, system operations are challenged by declining frequency response characteristics of the system, and the project connection queue is overwhelmed with renewables projects that cannot all be integrated in a reliable manner. ???

With today’s social and political desires to decarbonize, there is no longer an appetite to allow markets to determine outcomes through price signals alone and federal policies are now dictating outcomes.?Generation and emissions abatement technologies are being mandated, and incentives are being provided to renewable resources.?In addition, net zero timelines are being mandated with no alignment to the timelines for system planning, regulatory processes, and project development.

The combination of the technical and political factors is making it increasingly difficult to plan and operate the power system in Alberta in a reliable and economically efficient manner.

So Now What?

The operating and social context has changed since Alberta deregulated over 20 years ago.?At that time, the primary objective was to allow the Alberta wholesale electricity market to determine outcomes based on economics and environmental regulation while maintaining reliability and the policy framework was implemented on that premise.?However, those objectives have changed.?Net zero is the primary federal policy objective, cost seems to be a distant ancillary concern, and operational reliability is, unfortunately, an assumption that is not given appropriate attention.

From my perspective, based on my experience with integrated resource planning and power system planning in a deregulated environment, the new set of aspirational policy objectives cannot be achieved with Alberta’s existing electricity policy framework.?

The market cannot function effectively or efficiently when the outcomes are pre-determined, subsidies are provided, and the timelines are mandated.?If we want net zero by 2035 (or even 2050 for that matter), at a cost that consumers can afford while maintaining the levels of reliability and availability we have historically enjoyed in Alberta, then I believe we need to move away from the current policy framework to a centrally planned, private ownership model.?Our market structure and regulatory process timelines will not be able to deliver on these objectives within the timelines mandated by the federal government.?Investors cannot be expected to take the financial risks required and the system operator cannot be expected to plan a reliable system within these timelines to achieve these objectives.

Moving to a centrally planned, private ownership model would allow optimization between the type, location, and timing of generation, transmission, and ancillary service requirements to align with the federal policy objectives within the mandated timelines while maintaining a reliable and operable power system.?In addition, this approach would enable a discussion on resource diversity through potential interties to BC, Saskatchewan, and Manitoba (which are all centrally planned systems) to share and optimize renewable energy across the West.?Alberta never was a vertically integrated, crown owned jurisdiction, and prior to deregulation there was a rough version of this centrally planned, private ownership approach in operation, so this is not an entirely new approach here.

Conclusion

To be clear, I am an advocate for Alberta’s market framework.?I came here from Manitoba to be a part of it, and while it’s not perfect, I believe it successfully achieved its purpose, was the most successful market design in North America, and I am proud to have played a very small role in it.?

Perhaps if the timelines of the net zero policy are extended or more flexibility in the allowable mechanisms is permitted, then our market framework could deliver the desired outcomes.?However, to achieve the current aspirational federal policy objectives, I see no other approach than a centrally planned model and I believe we need to act quickly and get the best minds in the industry talking about how we can transition to a new framework while retaining private ownership and profitable, reliable operation of distribution, transmission, and generation assets.

This is just my perspective, and I would love to hear others’ thoughts on this – I’m sure there are many. Can we blend integrated resource planning and market outcomes? Is it even possible to evolve our current market design or do we need to start with a blank sheet and re-imagine our approach?

As an advocate of Alberta’s successful market design, I hope I’m wrong about this.?But as a system planner and engineer, I’m having a hard time seeing a successful outcome under the current framework.

Appendix – Alberta Electricity Policy Principles

2003 Transmission Development Policy Principles

1.??????Transmission is a monopoly service. This regulatory model for provision of transmission service best serves the purposes of Alberta.

2.??????Transmission is essential to reliability. Dependable provision of electric service underpins a strong economy and supports the safety and well being of every Albertan.

3.??????Transmission policy under a vertically integrated monopoly regime, like those of history, is fundamentally different from transmission policy within a competitive market for electricity.

4.??????Pricing and payment for transmission is fundamentally a cost most appropriately borne by the loads that are served by the transmission system on an equal basis, regardless of location.

5.??????Generators will make financial commitment and contribution towards upgrades of the transmission system based on generator size and location on the system.

6.??????Inter-ties are essential to a well-functioning market structure. Alberta is integrated with the electric systems of our neighbours. Transmission policy and the regulatory environment must facilitate open access to larger markets, while ensuring that Alberta’s needs are met.

7.??????The policy should support appropriate consideration of export projects including the benefits to Alberta consumers.

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?2005 Alberta Electricity Policy Framework Principles

1.??????The market framework must ensure that, over time, reliability is not compromised – the reliable delivery of electricity is the bedrock of Alberta’s economy.

2.??????The market framework must be guided and founded on fair and sustainable market and competitive forces.

3.??????The market framework must provide market signals to build new supply in a timely manner to meet growing demand while recognizing the lead-time required building new generation.

4.??????The market framework must provide confidence to investors and customers, and be supported by a clear and stable policy and regulatory framework.

5.??????The market framework must continue to preclude the exercise of market power and unwarranted transfer of wealth.

6.??????The market framework must accommodate the current state of restructuring and be flexible and adaptable to support the desired end state without any major government intervention.

7.??????The market framework and any required refinements must ensure the needs of all market participants, including the residential, farm and small business customers, are satisfied. The market framework and any refinements or transition needed between the current and final states, must be fair, as orderly as possible, and provide certainty to existing and new market participants.