Alberta transitions away from coal and an energy only market toward a lower carbon power system and new capacity market



In November 2015, the newly elected New Democratic Party in Alberta released its Climate Leadership Plan (Climate Plan) introducing a multitude of policy changes intended to limit provincial greenhouse gas emissions. As these policies have begun to take shape, perhaps the most significant change, save the introduction of a carbon tax, are the proposed changes to Alberta’s electricity market, including a fundamental shift away from Alberta’s current energy only electricity market.

Coal phase out

Under the Climate Plan, all Alberta coal-fired power plants must cease operations or eliminate all emissions by 2030. The impact of this policy is significant, as it will result in the phase out of approximately 6300 MW of capacity or 51 percent of total electricity generated (based on 2015 data) in the province. To understand the impacts of this policy and facilitate a path forward, the government of Alberta appointed Terry Boston, a well-known power executive, to act as the province’s independent coal phase-out facilitator. Boston prepared a report to cabinet outlining his conclusions and setting forth a number of recommendations to facilitate the transition away from coal while still maintaining system reliability. These include: reasonable price stability for consumers and business, maintaining investor confidence in the province, and ensuring that workers and communities impacted by the coal phase out are fairly treated.

The province has largely accepted Boston’s recommendations, including that the government make ‘transition payments’ totalling $1.36bn to the current operators of coal fired assets slated to operate beyond 2030 that will be impacted by the phase out. The government has indicated that the transition payments will come from revenues collected under the province’s newly implemented carbon tax.

Procurement of renewable power under the Renewable Electricity Programme

Under the Climate Plan, the province committed to providing financial support by way of a Renewable Electricity Programme (REP) to support the development of new renewable power generation in line with its objective to have renewable sources of power account for 30 percent of Alberta’s power generation by 2030. The government of Alberta tasked the Alberta Electric System Operator (AESO) with developing and implementing the REP to facilitate the introduction of new renewable energy sources to the grid, while still maintaining a competitive energy market.

The intention of the REP is to facilitate the development and integration of 5000 MW of renewable electricity capacity by 2030. The AESO intends to accomplish this policy through a series of auctions, with the first competition expected to open in early 2017 culminating in a final award in December 2017, for up to 400 MW of renewable generation with a required in service date in 2019. To participate in the first competition, a project must be situated in Alberta, be either new or an expansion (existing projects are ineligible), have a minimum capacity of 5 MW, connect to existing transmission or distribution infrastructure, and be operational by the end of 2019.

The AESO indicated its selection will be ‘fuel neutral’, in the sense that Alberta has not identified a preference for wind, solar or other renewable sources of power. The winning bidder will sign a Renewable Energy Support Agreement (RESA) with the AESO for a 20-year term and will be a contract for differences with the amount of the RESA payments based on the difference between the market price and the accepted bid price. If the market price exceeds the bid price, the bidder will be required to pay the excess amount to the government.

Given the ambitious timelines associated with the first REP, it is likely that incumbents, notably those seeking to expand existing projects or those with projects already well advanced within the regulatory process, are likely to have an advantage. To this end, it seems unlikely, at least with respect to the first REP process that the REP programme will facilitate new entrants to the Alberta market.

New capacity market

Shortly after the announcement of the REP, and in line with one of Boston’s recommendations, the government announced that Alberta would transition from the current energy only market to a capacity market. Alberta’s existing energy only market allows generators to compete to sell electricity into the power pool. However, the current energy-only market does not provide the government with the ability to implement its new focus on renewable energy projects which are generally uneconomic within the current framework. Moreover, the AESO and Boston advised the province that Alberta’s existing energy only market structure will not ensure the necessary investment in new generation required to displace the retired coal (or at least not without a lot of price volatility). As such, the AESO also recommended that the province transition to a capacity market to ensure an adequate supply of electricity to meet the province’s demand and ensure system reliability.

A capacity market regime is principally comprised of two markets: a capacity market and an energy market. A capacity market pays generators for the ability to reliably dispatch electricity regardless of how often they actually sell the available electricity onto the grid, whereas generators are paid for electricity actually supplied onto the grid through the energy market. This means generators may have additional revenue streams resulting from the new capacity market. Market participants that are unsuccessful in bidding for capacity contracts will still be eligible to participate in the energy market, as it will operate separately from the new capacity market. Generators awarded a RESA in the first round of REP will not be eligible to sell in the capacity market and at this time it is unclear what, if any, other restrictions on participating in the capacity market there may be.

The province tasked the AESO with designing and implementing the new capacity market. The government has indicated that the choice to task the AESO (an arm’s length government agency) with developing and implementing the capacity market is to ensure that Alberta’s new capacity market does not encounter the same problems the Ontario power market faced resulting from its shift towards more renewable sources of power.

Based on pronouncements to date, the design of Alberta’s electricity capacity market will be subject to continued consultation with market participants. However, the process will likely be based on a competitive auction process where the lowest qualified bid for available capacity will win the contract. The AESO has indicated that it intends to complete the design and implementation of the capacity market by the end of 2018, to facilitate first capacity procurement in 2019 and first delivery in 2021.

Under the new capacity market regime, capacity obligations will be a forward physical obligation requiring the capacity sold in the market to be available to provide energy when needed. There will likely be a ‘must offer’ requirement in the capacity market. Under this requirement, generators must offer their eligible capacity to the market and generators with planned capacity (i.e., new and expansion projects must offer the capacity for delivery in the year it is connected). This is consistent with the ‘must offer, must comply’ rule in the existing energy only market, and prevents generators from withholding eligible capacity to drive up the clearing price in a procurement.

Although a capacity market uses competitive forces to incentivise suppliers to provide innovative and low cost solutions to maintain system reliability, electricity prices will likely need to rise beyond the current low prices. In preparation for this cost increase, the government announced that by June 2017 it would put in place a ceiling rate to ensure that Albertans opting for the regulated rate option will not pay more than 6.8 cents per kWh for electricity until June 2021. That cap price is about twice the rate most Albertans currently pay, as power prices have fallen to some of the lowest levels in decades due to oversupply.

Impact going forward

The government of Alberta’s strong focus on renewable energy is likely to increase demand for gas to serve as the backbone of the electricity generation system in Alberta for both base and peaking demand, for at least the short term and likely longer. Going forward, it appears likely the province will move forward with additional REP phases to incorporate sources of renewable energy onto the grid in order to advance the objectives of the Climate Plan. It is probable future phases of the REP will follow a similar format and it will be interesting to see how future REP phases will interact with the forthcoming capacity market design.

As these changes are implemented, the reliability of the power system may be challenged due to aging infrastructure and new operating challenges resulting from the greater integration of intermittent renewable generation. Given the phase out of coal, reliability may be an issue under the new capacity market unless the existing grid can accommodate and receive new renewable electricity generation efficiently. As such, and although Boston has concluded that the Alberta has a strong transmission system, new transmission may also ultimately be required to fully realise the renewable objectives set by the province.

Phasing out coal likely presents an opportunity for coal-to-gas conversion, at a lower overall cost, until new combined cycle natural gas units can be brought on line. New natural gas combined cycle units typically have a 35 to 40-year life span whereas natural gas conversion of the existing coal-fired units will likely have a 10 to 20-year expected life span. As such, the capacity market may facilitate the conversion of coal plants in Alberta to natural gas in order to bridge the gap in electricity generation lost in 2030 before additional sources of generation come on line. Currently there are several permitted gas-fired projects in Alberta and we expect other projects will be expedited by developers seeking to participate in the 2019 capacity market procurement.

The forthcoming changes to Alberta’s electricity market arising from the objectives of the Climate Plan were likely the only realistic way to achieve the government’s climate objectives while maintaining system reliability and investor confidence. Whether or not one agrees with the underlying policy objectives of the Climate Plan, including the premature shift away from coal fired generation, the new capacity market and REP presents a real opportunity for investors and new entrants to participate in Alberta’s electricity market.

Today is an exciting time in Alberta for market participants and those seeking to become market participants, as there appears to be significant growth opportunities for both new entrants and incumbents to take advantage of new opportunities in renewable and gas fired generation, as well as technical innovations such as storage technologies. Overall, the capacity market will likely maintain a degree of cost stability for consumers and ensure system reliability while allowing for the transition to a lower carbon electricity system. We expect that all developers and investors will welcome the revenue certainty and potential opportunities associated with Alberta’s new capacity market.


Evan W. Dixon is a partner and Brittany Scott is a student at Burnet, Duckworth & Palmer LLP. Mr Dixon can be contacted on +1 (403) 260 0162 or by email: Ms Scott can be contacted on +1 (403) 260 0373 or by email:

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Evan W. Dixon and Brittany Scott

Burnet, Duckworth & Palmer LLP

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