Alberta s Energy Only Market

long term adequacy 2012 Alberta’s Energy Only Market Alberta Power Market Luncheon BMO Capital Markets Toronto, ON Richard Penn April 4, 2013 Market ...
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long term adequacy 2012

Alberta’s Energy Only Market Alberta Power Market Luncheon BMO Capital Markets Toronto, ON Richard Penn April 4, 2013 Market Surveillance Administrator | 403.705.3181 | #500, 400 – 5th Avenue S.W., Calgary AB T2P 0L6 | www.albertamsa.ca

MSA’s Role

o

The Market Surveillance Administrator is an independent enforcement agency that protects and promotes the fair, efficient and openly competitive operation of Alberta’s wholesale electricity markets and its retail electricity and natural gas markets.

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State of the Market Report Conclusion Wholesale market effectively competitive A level of competition (and related outcomes) that (i) achieves efficient investment with the lowest possible short-run inefficiencies, (ii) does so over a reasonable timeframe, and (iii) where open competition ensures neither collusion, abuse of market power, or anti-competitive practices.

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Energy Only Market

o o o o o o

Generator Revenue is from Energy market and / or ancillaries There are no “out of the back pocket” payments such as Global Adjustment in Ontario or Capacity payments in other markets “What you see is what you get” creates efficient response Similar markets include ERCOT and Australia Although ERCOT is discussing the addition of a capacity market as it has concerns over its Reliability margin Suppliers only build if they anticipate prices are high enough to recover costs and make a reasonable ROR. 4

A comparison Typical Market with Capacity

Alberta Energy Only Market

Forward Reserve Market Reserve Market Real-time Demand Response Program Forward Capacity Market Zonal FCM Day Ahead Energy Market Real-Time Energy market Generator Cost Guarantee (BPCG) Day Ahead Real-time Start Up Costs Import Cost Guarantees Revenue Sufficiency Guarantees Reactive and Voltage Control Revenue Outage cancellation costs Marginal Loss Revenue Financial Transmission Rights Automatic Mitigation of Offers Bid Mitigation of FCM

Real Time Energy Market Day Ahead Ancillary Services

Both markets designed to incent Investment. Markets with Capacity have very little volatility but large chunks of money out of loads back pocket. Energy Only markets have price volatility which politically could be unpalatable in some jurisdictions. Price Volatility also leads to Uncertainty which can increase the return investors require before entry 5

60

70

Prices and Volatility

40 30 20 10 0

Number of Hours

50

Prices > 700 $/MWh

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

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Participants Offer Control 19%

18%

13%

13% 11% 10%

9%

5%

Other

A

B

C

D

E

Non dispatchable Balancing Pool

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Exercise of Market Power o

o o

o

The design of the Alberta Energy market has been interpreted by the MSA as allowing exercises of market Power In January 2011 the MSA published its Offer and Bid Guidelines A generator cannot physically withhold its generation from the market but can financially withhold it. Unlike most US Electricity markets that Mitigate offers

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Energy Merit Order & Withholding 1000

Offer Curve: March 26th HE 10

500 250

MW Dispatched 0

Block Price ($/MWh)

750

Pool Price: $828.65

6500

7000

7500

8000

8500

9000

9500

Total MW

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3000

Energy only vs Energy Only (ERCOT vs AESO)

2500

ERCOT

500

1000

1500

Annual Average Price (2011): ERCOT: $42.44 AESO: $76.22

0

Price ($/MWh)

2000

AESO

0%

5%

10%

15%

20%

25%

% of the time prices are higher

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A sign of Health - Capacity Growth o

o

Since deregulation in 2000 over 6,800 MW of new capacity has been developed and 1,400 MW of inefficient capacity has been retired - this in a market with a peak demand in the order of 10,000 MW Addition of over 1000 MW of wind

2000

Capacity (MW)

2012 6286

Coal 5614 Oil sands projects build generators for steam and sell power to the grid (cogen) 4093

1640 1273 Gas Hydro 835 Cogen 814 Other

171 24 Wind

1087 894 404

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Expected Additions o o

Sundance A Returns Shepard Energy centre

Year Biomass Coal

Gas

Total

2013

4

140

720

2014

41

270

311

800

800

1210

1831

576

2015 Total

45

576

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Are market prices high enough to incent new investment o o

Market price is signaling a need for peaking gas The recent Brattle report on the Alberta market reinforces the opinion that market conditions continue favorable investment conditions for natural-gas-fired power plants. 13

Distribution of prices impacts technology choice

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Challenges / Opportunities for the Market o o o o o

Low Natural Gas prices put downward pressure on prices Increasing Wind penetration and externalities suppressing price Environmental regulations – eventual closing of aging coal plants and replacement by natural gas plants PPA retirement – close to 5000 MW of PPA’s expire in 2020 Recent surveys indicate that in the present investment climate the market structure is not suitable for project developers, investment is likely to come from balance sheet financing. 15

MSA’s Projected Coal Retirements

0

2000

MW

4000

6000

MSA Projected Coal Retirements

2010

2020

2030

2040

2050

2060

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