Ontario’s Market Renewal
Ontario opened its wholesale electricity market in 2002, but a confluence of political and structural issues led to the partial closing of the market. For the last 15 years, massive expenditures have been undertaken to retire Ontario’s coal generation and replace lost capacity with lower-emitting natural gas, renewable and refurbished nuclear resources. These investments were largely made pursuant to government sponsored procurements and other programs.
The Independent Electricity System Operator (IESO), the agency responsible for administering Ontario’s wholesale electricity market and managing the provincial transmission grid, is leading efforts to wean Ontario off government procurement and revitalize the wholesale electricity market. The IESO’s Market Renewal initiative, which stands to be one of the most transformative change to the sector since the breakup of Ontario Hydro and the opening of the wholesale market, aims to transition Ontario’s market to a more U.S.-style competitive market design. This initiative will, among other things, introduce a capacity market to, in part, supplant the need for future procurements; it will implement locational marginal pricing, a feature of other competitive North American markets but a feature that was left out of Ontario’s original design; it will facilitate the import and export of new electricity products, including capacity and environmental attributes; and, it will deliver a day- ahead-market to encourage the scheduling of offers and bids in advance of real time. An important objective of Market Renewal is to increase market efficiency, reduce overall system cost and ultimately shift economic risk from ratepayers/ taxpayers to the market.
Alberta’s Renewable Energy Procurement and Capacity Market
Since 2001, decisions regarding the development or retirement of generation facilities in Alberta have been based on price signals from Alberta’s energy-only wholesale electricity market. However, as with the Ontario electricity sector in the mid-2000s, pivotal changes to the structure and function of the entire electricity market are now being driven by climate change and other socioeconomic forces.
In 2015, the Alberta government announced its policy to phase out coal-fired generation by 2030 and to set a target of at least 30% of electricity coming from renewable sources in Alberta by 2030. This target, which is estimated to be approximately 5,000 MW, has since been established by the Renewable Electricity Act under which Alberta’s Independent System Operator (known as the Alberta Electric System Operator or AESO) competitively procures renewable energy projects using a contract for differences, indexed to the Alberta pool price.
In response to the mandated retirement of coal-generation and the resulting need to attract investment for new natural gas and renewable generation to ensure future supply adequacy for Alberta, the AESO made a recommendation to the Alberta government, which was accepted, to establish a capacity market, in addition to the energy and ancillary services markets. The design of those existing markets will be largely unchanged.
Following completion of the regulatory process for approval of the AESO’s forthcoming market design rules, the initial base auction for capacity procurement is expected to commence in November 2019 and conclude in June 2020, with the one-year capacity delivery obligation to commence in November 2021.