As the organization responsible for managing Alberta’s electricity grid on a 24/7 basis to ensure reliable power is available to meet the needs of all Albertans, the Alberta Electric System Operator (AESO) wishes to correct inaccurate information included in a Letter to the Editor that ran in a recent issue of your publication about the structure of Alberta’s wholesale electricity market.
Alberta’s wholesale electricity market design is based on the premise of an uncongested transmission system that enables all generators to compete to offer their supply to the grid. This competition benefits Albertans by ensuring they pay the lowest price possible for electricity.
While the transmission of electricity is regulated, the generation component is deregulated and decisions to build and operate generation facilities are made by independent, shareholder-held companies. These companies bear the risk and reward of those investments.
Wholesale electricity prices are determined hourly by the lowest price that delivers enough supply to meet the total demand for that hour. This hourly price is called the pool price, and this market structure is called a clearing price model. Generators of electricity offer their power into the AESO-operated market at their own chosen price from $0 up to a ceiling of $999.99 per megawatt hour (MWh). These offers are sorted from the lowest to highest price for each hour of every day into a list called a merit order.
The retail price for electricity paid by consumers in Alberta is based on the average pool price expected for the month ahead.
The AESO’s system controllers use the merit order to balance electricity supply and demand, dispatching the lowest-priced supply offers and moving up to the highest priced offers until all electricity required for that hour is supplied.
Approximately 6,000 – 7,000 MW of the 13,866 MW of generation available on Alberta’s electric system offers in at $0. In a clearing price model, contrary to the assertions of Mr. Anglin, this does not mean that those generators want to give their energy away for free. There are costs to producing the energy (capital for construction and maintenance, salaries, fuel costs, etc.); and generators need to see a return on that investment. What it does mean is that they are willing to be price takers: it is important to them, for a variety of reasons, to produce that energy in that hour and they are willing to accept whatever price the market sets. This includes taking the risk that on very rare occasions, the hourly price may actually settle at $0, and then that is what they get paid for their production in that hour. This was in fact the case six times in 2011.
The wholesale price of electricity, like other commodities, is driven by supply and demand and varies depending on time of day, time of year and other factors. Supply availability can be affected by planned or forced generation outages, transmission constraints and how much energy we are able to import across our interties. Congestion on the transmission system can impact the wholesale market price by impeding a generator’s access to the market, resulting in higher priced generation dispatched to the grid.
According to a study commissioned by the Independent Power Producers Society of Alberta, the Independent Power Consumers Association of Alberta and the Utilities Consumer Advocate in 2011, London Economics International benchmarked Alberta’s electricity prices for the next five years against other Canadian provinces and concluded that, when compared fairly, Alberta’s all-in delivered energy prices are competitive across Canada for both residential and industrial consumers.
Openly competitive generation allows Albertans access to competitively priced power. Our existing wholesale market structure supports economic development in Alberta and provides a reliable price signal for producers, consumers and investors, aiding private companies in making investment decisions that ensure an adequate supply of electricity for many years to come. In the 10 years since the restructuring of the industry, this point has been well-proven with 6400 MW of new generation added to the grid.
Please go to www.poweringalberta.com to learn more.