Powering Change: Alberta’s Restructured Energy Market (REM)

On March 11, 2024, the Minister of Affordability and Utilities (MUA) directed the Alberta Electric System Operator (AESO) and the Alberta Market Surveillance Administrator (MSA) to commence drafting a technical design proposal for a Restructured Energy Market (REM). This directive was influenced by informed recommendations from the respective reports of the AESO and the MSA. The AESO Report revealed its preliminary plan for the REM, the chosen strategy designed to improve system reliability and affordability.

Concurrently, two temporary policy changes were announced to support the AESO’s transition to a REM. These amendments, which will be implemented through new regulations and alterations to the AESO's rules, are designed to:

1. Prevent market dominance by any single electricity generation entity in Alberta by mandating an equitable pricing standard if net revenues exceed a predefined threshold; and
2. Ensure an appropriate reserve margin of electricity supply by requiring advance commitments from natural gas generating assets, as directed by the AESO, when there is an anticipated risk, such as extreme weather and other times of peak demand.

Background

In August 2023, the AESO, along with the MSA, received letters from the MAU. These letters requested the preparation of a comprehensive recommendation report by February 1, 2024. Details of this announcement can be found in the AESO’s Market Pathways Stakeholder Engagement Session. The report's objective is to inform the government about various market mechanisms that can support a stable and affordable energy supply mix. Specifically, the AESO was tasked with presenting insights on market incentives, the design of the energy market, and the integration of emerging dispatchable technologies. The AESO noted these objectives are informed by its specialized knowledge in managing and operating electricity markets, a comprehensive review of stakeholder engagement, governmental policy deliberations, and strategic input from the Executive Working Group.

During the AESO's Market Pathway Stakeholder Engagement sessions in October and November 2023, there was a clear consensus among stakeholders, including the Executive Working Group, on the essential need to balance reliability and cost-efficiency with a commitment to decarbonization. Stakeholders emphasized the importance of adopting pragmatic and attainable strategies to reach these objectives. Integral to this approach is the delineation of both long-term and short-term objectives within the planning process. Details of the engagement and objectives discussed in the AESO’s Market Pathways approach can be found here.

REM aligns with the goals highlighted in the  AESO Net-Zero Emissions Pathways Report, which we have reported on in our 2024 Power Perspective publication. REM is also strategically developed to manage the uncertainties stemming from evolving federal policies, such as the proposed Clean Electricity Regulations (CER).  For further details on the status of CER, please visit our previous blog posts, which can be found here and here.

AESO Report & REM

Major modifications to the current energy-only market are part of the REM strategy. These changes will be phased in according to the milestone dates detailed in the table below. The ultimate purpose of the REM is to ensure a robust and flexible energy supply that can adjust to the interconnected electric grid's changing requirements while advancing decarbonization initiatives. REM further seeks to mitigate the influence of market dominance and offer consistent investment signals to bolster reliability throughout the province.

The AESO's report recommends a phased approach to implementing the REM, which will allow for the effective introduction of critical measures, such as:

1. Short-term price protection for consumers via a market power mitigation framework.
2. Enhanced reliability through optimizing existing supply and potential new reliability services or standards.
3. Medium-term investment incentives in dispatchable energy and demand response with new pricing mechanisms and markets.
4. A long-term option to directly contract controllable supply to ensure reliability, used only as a last resort due to its significant impact on investor confidence and the market.

The specifics of the recommended phased approach are outlined in the following table.

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MSA Report

The MSA report outlines key recommendations to improve market operations. These recommendations are as follows:

Recommendation 1: Market Power Mitigation Measures

The MSA recommends the introduction of interim measures by July 1, 2024, to address economic and physical withholding in the market:

1. Implement a Monthly Net Revenue Secondary Offer Price Cap to regulate the offer prices of natural gas-fired generators by the largest firms. This Secondary Offer Price Cap would limit the offer prices to the greater of:
   1. 25 times the day-ahead natural gas price (approximately 3 times marginal cost); or
   2. $100/MWh, for the balance of any month in which the net revenue (contribution to covering fixed cost) associated with a hypothetical combined cycle natural gas-fired generator exceeds two-twelfths of the annualized capital cost of the hypothetical generator.

The proposed MPM, enacted under the Electric Utilities Act (EUA) and the Alberta Utilities Commission Act, should remain effective until the implementation of Recommendation 2.

Recommendation 2: Development of an Enhanced Energy Market (EEM)

The MSA Report notes that change to the Alberta electricity market is required. The long-term solution proposed is through the development of EEM. However, the MSA recognizes the complexity of requirements necessary to replace the current energy-only market. Nonetheless, the MSA recommends that the EEM should include:

• A day-ahead market;
• Replace the recommended interim Market Power Mitigation Regulation with a market power mitigation framework tailored to the day-ahead market (that is, suited for multiple part offers) and run with the day ahead market;
• Load obligations to forward contract for generation;
• Negative price floor and administrative scarcity pricing / operating reserve demand curve;
• Congestion management through locational marginal pricing, security constrained Economic dispatch, and system tools;
• Extended unit commitment market with co-optimization of energy and ancillary services;
• Five-minute real-time settlement intervals;
• Enhanced role for demand response; and
• New technical standards for intermittent generation and energy storage.

It appears that many of the proposed EEM components are captured in the AESO’s REM design.  However, it will be important to monitor the regulations and announcements from the MAU to see how the recommendations from the AESO and MSA are ultimately incorporated.

Implications of REM

The overarching implications of the REM on Alberta's energy sector are multifaceted. As an initial step, the introduction of the interim policy changes within Alberta's electricity market underpins the government's commitment to ensuring a secure and reliable power supply. The objectives of REM are anticipated to minimize market dominance, encourage the integration of diverse energy sources, and uphold system stability. The long-term impact on the market will depend on the effectiveness of these proposed changes in achieving their intended objectives and the potential for future legislative adjustments based on the evolving energy landscape affected by the REM.

Next Steps

Our team at McCarthy Tétrault is closely observing the development and implementation of the two temporary policies and the REM generally, and we remain committed to helping our clients navigate the broader regulatory landscape of the energy transition. To discuss these regulatory changes, please contact your trusted McCarthy Tétrault advisor or one of the authors.