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Canada

Canada

POWER POOL FIRST STEP TO COMPETITIVE MARKET

Alberta launched its power pool, becoming the first province with open transmission access and competition to supply new wholesale electricity generation. The pool functions as a spot market for centralised buying and selling of electricity from new suppliers. Existing generation continues to receive regulated cost-of-service payments covering fixed costs. The pool is the first step towards a fully competitive structure. The article details the workings of the pool and its regulation.

Competition has come to Canada's electricity supply industry. Alberta launched its power pool on January 1, becoming the first province with open transmission access and competition to supply new wholesale electricity generation. The pool is structured along the lines of the British power pool and aims to encourage new generating projects, renewables among them. It was initiated by the province's Electric Utilities Act (EUA) of May 1995.

Alberta now leads North America in competitive wholesale power pooling, with the US Electricity Daily headlining the move: "Alberta acts while US states dither." The Alberta power pool functions as a spot market, with centralised buying and selling of electricity at hourly prices established by competition between suppliers and purchasers bidding into the pool. However, existing generation continues to receive regulated cost-of-service payments covering fixed costs.

"The pool is the first step towards a fully competitive structure -- new generation will be based on competition," says pool chairman Murray Rogers. It is designed to foster an efficient market for electricity based on "fair and open" competition for new generation. Eligible participants wishing to trade electricity through the power pool can do so on non-discriminatory terms and may make arrangements to manage financial risk associated with the pool price.

All physical and cash transactions must be cleared through the pool each month. TransAlta Utilities (TAU, Canada's largest investor owned utility), and Alberta Power (likewise investor owned), along with municipal utilities including Edmonton Power, independent power producers and cogenerators, and electricity importers, offer their power through the pool, for which they receive the pool price. All distributors must obtain their power supply from the pool and pay the pool price for the power they receive.

Existing end use customers continue to be supplied by the distributors. In 1996, the Alberta government will study how best to provide end use customers with more choice in supply options. However, the pool does not provide for retail wheeling and domestic customers, for example, cannot choose to buy wind power through the pool.

Eligible buyers from the pool are the entitled distributors TAU, Alberta Power, the cities of Calgary, Edmonton, Lethbridge and Red Deer, as well as the transmission administrator, and any exporters seeking to sell power outside of the province.

Physical separation into generation, transmission and distribution entities to facilitate the new arrangement is being considered by the individual utilities, or is actually underway, along with concomitant unbundling of costs.

Bids, offers and dispatch

In a "bid/offer" process, generators and importers make offers to supply energy into the pool, while distributors and exporters make bids to remove energy from the pool. The power pool administrator receives hourly bids and offers daily for the next seven trading days. These prices are binding only for the following day.

The lowest cost generating units are dispatched in merit order according to the prices they have offered, to meet forecast pool demand. The highest offer dispatched in each hour forms the basis for the pool price. This varies hourly on the spot market, peaking in times of high demand, just as it does on electricity exchanges in the US. Such real time pricing is designed to promote greater efficiency in generation and consumption. Payment from the pool is output related, not capacity related.

Existing utility generating units recover fixed costs through annual "reservation payments" from the entitled distributors, which is Alberta's solution to the problem of stranded asset (power plant, usually nuclear, running at a loss) cost recovery over the remaining life of the assets. In exchange for fixed costs coverage, generators must supply a certain amount of energy at a certain price, known as the "unit obligation price," which covers the unit's variable costs. Each distributor is entitled to a specific share of that energy during each hour of the day. When the pool price exceeds the unit obligation price, the generator remits the difference to the distributor.

Jim Fitzowich, Western Region Director at TransCanada Northridge Power Ltd, says the Alberta pool "is intended to protect vested interests but there is the hope that the pool can evolve to be a market place mechanism."

According to a background report by Carl Buskuhl of the Bonneville Power Administration for EnergyOnline, "The pool bids generally will be based on running costs of existing resources for Alberta utilities and for others based on whatever they want to bid. However, since the pool is competitive, if Alberta utilities want to sell they will have to offer a competitive price. As a result, they could receive less than their variable costs. Since Alberta is 90% coal and gas (generation), the pool price will be primarily determined by the running costs of these resources."

The transmission system

The Grid Company of Alberta, Inc (Gridco) has been established as the independent system operator. It is a joint venture between TAU, Alberta Power, Edmonton and Calgary, and will be regulated by the Alberta Energy and Utilities Board (AEUB). Gridco receives bids and offers, performs scheduling, financial settlement, and reports pool price and market information. The system controller performs dispatch, ensures reliability and safety, and arranges for system support services.

There are no wheeling charges, and Gridco offers non-discriminatory access to all who pay a common "postage stamp" transmission charge, which is independent of the generator and load locations in Alberta. Capacity-related charges may appear in the transmission system. Transmission tariffs will be unbundled to identify specific system support service and system access considerations.

All new generation will be built in response to the market and will be unregulated. Investment in new generation will be a commercial decision with no regulatory scrutiny of need or economics. "All new generation will be subject to competition -- both fixed and variable costs. The province appears to have a surplus for a period of two to four years, depending to whom you talk," notes Buskuhl. Distributors will be able to tender contracts for any consumption that requires building new generating capacity. When new generation is required by the distributors, they will obtain it through competition among suppliers.

"The market has opened and all independent power proponents can pitch projects to the distribution utilities when new generation is needed," said one developer.

The pool's financial set up encourages hedges for new incremental electric supply capacity via a "contract for differences" (CFD) -- a financial contract which replaces floating energy commodity prices with fixed capacity prices, entitling distributors to the energy they produce. Existing Alberta power pool generation is based on CFDs, in which the six distributors pay the three generators for their capacity (the fixed costs), while receiving entitlement to their energy. As load grows, or existing units are decommissioned, distributors will initiate new financial arrangements to manage the risk of the future pool price, with CFDs to facilitate construction finance for new generation projects. Investor owned distributors may maintain a portfolio of financial arrangements, reviewed by the AEUB, to manage the financial risk associated with the pool price. The AEUB can review the financial hedges of TransAlta Utilities and Alberta Power, but not the hedges of municipal utilities.

The EUA affords equal opportunity to all types of generation, making it possible for distributors to obtain their electricity from wind and other renewable sources, if they so wish to. This desire could help renewables compete on non-price terms. Guido Bachmann, chair of the Independent Power Producers' Society of Alberta, says the group is excited about the potential economic and environmental benefits which the new structure can provide. "The EUA will drive the marketplace in Alberta towards true competition, thereby allowing for increased participation by independent power producers in providing generation capacity," says the society.

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