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Shock: Brattle Says Energy-Only Market Sustainable From a Resource Adequacy Perspective A new report from The Brattle Group confirms that an energy-only market is sustainable from a resource adequacy perspective.
Brattle was addressing the Alberta energy-only market, in an updated analysis (click here)
"[F]rom a resource adequacy and generation investment perspective, the Alberta electricity market is generally well functioning based on current market conditions and policies. The current [energy-only] market design should be able to address the identified resource adequacy challenges and there is no compelling or immediate need for major design changes to address these challenges," Brattle said.
"Attracting financing for the construction of new power plants requires investors to believe that they will earn returns sufficient to cover their investment costs. While some stakeholders have expressed concerns about the ability of the Alberta market to allow for financing of new power plants, we are more optimistic," Brattle said.
"Alberta will require generation investments of approximately 530 MW per year between 2013 and 2029 to keep pace with retirements and load growth, a challenge in a small market like Alberta. Alberta's track record is very promising, however, given that the market has successfully attracted enough merchant investment to sustain resource adequacy for more than a decade. Generation companies have constructed on average approximately 450 MW of power plants per year since the current market design was established in 2000. Also reassuring is that, since the financial crises began in 2008, Alberta has attracted at least one large investment (ENMAX-Capital Power 800 MW Shepard Energy Center) and a number of wind and cogeneration projects," Brattle said.
"Our review of current and projected market conditions documents continued favorable investment conditions for natural-gas-fired power plants. On-peak power prices have increased since 2010, likely driven primarily by changes in generators' offer behavior in 2011 and 2012. If this offer behavior were to continue, new gas generation investments would be very profitable. However, even when projecting future market prices based [on] the four-year average of the (less favorable) 2009-10 and (more favorable) 2011-12 market conditions, our analysis shows that natural-gas-fired power plants are economic. We consequently expect that a sufficient amount of new natural gas generation will be constructed unless, as we noted above, investors heavily discount the projected future prices because of their dependence on generator offer behavior," Brattle said.
Notably, Brattle's conclusion came in a market with a price cap of only $1,000/MWh (Canadian $), though Brattle did recommended consideration of an increase to $3,000-$7,500, reflecting a value that is more consistent with customers' value of lost load (VOLL). "We do not recommend increasing the generator offer cap of $999.99/MWh, however, as the higher prices should only be realized during operating reserve depletion and rare load shed events," Brattle said.
Brattle raised concerns with low levels of forward contracting, concluding that the currently short-term nature of the Regulated Rate Option (RRO) may be hindering longer-term contracting.
Brattle recommended analyzing the extent to which exclusive reliance on monthly contracting to supply RRO load results in an inefficiently low level of forward, bilateral contracting, and whether such inefficiencies should be addressed through either phasing out the RRO or introducing longer-term contracting for a portion of RRO supply [emphasis added].
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March 21, 2013
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Reporting by Paul Ring • ring@energychoicematters.com
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