Ross Nazareth | MEL Candidate | December 14, 2023
Mentors: Bryce Wade and Tyler Seal, Natural Resources Canada
ABSTRACT
With the passing of time, the anthropogenic effects of climate change are ever-increasing. In response to climate change, the Government of Canada has committed to reducing greenhouse gas emissions from electricity generation by achieving a net-zero emissions electricity system by 2035 (NZ2035). Alberta is experiencing the highest growth of wind and solar electricity generation of any province, capturing over ¾ of Canada’s growth in solar during 2022.
The wholesale electricity market in Alberta employs a pricing system in which the price paid for electricity supplied to the grid is higher than the cost to produce the electricity. An economic irony exists for ratepayers; the cost of electricity generated from wind and solar is decreasing relative to alternative forms, yet ratepayers are subjected to increasing rates.
This study identifies an inefficiency in the merit order pricing system, explains how the merit order effect works, and how it contributes to higher final electricity costs. By examining recent advancements and lessons learned in Australia, and Texas, the study seeks to identify effective practices to integrate wind and solar electricity generation, that could assist Alberta in achieving a net-zero electricity grid. The study concludes with recommendations on how wholesale electricity markets can more efficiently incorporate renewable forms of electricity generation into the grid.
INTRODUCTION
Alberta is the only province in Canada with a true wholesale electricity market. Alberta’s wholesale market is an electricity-only market, meaning that there is no payment for capacity, only for the electricity dispatched; thus, electricity is produced and consumed simultaneously. Electricity is a tradable commodity, where it is traded wholesale (in bulk), dependent on supply and demand.
In Alberta, the wholesale market is operated by an Independent System Operator (ISO), the Alberta Electric System Operator (AESO), which directs operations of the grid 24/7. The AESO facilitates the province’s wholesale market by matching electricity supplied to electricity demanded simultaneously, effectively creating a market where generators are only paid for electricity generated and dispatched. The Alberta Utilities Commission (AUC) is the market regulator that reviews electricity generating projects for approval, determines the delivery costs for transmission and distribution, and sets rates and riders.
The open and competitive nature of the wholesale market allows private businesses to enter the energy market and generate electricity for the province. Many new entrants to the market are wind and solar generators, which can supply additional electricity to the grid but do not serve as a dispatchable source of electricity.
The market structure of the wholesale electricity market, as operated by the AESO, presents a challenge, where the merit order and clearing price of electricity supplied to the grid drives the pool price and effectively the energy charge (retail charge) reflected in a consumer’s electricity bill. There is a resulting incongruity between falling renewable generation costs and final pricing for consumers.
METHODS AND MATERIALS
Researching the energy landscape of Alberta, this study recognizes the increasing penetration of wind and solar electricity generation, and then identifies the issue of falling costs of electricity generation from renewable sources alongside the confounding situation of increasing rates. The study involves evaluating the documentation of relevant entities in Alberta: the AESO (grid operator) and the AUC (market regulator) to determine their roles and their effects on the wholesale market. The structure and operation of a wholesale market were evaluated by studying AESO documentation and journal articles, effectively identifying the merit order effect. This research also incorporates public data from the Government of Canada, the Government of Alberta, and the Canada Energy Regulator.
RESULTS
The pool price is increasing in Alberta. Renewables such as wind and solar offer to supply electricity at or near zero marginal cost ($/MWh), as there are no operating costs associated with starting up or shutting down.
Alternate forms of dispatchable baseload electricity generation, such as natural gas, submit higher marginal cost offers to supply electricity, as they experience operating costs associated with fuel, non-generation, and starting up or shutting down. System Controllers at the AESO’s System Coordination Centre (SCC) determine the necessary capacity (demand) using the merit order to determine the clearing price, and electricity is then dispatched. Each minute, the highest priced offer/bid submitted and dispatched is designated as the System Marginal Price (SMP). After each hour, the pool price is calculated by averaging the last 60 SMPs.
Increasing penetration of wind and solar generation increases the market capacity. Alternate generators with higher marginal costs are forced to remain offline until it becomes economic, and they incur higher operating costs when put back online. This increases the market clearing price, which is effectively passed on to the consumer in the form of higher electricity rates.
DISCUSSION AND RECOMMENDATIONS
The open and competitive nature of the wholesale market will guide the forms of electricity generation implemented. The lower cost of electricity generated from wind and solar, when compared to relatively higher priced forms such as natural gas (with its volatile and increasing fuel costs) will guide the market toward increasing production from renewables.
Alberta will have to evaluate and optimize its market design (paying special attention to the merit order and clearing price) to ensure that ratepayers are benefiting from the low cost of renewable sources of electricity generation.
Alberta has placed a 6-month moratorium on approving new wind and solar projects larger than 1MW and would be well advised to use this time to re-evaluate their market and consider how to best provide the lowest cost electricity to rate payers.
Beyond possible introduction of a capacity market and introducing renewable caps, both of which may not be ideally suited to the current environment, other options are presented. By integrating machine learning into forecasting, we can trade electricity with probabilistic quantities not deterministic quantities. By integrating battery storage with renewables, we can store the electricity for demand response, mitigate intermittency, and even out the supply of renewable energy.
As electrification touches more and more parts of daily life, the demand for electricity will increase. Responsible management of resources will influence climate and the economy.
CONTACT
Your Name: Ross Nazareth
LinkedIn: https://www.linkedin.com/in/rossnazareth/