Thread by @bcshaffer

My take on today’s Alberta electricity market announcement. A brief thread.

First, a disclosure. I was hired by this government to provide advice into this process through a report. I hope that report is made public. My comments will be (relatively) brief in light of that.

In 2017 there were 4 options on the table:
1. energy only with a higher cap
2. capacity mkt
3. long term supply contracts
4. cost of service regulation

Personally, #1 was my preferred route. Raising price caps in the wholesale market, however, was off the table. This left #2 as my preferred 2nd choice as it maintained a market-based system.

I disagree that the choice was ideological. That would have been #3 or #4.

Nor are capacity mkts ‘experiments’, they are well established in most North American wholesale markets, although they certainly have issues.

I support today’s move to remain on an energy-only market *but* it’s the details that come next that matter. Maintaining the EO with a relatively the current wholesale hourly price cap is problematic.

The problem is a reliability externality. With a price cap, consumers know they're capped on what they might have to pay in the short term market so they under-contract. If there’s insufficient supply blackouts apply randomly, so buying ahead of time doesn’t protect the consumer.

This leads to insufficient forward contracting and (potentially) insufficient investment. Paradoxically, a lower price cap, though well intentioned can as a result lead to higher average prices.

Simply raising the price cap is one solution, but it also has challenges. Namely with most demand not facing short-term prices, the ability to exercise market power is high and volatility abounds. This can lead to more forward contracting, which resolves the problem.

Absent that, my recommendation is an energy-only market with a rolling forward contracting mandate for load. This resolves the reliability externality and, importantly, maintains the fidelity of the energy market price signal.

This method also provides cost certainty for consumers, and real revenue certainty for generators, resulting in affordable and reliable power. What we want.

So: energy-only plus energy contracting 👍

Additionally, I recommended more interval meters so that demand is able to face short-term prices and respond accordingly. This is essential for a well-functioning short-term market. And while we’re at it, locational prices, at least for supply :)

So while I disagree with some of today’s rhetoric regarding ‘experiments’ and ‘ideology’, I think that an energy-only market can provide the best combination of reliability and affordability *conditional* on important modifications being adopted. I hope that work is starting now.