In 2016, the then-NDP government decided to change Alberta’s energy-only market for electricity to a capacity market. This Alberta electricity market redesign was supposed to be completed by 2021. However, since the UCP won the 2019 election, they ultimately decided to scrap the plans to switch to a capacity market. The news was announced after a 90-day consultation to decide on which market plan would be better going forward in Alberta.
People in the province received the news with mixed feelings. Some loved it while others didn’t seem so happy about it. That main reason why is that it’s still quite unclear how the pros and cons of each market could affect Albertans. So, it is time for us to ask: How does this affect consumers both presently and in the future?
What is an energy-only market?
First of all, it would be helpful to know the difference between these electricity markets. According to the Alberta Government, an energy-only market is where generators are paid just for the electricity that they produce, and this price is based upon the fluctuating wholesale price of electricity. In an energy-only market, companies are free to choose the type of generation they produce (for example, wind energy, solar energy, geothermal, etc.) and where their facilities are located.
What is a capacity market?
According to the Pembina Institute, in a capacity market, electricity generators are “paid on both the ability to produce electricity, as well as electricity produced.” In other words, unlike an energy-only market, electricity generators are also compensated having generation capacity available at all times.
Alberta energy-only market vs. the capacity market
Now that you know the difference between an energy-only market and a capacity market, here are the pros and cons of each.
As stated by the Alberta Government, continuing with an energy-only market would be best for Alberta because its structure is simpler than that of a capacity market. In addition, the energy-only market has a good track record for providing a reliable and affordable supply of electricity as well as being well understood and supported by investors and electricity stakeholders.
Another advantage of not going through with the Alberta electricity market redesign is that it allows for more investment into renewable energy sources. Capacity markets require on-demand generation capacity, which isn’t necessarily compatible with some renewable power sources, such as wind or solar.
However, with an energy-only market, power has been historically cheap, and thus investing in the energy market can be unappealing to investors. Without investments, the electricity market would be unable to switch to renewable resources and ultimately, would be unable to keep up with the demands of the province. The amount of investment required isn’t a small number — up to $25 billion would be required to transition to cleaner energy and support growing energy demands for Alberta.
In contrast to the energy-only market, a capacity market would bring about more stable pricing since the profits for companies in an energy-only market rely on the volatility of the market, according to an Edmonton Journal story. While there may be low prices in periods of low demand, high demand can cause prices to spike and be quite costly for consumers.
When demand exceeds supply for electricity, not only are there price spikes for electricity but also rolling blackouts throughout the province, as reported by CBC. According to the Alberta Utilities Commission (AUC), a capacity market would ensure that there would always be sufficient capacity to meet demand and thus no unexpected blackouts.
Capacity markets, in addition to providing better power price stability, are meant to encourage competition and inspire innovation within the energy market, according to the Calgary Herald. For example, it could lead to innovation within the green energy sector and lead to an overall more sustainable energy generation. However, a potential downside of having a capacity market is that consumers could be stuck with higher electricity bills regardless of whether the extra capacity provided by the capacity market is used.
While capacity markets were initially considered for “… being a more inviting market for additional investment,” according to an article published by The Globe and Mail, the amount of investment required by the electricity market has fallen greatly and thus a capacity market may not be worth implementing.
Learn more about it
If you would like to learn more about energy in Alberta, EnergyRates.ca can be of help to you. This website is an unbiased cost-comparison tool for energy rates in Canada. EnergyRates.ca enables you to compare rates from major electricity and natural gas providers in Alberta, regardless of the status of the “energy-only market or capacity market” conversation. In addition to comparing the cheapest energy rates, you can learn more about the utility providers themselves as well as relevant topics such as energy disconnection and green energy credits.