What is a Capacity Market and What Are its Benefits for Alberta?

*Updated November 2024: On April 18, 2024, the Alberta government announced the RRO would be renamed to the Rate of Last Resort (RoLR). The proposed change was done to provide more clarity to electricity consumers and encourage them to explore other retail energy options. The RoLR will be set at a fixed rate every two years rather than month-to-month as was the case for the RRO. The RoLR came into effect on January 1, 2025. We have updated certain sections of this article with the term RoLR. To learn more about the RoLR, check out our in-depth article.

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The Alberta Government has come to an apparent realization: in order for Alberta to meet its electricity goals, it needs to change its electricity system. As a result, in June of 2018, legislation passed “an Act to Secure Alberta’s Electricity Future” by transitioning from the current energy-only market into a capacity market — but what does this mean for electricity consumers, both now and in the future?

What is an energy-only market?

Alberta’s electricity system is currently based on the energy-only model. In fact, it’s one of only two jurisdictions in North America that is using this model to date. According to the Government of Alberta, with an energy-only market, energy generators are “only paid for the electricity they generate and sell to the market.” The price of electricity for consumers is thus based on a supply and demand model: when supply is high and demand is low, the price for electricity remains lower; however, when demand increases, it puts strain on the supply, causing prices to increase. That leaves consumers to face price volatility and market spikes during peak demand seasons—a burden which could be alleviated with a capacity market in Alberta. The other problem with the energy-only market is that it depends on its own market volatility in order to attract new investors. Since investors, the Alberta Government explains, “[rely] on the ability to leverage a few high-priced hours to recover their invested capital,” their interest in investing in the Alberta market is limited to when market volatility presents opportunistic circumstances. That becomes problematic when the goals set by the Alberta Government require “up to an estimated $25 billion of new investment in electricity generation by 2030 to support the transition toward cleaner sources of energy and meet the electricity needs of a growing province.” In order “to serve Albertans in the 21st century,” and to make investment opportunities and the diversification of the energy market a more viable action plan, their site reads, they need to move to a capacity market in Alberta.

What will it mean to have a capacity market in Alberta?

Introducing a capacity market in Alberta means developing an energy system that is based on two separate markets, one in which “generators compete to sell their produced energy,” and another in which “generators compete for payments to keep generation capacity available to produce electricity when required.” Thereby, generators will receive two revenue streams (energy payments and capacity payments), which will help to lessen price volatility, stabilize electricity supply, attract more investment and innovation, and increase the need for generators to compete to provide the lowest costs. Capacity markets are already used around the globe (including in the U.K. and the U.S.). As a result of their widespread use, they’ve already been proven capable of maintaining price stability while also opening the door for both competition and innovation in the energy market. The Alberta Government aimed to introduce a capacity market in Alberta to facilitate both an increase in investment, which will lead to an increase in market competition, and an increase in diversification and innovation within the green energy sector, all while protecting consumers from price volatility. The capacity market was expected to be operational in 2021. In the meantime, the Government of Alberta implemented a four-year electricity price cap on the Regulated Rate Option (RRO)(now known as the Rate of Last Resort), which came into effect June 1, 2017, to protect consumers from price volatility as the electricity market transitions. However, in 2019, the Alberta government decided to retain the energy-only market system. The provincial minister at the time, Sonya Savage, said the Alberta government stuck with an energy-only market because it believed it provided more affordability and a simpler structure. The question of introducing a capacity market remerged in January 2024 during a severe cold snap. Some experts believed a capacity market would have helped the province meet the high demand and avoid the grid alerts caused by the extreme cold weather. Implementing a capacity market takes careful planning and numerous considerations.