July 2022 Alberta Electricity Newsletter: Significant Changes in Transmission Policy

August 4, 2022
Christine Runge

From April to July the Alberta Government Department of Energy engaged in eight full day consultation sessions on a variety of topics. Their goal is to table a new draft regulation in fall session and have it approved by the government to be effective January 1, 2023.

This issues of ancillary services and zero-congestion policy have been effectively parked for now. The government consulted on both these topics, but ultimately decided not to make changes in either of these areas at this time. The government did note that it may look to re-open the Regulation again in two or three years to address these topics.

Ancillary services are currently paid for by load; however, increased volumes of variable renewable generation could result in a need for increased ancillary service procurement, raising the total costs. The government is interested in exploring if generators that cause these costs should pay them directly in the future.

The changes originally proposed by the government to the zero-congestion policy were narrow in scope, focusing only on allowing the AESO increased flexibility for short-term exemptions. The AESO is currently required to plan the transmission system based on zero-congestion, which means building transmission for forecast needs. The short-term exemptions allow the AESO to build just-in-time transmission solutions, which will result in short-term congestion until a transmission solution can be put into service. A number of concerns were raised with this approach given the AESO’s current transmission congestion management rule and the lack of transmission rights, which mean that a new generator can connect and cause congestion but the incumbent generators can be the ones seeing reduced revenues as a result of the local congestion.

On the other hand, stakeholders interested in discussing the zero-congestion policy were disappointed in the limited scope of exploration, noting that allowing short-term exemptions is inadequate and suggesting that the government should instead allow for a small amount of systemic congestion. The AESO is currently required to plan the system such that under normal operating conditions all in-merit energy can access the transmission system 100% of the time. Stakeholders suggested this to be a major driver of transmission costs and requested consideration of lowering the threshold to 95%-98%.

As noted, the government has decided not to make any changes to zero-congestion policy at this time;however, these should be considered open topics of policy debate over the next few years as government relations efforts may convince the government to either re-open or not re-open these issues sometime in the next few years.

The two areas expected to see major changes in a new Regulation are GUOC and line losses.

It was largely accepted by the government that line losses provide a poor locational signal given the possibility for significant year over year variability and the requirement to set fixed values on an annual basis. The government approached the conversation noting they did not require line losses to provide a locational signal given the existence of GUOC. With this initial consideration, the focus of there-design was on increasing clarity, predictability, and investor certainty, and reducing red tape. To meet these goals, the government intends to replace the existing line loss methodology with a system average line loss methodology.

Under the new approach, the AESO would calculate a line loss percentage for each calendar year and that percentage would apply equally to all generators, regardless of location. In order to implement this change, the AESO will need to amend its line loss rule and receive Commission approval for a new rule. Accordingly, if the new Regulation takes effect January 1, 2023, the new line loss calculation is expected to take effect in 2024.

This change will have a negative impact on generators that sited in response to a line loss credit and had planned to continue to each a credit into the future. However, most generators who have experienced major loss factor swings (by as much as 24% in a single year) will be happy to sacrifice the possibility of loss factor credits in exchange for the loss of volatility.

The government’s main goal associated with changing the Regulation as it relates to GUOC is ensuring a strong and efficient price signal. In order to ensure the price signal could be strong enough to incent changes in generation siting decisions, the government originally proposed to remove the $50k maximum and the refundability requirement from the regulation. This would allow the AESO to set GUOC at any level that could be justified and approved by the Commission.

This proposal caused significant concern to many generators planning development in Alberta as it results in significant uncertainty until new GUOC rates are approved and leaves the door open for the AESO to further increase GUOC rates again at any time in the future without any constraints beyond those the Commission may apply. Given considerable push-back, the government revisited this conversation suggesting an openness to including a maximum level in the regulation, but noting that it would need to be sufficiently high in order to ensure it wouldn’t be binding on the AESO. The government proposed $500k/MW non-refundable or a net-presentvalue equivalent amount (expected to be about $1m/MW) if the GUOC remains refundable. The new proposal did little to quell investor concerns.

The proposal to have generators make significant GUOC payments (of up to $500k/MW) and to eliminate refundability results in a significant departure from the current model in Alberta where: (1) load pays for transmission; (2) generators cannot be given transmission rights; and (3) there is a transparency objective where the energy price on a customer bill is reflective only of generation costs and the transmission price on the customer bill is fully reflective of transmission costs.

While noting that changes to the load pays model and the introduction of transmission rights were out of scope of the discussion, the government continued to express a preference for high non-refundable GUOC rates in order to best send a strong locational incentive. We will have to wait until a draft legislation is tabled to see where the government ultimately lands on this issue.

Generators seemed to be mostly aligned that GUOC could increase, but only into the $60k-100k range, and that GUOC should continue to be refundable. On the other hand, load raised concerns about the ever increasing costs of transmission and suggested that strong locational signals were required in order to ensure that new transmission isn’t needed.

Overall, the government is focused on changes to a very blunt tool that seems unlikely to achieve its goal. As currently designed, the new $500k/MW GUOC would apply to all connections within a specific region, which would likely completely halt development in a region, regardless of any available capacity at specific substations or for small or behind-the-fence generation. Similarly, energy storage is likely to add to rather than subtract from available transmission capacity in many cases, but under the current rules it would be equally subject to the same GUOC. The application of GUOC on the basis of maximum capability may also cause concerns as it results in a higher effective GUOC for resources with lower capacity factors.

These are the types of changes that the AESO can consider regardless of any changes made to the Regulation. The AESO has the ability to refine GUOC in order to meet the government’s goal of an efficient locational signal and should focus on increasing the granularity and making technology specific considerations.

Following a change to the Regulation, the AESO will need to consult on changes to its GUOC rule. If the AESO doesn’t lead the way in consideration of these types of other changes to GUOC, it will fall to industry to push for change in the AESO consultation and before the Commission when the AESO applies to have the rule approved.

In addition to these other changes, if the government either removes the GUOC maximum or increases the maximum to $500k, the AESO will likely be required to perform a net present analysis justifying its new GUOC choices in congested areas. All of this combined is likely to lead to a lengthy consultation and a contentions Commission proceeding. As a result, implementation of new GUOC charges is not expected fora couple years.

The last issue on the consultation list was non-wires solutions. While a healthy discussion was had at the consultation sessions, changes in this area are expected to be minimal. Bill 22 has already passed and includes the changes of interest to the government at this time. The Regulation is expected only to be amended to be consistent with the changes made by Bill 22, but it is unlikely to go further.

Bill 22 enabled and encouraged the use of non-wires solutions at both the distribution and transmission levels and further ensured that regulatory ownership of non-wires solutions would be significantly limited. This is another area to watch at the AESO. With these high-level changes, we will need to see how frequently the AESO considers non-wires solution procurement in its process.