November 2022 Alberta Electricity Newsletter: Consequences of the ISO Tariff Decision and Next Steps

November 30, 2022
Christine Runge

The highly anticipated decision on the AESO’s bulk and regional tariff application was released on November 10, 2022. In it, the Commission denied the AESO’s application.

The AESO applied for cost allocation methodology determines demand charges (12CP and billing capacity) based on costs required to serve demand and sets energy charges based on costs accommodate the flow of in-merit energy. NERA, the AESO’s expert, proposed flipping the historical order of classification and functionalization and proposed a new minimum system calculation to set the energy classification.  The AESO’s primary concern in moving to this approach was that the current rate design does not adequately consider the costs associated with accommodating the flow of in-merit energy and, accordingly, overstates the costs associated with using the system at peak hours (i.e. the 12CP charge). The resulting concern is that customers who avoid the 12CP charge are inefficiently shifting costs on to other customers who cannot or do not avoid the 12CP charge.

The AESO’s application relied heavily on the rate design principle of cost causation, which the Commission noted was largely not applicable in this case. Accommodating the flow of in-merit energy is a result of both load and generation siting decisions, but the Transmission Regulation prevents any wires costs from being allocated to generation and prevents any variation in tariff charges based on location. Further, recent and future wires costs are largely driven not by load, but by government policies (i.e. critical transmission infrastructure and the need to build out the system to accommodate the influx of renewable generation policies intended to reduce greenhouse gas emissions, such as the result of federal net-zero policies and carbon tax incentives).

The Commission determined that there should not be a 12CP charge, that rates should be overall difficult for consumers to avoid, that customers who benefit similarly should contribute similarly, and that consideration should be given to developing an off-peak billing capacity charge. The last of those items is designed to send a price signal for the efficient use of surplus transmission capacity, while the other items focus on the fairness in sunk cost recovery. The overarching goal for the next tariff application is to minimize inappropriate price signals that enable avoiding payment for the sunk costs of the system. All of these aspects should be worked into the AESO’s next application.

This suite of changes will likely be extremely problematic for large industrial customers who currently avoid paying the majority of the costs associated with the 12CP charge, either through active reductions in load or via self-supply. The AESO’s application was already causing high bill impacts and this more extreme shift to a fixed fee tariff that fully eliminates the 12CP charge can only result in higher bill impacts for those specific customers. In order to keep these customers from abandoning the grid completely under a new tariff, a load retention rate will need to be developed.

In the meantime, the Commission’s wholesale rejection of the AESO’s application leaves two major issues outstanding. First, the 12CP charge is yet unchanged, leading to inefficient decisions by market participants who are avoiding a charge that has been determined by the Commission to not be sending an appropriate price signal. This issue is not a significant concern. The Commission’s decision has provided strong direction on the boundaries of the next rate design. While new rates may not take effect until 2026, 2027 or even 2028, this decision adequately forecasts the future such that current market participants will discount the ability to avoid the majority of the tariff rates in making any decisions to install capabilities to become price responsive or in developing of behind-the-fence generation.

Just as costs associated with transmission infrastructure are sunk, so too are costs of existing behind-the-fence generation. Implementing a new rate design more quickly could not impact the existence of those assets, it could only impact their ability to recover those sunk costs and earn a return on investment. This multi-year delay in implementation of a new rate design could be considered as a substitute for the rate mitigation proposal that accompanied the AESO’s, now denied, proposed rate design.

Additionally, now could be a terrible time to change the rate design. The limitations noted by the Commission (the load pays model and postage stamp pricing) are limitations imposed by the Transmission Regulation. While a change in government has prevented a new Regulation from being tabled and passed in fall sitting, industry may still receive a new Regulation in the coming years.

If this UCP government holds onto power in the next election, it is noteworthy that a new Minister of Affordability and Utilities was created. While the mandate of this minister is yet unknown, it can be assumed that affordability is at the forefront of this government’s policy goals. This may open the doors wider for changes to the Regulation, which may include consideration for changes to the load pays model and the postage stamp pricing requirement. If those changes do occur, market participants will be happy not to have had a major transmission tariff overhaul at this time as a second transmission tariff overhaul would be required.

The second outstanding issue is of much greater and more immediate concern: energy storage remains without a new rate option, leaving it with only Rate DTS in its current form should it choose to grid charge.  This high transmission tariff cost associated with grid charging severely limits the ability to earn profits from engaging in energy price arbitrage or other market opportunities. Behind-the-fence storage paired with renewable generation assets, such that storage can shift the timing of the generation profile, continues to have potential. However, energy storage may not be able to move forward on an investment decision if it planned to rely on grid charging.
Further, the Commission has suggested its preference in the next tariff application is not for an energy storage rate class, but instead for Rate DTS reform paired with energy storage use of Rate DTS. The Commission’s goal is for Rate DTS to recognize the benefits of consumption during periods of surplus capacity by creating an off-peak billing capacity rate. However, the Commission has also suggested the next tariff be designed to be largely unavoidable in recognition that costs are largely sunk and changes in load behaviour has minimal impacts on future costs. On balance, these two items may not create a Rate DTS that is workable for energy storage.

The Commission has not prevented the AESO from creating an opportunity service rate in the next application; however, it would require the AESO to provide sufficient evidence to demonstrate that the creation of an opportunity service rate and its use by energy storage provides an overall net benefit to transmission system customers in the form of additional incremental revenue.

The AESO is required to file a new application by January 1, 2025. This is a long way off. The AESO should not need two years to develop a new proposal through consultation and draft a new application; however, they may choose to park this issue for a while before resuming consultation, given the generous time allotment and given the potential for a new Transmission Regulation.

The Commission also noted in its decision that the AESO may choose to file an off-peak billing capacity rate structure on a stand-alone basis earlier than the rest of its next rate design application. If the AESO takes this option, it may be helpful to energy storage developers, who will be able to see the proposed off-peak option under DTS before completing consultation on the remainder of the tariff, which will include whether a carve out opportunity service rate is required.

Overall, self-suppliers and price responsive loads will be happy to retain the old rate structure for at least a few additional years, though not happy to see what lies ahead for them and energy storage developers will be frustrated to see no progress in the removal of a barrier to their development.