ALBERTA UTILITIES COMMISSION Application by the Alberta Electric System Operator for Approval of the First Set of ISO Rules to Establish and Operate the Capacity Market, Proceeding 23757, Application 23757-A001 MARKET DESIGN ISSUES IN THE ALBERTA CAPACITY AND ENERGY MARKETS Panel Mr. Christopher Russo, Vice President, CRA Dr. David B. Patton, President, Potomac Economics Mr. Jordan Kwok, Associate Principal, CRA February 28, 2019 Alberta Market Surveillance Administrator Suite 500 – 400 5 Avenue SW Calgary, AB T2P 0L6 MARKET DESIGN REPORT Table of Contents I. Introduction .................................................................................................................................. 7 II. Initial Observations and Commentary ..................................................................................... 12 III. Capacity Market Mitigation: Offer Price Cap Mitigation Level .............................................. 15 IV. Delisting: No Market Power Screening for Permanent Delist ............................................... 25 V. Energy Market Mitigation: Offer Price Cap Levels and Tiered Mitigation Thresholds ....... 29 VI. Capacity Market Demand Curve: Calculation of the E&AS Offset ........................................ 56 VII. Capacity Market Demand Curve: Selection of Reference Technology ................................ 66 VIII. Capacity Market Demand Curve: Calculation of Adjusted net-CONE .................................. 75 IX. Capacity Market Demand Curve: Overall Shape .................................................................... 80 X. Additional Commentary on Market Design Elements ............................................................ 89 Appendix A: Selected Analysis Background .................................................................................. 94 Appendix B: Curriculum Vitae of Testifying Experts ..................................................................... 97 ALBERTA CAPACITY MARKET | 2 MARKET DESIGN REPORT List of Figures Figure 1: Demand Curve Comparison, Market-wide Curves Only ............................................ 9 Figure 2: Estimate of Net Avoidable Costs by Technology Type ............................................ 16 Figure 3: Illustrative Alberta Demand Curve Locations as Function of Net-CONE ................. 19 Figure 4: Illustrative Effect of 500 MW Delist .......................................................................... 26 Figure 5: Historical Frequency of Pricing Hours when Supply Cushion in 250-500 MW Range ................................................................................................................................................. 38 Figure 6: Historical Alberta Supply Cushion Compared to Pool Prices................................... 39 Figure 7: Run Times for Simple Cycle Units, 2013-2018 (Full output events) ........................ 41 Figure 8: Illustrative Effect of Alternative Performance Factors .............................................. 78 Figure 9: Proposed AESO Demand Curve .............................................................................. 80 Figure 10: Graphical Comparison of Demand Curves in AESO Proposal and US Jurisdictions ................................................................................................................................................. 82 Figure 11: Demand Curve Comparison Accounting for Recent CONE Parameters ............... 83 Figure 12: Capacity Pricing Under a Sloped Capacity Demand Curve ................................... 85 Figure 13: Establishing a Target Excess Capacity Level ........................................................ 85 Figure 14: AESO Proposed Demand Curve with Comparisons .............................................. 86 Figure 15: Illustrative Capacity Market Outcome .................................................................... 95 Figure 16: Historical Alberta Supply Cushion .......................................................................... 96 ALBERTA CAPACITY MARKET | 3 MARKET DESIGN REPORT List of Tables Table 1: Summary of Findings and Recommendations .......................................................... 11 Table 2: Comparison of Capacity Offer Price Caps in AESO Proposal and US Jurisdictions 18 Table 3: Total Capacity Costs Relative to Clearing Location .................................................. 18 Table 4: Historical Capacity Market Outcomes as Compared to Net-CONE .......................... 20 Table 5: Coal Units Likely to Face Capacity Market Mitigation ............................................... 21 Table 6: Possible Cost of Capacity Market Offer Reviews ...................................................... 22 Table 7: Comparison of Delist Bid Rules in AESO Proposal and US Jurisdictions ................ 26 Table 8: Illustrative Effect of 500 MW Delist on Market Outcomes ......................................... 27 Table 9: Supply cushion and ASRP multiplier for mitigated units in energy market ............... 29 Table 10: Effect of various market-wide energy offer mitigation multipliers on net energy revenues and net-CONE for a simple cycle unit ..................................................................... 32 Table 11: AESO comparison of historic efficiencies to estimated efficiencies under proposed energy market mitigation scheme............................................................................................ 34 Table 12: AESO comparison of historic efficiencies to estimated efficiencies under proposed energy market mitigation schemeand an alternative scenario with flat 3X mitigation ............. 35 Table 13: Comparison of Energy Market Offer Mitigation Levels in AESO Proposal and US Jurisdictions ............................................................................................................................. 35 Table 14: Supply Cushion “Bucket” Analysis for 2013-2018 ................................................... 37 Table 15: Run Times Event Frequency for Simple Cycle Units, 2013-2018 (Full Output Events) ..................................................................................................................................... 40 Table 16: Sensitivity of Average-to-Marginal Cost Ratio to Gas Price and Heat Rate (for 30 min run time) ............................................................................................................................ 41 Table 17: Calculation of Additional Cost to Load of Allowing Start-up Cost Recovery through Energy Market Offers (30-minute events only) ........................................................................ 43 Table 18: Load Cost and Economic Efficiency Impact of Alternative Energy Mitigation Approaches (Summary of AESO Efficiency Assessment) ...................................................... 45 Table 19: Comparison of E&AS Offset Methodologies in AESO Proposal and US Jurisdictions ................................................................................................................................................. 59 Table 20: Calendar Year Flat Forwards, Prices ($/MWh) and Cumulative Volumes (MW) ... 61 Table 21: Gas Forwards and Realized Prices ......................................................................... 61 Table 22: Proposed E&AS Calculation Compared to Margins Based on Actual Market Outcomes ................................................................................................................................ 62 Table 23: Sensitivity of Proposed E&AS Methodology to Power and Gas Price Forwards (table in $/kw-year) .................................................................................................................. 63 ALBERTA CAPACITY MARKET | 4 MARKET DESIGN REPORT Table 24: Gross-CONE Estimates from Gross-CONE Report ................................................ 66 Table 25: Comparison of Reference Technology and Gross-CONE in AESO Proposal and US Jurisdictions ............................................................................................................................. 68 Table 26: Turbine Models of CT Plants Built Since 2008 or Planned in Alberta ..................... 70 Table 27: Planned CTs in Alberta (non-BTM) ......................................................................... 70 Table 28: In Service Date Progression for Select CTs ............................................................ 71 Table 29: Model-Specific Aero CT Installation Trends in North America (2013-2018) ........... 71 Table 30: Calculated net-CONE for Alternative Technologies Using Forwards Data for 2021 ................................................................................................................................................. 72 Table 31: Comparison of net-CONE adjustments in AESO Proposal and US Jurisdictions ... 76 Table 32: Historical Availability of Representative CT Units ................................................... 77 Table 33: Impact Analysis of Performance Factor .................................................................. 78 Table 34: Comparison of Demand Curve Parameters in AESO Proposal and US Jurisdictions ................................................................................................................................................. 82 Table 35: Capacity Auction Base Case Parameters ............................................................... 94 ALBERTA CAPACITY MARKET | 5 MARKET DESIGN REPORT ACKNOWLEDGEMENT This evidence was produced