Long Term Adequacy Recommendation

1. Long Term AdequacyRecommendation March 5, 2007 Colleen Fairhead Gordon Nadeau

2. Background

3. What is LTA Initiative? • On June 6, 2005 the Alberta Department of Energy (DOE) released a Wholesale Market Policy • AESO began discussion with stakeholders on LTA in November 2005 • open invitation • meeting information posted to website • active participation by DOE

4. Requirements of Policy Paper • Metrics: The entire suite of LTA related information items, including historical data, forecasts and leading and lagging indicators that the AESO will regularly capture, calculate and report upon • Thresholds: Specific points/quantum with respect to one or more metrics when if breached or forecast to be breached, the AESO may choose to implement one or more Threshold Actions • Threshold Actions: The “out of market” measures the AESO may choose to implement to remedy an actual or impending LTA shortfall

5. Principles • The combination of Metrics, Thresholds, Threshold Actions and Enhancements will: • work together harmoniously • create awareness of long term adequacy in Alberta • maintain the integrity of Alberta’s energy-only market • The combination of Metrics, Enhancements, Thresholds, and Threshold Actions will not: • be a self-fulfilling prophecy. For example, the generation developer community will not wait until the LTA Solution is executed before building generation • create perverse incentives such that there are windfalls or substantial capital leaves Alberta or plant retirements are unduly advanced. • be a price management tool. • Stakeholders will not be “surprised” when and if any portions of the Action Plan are executed. Stakeholders will not be “surprised” at how the Action Plan is executed.

6. What is LTA in an Energy Only Market? • EUA states that “the need for and investment in generation of electricity are guided by competitive market forces” • In energy only market, the market determines the right level of reserves • Traditionally regulated markets set reserve margin targets • Some markets implement capacity markets to encourage investment, due to significant bid mitigation and transmission constraints • What happens if that level is not enough?

7. Bridge A Temporary Adequacy Gap

8. Locational Resource Adequacy • LTA does not address threshold or threshold actions if adequacy is an issue on a regional basis • Regional issue suggests the problem is transmission adequacy, not generation adequacy • Regional issues are currently dealt with through Operating Policies and Procedures • LTA recommendations do not directly apply, however similar tools may be considered • Transmission status will continue to be reported, and likely be referenced in adequacy reports

9. Market Modifications • Early in process, stakeholders expressed a desire to address “market modifications” • Market Modifications: Any changes to the market that the AESO can implement on a permanent basis to improve LTA and decrease the probability of a Threshold being breached

10. Recommendations

11. Metrics

12. Rationale for Metrics • Suite of metrics chosen because: • They cover the key elements which directly or indirectly measure adequacy • Are relatively simple to understand and will promote understanding of the market • To the extent possible, are based on publicly available and verifiable information • Provides an outlook on adequacy

13. Metrics Reporting • AESO would publish a quarterly report providing a snapshot of all metrics • Some metrics may be published separately and updated on an ongoing basis • Publication timing would be developed through the ISO rule process

14. Metrics • New Generation Status and Retirements • Reserve Margin • Supply Cushion • Two Year Probability of Supply Adequacy Shortfall • Loss of Load Probability (LOLP) and Expected Unserved Energy (EUE) • Generation Investment Signposts • Contribution to Fixed Costs of Notional Gas Fired Peaking Unit

15. New Generation Status and Retirements • Near term outlook for generation capacity in Alberta • Information drawn from wide variety of publicly available sources; AESO confidential information would not be disclosed • Information provided on four general categories: • Active Construction: generation projects under construction or otherwise committed to completion • Approved: projects that have secured regulatory or other approvals and permits required to proceed • Announced: projects in the early study stage or have a limited level of investment • Retirements: units being demolished or otherwise committed to retirement; potential retirements associated with expiring PPA contracts

16. Reserve Margin • Historical and forecast outlook for AIL and AIES reserve margins • Defined as: (Installed Generation Capacity – Peak Demand) x 100 Peak Demand • Data Sources: • Peak demand from AESO published load forecasts • Existing generation from CSD report • New capacity from Active Construction projects in New Generation metric • Other scenarios, as development progresses • Installed capacity will also address: • Wind and hydro derates • Cogeneration available capacity to meet peak • Intertie capacity

17. Supply Cushion • Two year forecast of AIES available daily generation capacity and peak demand • Defined as: (Total Daily Supply – Estimated forced outages) – Daily peak demand where Total Daily Supply incorporates available energy excluding wind; available energy incorporates reported planned outages and estimated forced outages; forced outages are based on generator history • Data Sources: • Daily peak demand from AESO published load forecasts • Existing generation from CSD report • New capacity from active construction projects in New Generation metric • Two years of reported planned outages (a new AESO market requirement) • Total Daily Supply addresses: • Hydro derates on monthly / seasonal average basis • Cogeneration available capacity to meet daily peak • Available wind and import ATC would also be provided for context

18. 2 Year Probability of Supply Adequacy Shortfall • Two year probabilistic assessment of an AIES supply shortfall • Supply shortfall expressed in terms of: • Expected number of hours of involuntary curtailments, • Expected total MWh’s not served, and/or • Expected number of events of involuntary curtailment • Data Sources: • Hourly demand from AESO published load forecasts • Existing generation from CSD report • New capacity from committed projects in New Generation metric • Two years of reported planned outages (a new AESO market requirement) • The probabilistic model will have a distribution of outcomes addressing: • Intermittent or energy limited production (wind and hydro) • Generation outages and derates • Available import ATC would be estimated within the model

19. Loss of Load Probability (LOLP) and Expected Unserved Energy (EUE) • Long term probabilistic assessment of an AIES supply shortfall • Supply shortfall expressed in terms of: • Probability of involuntary curtailments expressed in total hours, • Expected total amount of unserved load in MWh’s • Data Sources: • Hourly demand from AESO published load forecasts • Existing generation from CSD report • New capacity from New Generation metric plus estimated cost of new generation • Two years of reported planned outages (a new AESO market requirement) • Estimated price responsive load (AESO estimate) • Forward fuel prices (published source to be determined) • The probabilistic model will require: • The calculation of hourly pool prices (not expected to be published) • An assessment of the cost of entry for all potential types of new generation

20. Generation Signposts • Short term forecast which compares several generation investment indicators specifically: • Reserve margin • Forward electricity and natural gas prices • Levelized cost in $/MWh of new generation (coal-fired, gas-fired, wind) • Data Sources: • Reserve margin metric • Energy prices from publicly available sources (brokers, NGX) • Levelized cost components reported and easily calculated; data sources to be determined but non-confidential information used • The metric will seek to identify general inconsistencies between the need for new generation, forward prices and the cost to build new generation

21. Contribution to Fixed Costs of Notional Gas Fired Peaking Unit • Historical investment indicator which shows the contribution to fixed capital a new gas-fired peaker could have received over the previous three years. • Data Sources: • Hourly electricity prices (AESO) • Daily natural gas prices (NGX) • The metric is not a forecast, only a rough investment indicator which provides an opportunity to compare the capital cost of a new unit to fixed cost contribution that might have been received. • It does not attempt to access the impact that adding a new unit might have had on pool price.

22. Threshold

23. Threshold • 2 year Probability of Supply Adequacy Shortfall (2yrPSAS) • Value has to be determined after metric is developed and historical information is evaluated • Will be used to determine when Threshold Action should – and should not – be implemented • Expect threshold level to proceed through normal rule consultation processes

24. Threshold Actions

25. Objective • Effective – must directly address an impending adequacy issue • Market stability and certainty – assess the impact, however understanding that it will be hard to predict • Cost – all actions will have a cost. Actual cost will be difficult to predict.

26. Threshold Actions • Load Shed Service • Offer to curtail load • Back-up Generation • Existing generators, not built with intention of offering into the market • Excess to onsite needs • Emergency Portable Generation • Temporary addition offered by stakeholder • Considered complementary services that would compete on similar terms

27. Threshold Action Options • Other options considered (in report appendix) • Some expected to have a significant financial cost that outweighs the perceived contribution to the LTA bridging solution • Others require significant structural market changes

28. Terms of Threshold Actions • Terms of contract to be determined • Only contracted when necessary • Only called upon when in supply shortfall procedures

29. Main Contract Features • MW Amount • Minimum Length of curtailment period/minimum run time • Notice period prior to dispatch • Compensation • Penalties

30. Rationale for Threshold Actions • Expected can provide significant capacity at the time it is required, and relatively quickly • Minimal impact on the market when they are procured and when they are dispatched • Costs could be significant when procured (unsure of what offers will be), however overall cost should be much lower than most other options • Timeliness of procurement – purchased only when necessary • No long term capacity payments

31. Who Pays? • Load would pay for threshold actions • Rationale: Alternative is that load would be curtailed (and pay through curtailment) or pay for load shed service to avoid curtailment

32. Will it work? • Precedent that reasonable capacity was offered through a similar program in 1998 – 2000 • About 600 MW of interest, although each month there was 112 to 190 MW offered • DOE study referenced in 2005 market policy indicated that there could be about 600 MW of curtailable load available.

33. Market Modifications

34. Outage Reporting • Report outages and expected retirements 24 months in advance • Submitted on monthly basis • Used as input into adequacy reports • Continues to be confidential • Increase accuracy of metrics • Improve AESO planning ability

35. Outage Reports • AESO to report historical actual outage information • Information generally available today, although not in a convenient format and may not be fully inclusive • May provide historical information on outage forecast schedules • Metrics can be replicated, albeit at a later date • Enables evaluation of accuracy of forecasts

36. Scope of Market Modifications • Some interest to expand scope of project to include more modifications • Price cap/floor • Interties • Demand Response • Concerned that such discussions will extend outside scope of LTA • Market Power • Transmission Planning • Interjurisdictional issues • Mixed stakeholder views

37. Additional Items Considered

38. Threshold Actions Not Recommended Under LTA • Adequacy Contracts • Acquire Intertie Right of Way/Add Intertie Capacity • Lowering Interval Meter Threshold • Temporary Price Cap Increase • Constrained on Payments to Generators • Acquire Site for Portable Generation

39. Market Modification Items Not Recommended Under LTA • Permanent Increase to Price Cap • Formal Outage Coordination • Ancillary Service Expansion • Education for Demand Side Response • Force Wait Period for a Generating Unit to Return from Retirement • Discipline for Price Offer Pairs • Improvements to Distribution Rate Structure • Load Purchases Long Term Capacity Options

40. Next Steps

41. Next Steps • Submission Feedback – Thursday, March 8 • Progressing development of metrics • Will initiate discussions with stakeholders within next month • Rules process • Will be initiated after recommendation is finalized

42. Metrics Timeline

43. Contact Information Colleen Fairhead colleen.fairhead@aeso.ca (403) 539-2462 Gordon Nadeau gordon.nadeau@aeso.ca (403) 539-2568

44. Discussion