In Alberta’s competitive electricity market, where independent producers sell power at real-time prices, a plan to sign long-term contracts with gas power plants is ruffling feathers among stakeholders.

The Alberta Energy System Operator (AESO) cast the contracts as “no turning back” option that may be required for a reliable supply of energy. Industry stakeholders called them the “beginning of the end” for Alberta’s free energy market. Or, they could be seen as Alberta “quietly planning to subsidize gas plants,” wrote The Narwhal, reporting that gas producers had lobbied the province to extend the life of their facilities.

Restructuring Alberta’s Energy Market

The AESO’s gas contracts proposal emerged as the operator makes plans to modernize Alberta’s electricity system, which has been unique in Canada since it was deregulated nearly two decades ago. While other provinces run government-owned utilities, Alberta has a market-driven approach in which independent power producers compete to sell electricity to utilities, which then distribute it to consumers. To keep competition fair, producers shouldn’t be able to get an edge by signing contracts with the government.

But recently, changes like the rise in renewable energy have challenged the system, which was designed when coal plants provided 80% of Alberta’s electricity with a fixed, predictable supply. The AESO was mandated to restructure the system to address this challenge while ensuring greater reliability and affordability. It published its plans [pdf] in March.

Long-Term Contracts

The system operator’s report contains a range of possible strategies, including one that critics say could undermine the free market: it suggests using long-term contracts to keep converted coal-to-gas plants running for “strategic reserves” of energy.

This carries risks, the AESO acknowledged: “Long-term contracting is a significant intervention in the market and is likely to dampen investments in controllable supply not supported by contracts, which will reduce the market’s ability to maintain long-term supply adequacy.”

In other words, by offering contracts to some producers, AESO may be discouraging investments in other electricity projects that still need to compete to sell their product. “The introduction of these contracts is therefore a ‘no turning back’ decision and should not be taken lightly,” the system operator added.

But this drastic option might be necessary, it wrote, because new low-carbon technologies might not be reliable enough in the next decade. At the same time, aging gas plants are likely to retire by the late 2030s due to rising carbon prices and federal gas regulations.

Backlash from Stakeholders

At an early September information session on the AESO’s plans, some stakeholders warned

that even discussing long-term contracts could disrupt the market, calling them a “band-aid” solution to keep fossil-fuelled power plants running. The contracts would create uncertainty and inhibit energy providers from building supply, especially when there might be an option to build on a more-secure contract, the critics argued.

The contracts would also contradict past policies to protect Alberta’s free market energy system, said Horst Klinkenborg, a senior regulatory advisor with Calgary-based Suncor Energy. At the session, he questioned whether they reflected the operator’s distrust in the market.

Nicole LeBlanc, the AESO’s vice president for markets, responded that the operator anticipates a state of instability or disequilibrium in the market for the next few years. Being responsible for adequate supply, the AESO is “nervous,” LeBlanc said, that the market signals that have worked for the past 20 years will be challenged over the next three to five.

The AESO is also concerned about the combination of the market restructuring under way and “unknown” clean electricity regulations. “We see the strategic reserves as the tool that can address that risk for the interim period, while the market resumes to get to a place of restored investor confidence,” LeBlanc said.

Spencer Hall, the AESO’s manager for market design, said that while the operator proposed long-term contracting, it doesn’t necessarily think the approach is needed. “The market design changes will be enough to attract the types of investment we require,” Hall said.