A summary of the Module B Study: Overview of Modeling Results and Key Findings prepared for the AUC

February 22, 2024

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A new analysis report commissioned by the Alberta Utilities Commission recently came out that examines Alberta’s electricity market. It implies that moving off of fossil fuel energy will negatively impact the reliability and affordability of Alberta’s electricity.

If this is true, then the key takeaway for Albertans and our leaders should be that we need to reconsider the province’s electricity market design, and make sure there are incentives and regulations that promote renewables (in appropriate sites) while ensuring reliability and affordability.

What should NOT be the takeaway: Alberta should resist decarbonization.

That’s according to Ruiping Luo, AWA conservation specialist who reviewed the report, which was prepared for the Alberta Utilities Commission by London Economics International.

“Alberta needs to transition to renewable energy for human and environmental health,” she explained.

So, if our market doesn’t currently allow for this while also being reliable and affordable, as the analysis suggests, then we need to change the way the market is designed, instead of abandoning our goals to move away from fossil fuels.

It’s also important to take the report’s findings and implications cautiously — as the information that informs the report can skew its results, Ruiping explains.

“The report did not question any of the assumptions provided by AESO (Alberta Electric System Operator),” she said, “Which means it’s reliant on information provided by the province.”

“For any model, the assumptions matter, because they are the starting point and can vastly change the results. Starting its research based on AESO’s Long Term Outlook report means incorporating their estimates for what the mix of electric generators is going to look like in a few decades, and there are a lot of unknowns in those assumptions, including how new technologies will change and improve efficiency.”

 

The recently released Module B Study: Overview of Modeling Results and Key Findings has concluded that, under Alberta’s current electricity market, decarbonizing will impact the reliability and affordability of Alberta’s electricity. Among other concerns, the report states, “The current energy-only market design does not provide sufficient economic incentives to ensure electric system reliability in Alberta under the modeled conditions,” and “Alberta’s existing electricity market framework does not mandate a specific quantity of new investment on a going forward basis or any system reliability requirements.”

This report implies that Alberta’s current electricity market design is not able to provide Alberta with reliable, affordable and decarbonized electricity. Assuming the report is accurate – which is disputed, considering it did not question any of the assumptions provided by AESO – this suggests that the electricity market needs to stop being entirely free-market, and there needs to more control on when fossil fuel generators retire and on how much new renewable energy is available to replace it. This could be accomplished through incentives or through stronger regulatory control.

Also, as the report states, there need to be more “flexible resources” that can be deployed when renewables are able to generate electricity. This might include some fossil fuel generators, but it can also include battery storage. The report does not mention how incorporating small-scale renewable energy source (i.e. adding solar panels to residential housing) would impact results, though does mention that “small changes in demand have a profound impact on Pool Prices.” So, if enough residential solar panels were installed that demand lowered, the grid could become considerably more stable and less costly.

There may be risks to transitioning to renewable energy, yet there are clear consequences for failing to transition. Last year was the hottest year on record. In Canada, we saw the effect in low snowpack and record-breaking high and low temperatures, conditions that will affect the coming year, with drought already predicted for much of Alberta. This is a question not answered in the report: what are the costs of failing to meet net-zero goals, and of living in a warming world?

Highlights:

• The report considered 2 main cases: a decarbonization by 2035 and a decarbonization by 2050.
• Renewables are able to produce electricity for cheaper when running, since they do not require fuel inputs.
  • In the model, Pool Prices (how much electricity is sold for) were often at $0/MWh.
  • With Pool Prices at $0/MWh, fossil fuel generators are running at a loss. The model predicts more fossil fuel generators will then shut down.
• Because of Alberta’s current market, investment depends entirely on “investor expectations”, or how much investors expect in profit.
  • As a result, as more renewables come online, electricity prices will be lower. This makes it less worthwhile for investors, so investment into renewables will slow.
  • The early loss of fossil fuel generators and slowing of renewable investment will decrease electricity supply and threaten reliability.
  • The model found this volatility, along with carbon pricing, impacts cost.
• Alberta’s market may benefit from economic incentives or reliability requirements.
• As a modelling exercise, the report relies heavily on assumptions, including assumptions from Alberta Electric Service Operator’s (AESO) preliminary 2024 Long Term Outlook (LTO).
• There is no comparison with a baseline “business as usual” scenario. In other words, the report does not show how reliability and affordability will be impacted if Alberta continues to rely on fossil fuel generators and should not be used to examine whether the grid must be decarbonized.
• Report was prepared by London Economics International and funded by the AUC.