Electricity Resource Compensation Under a Net Zero Future

E3 is a 130+plus-person energy consulting firm with offices in Calgary, San Francisco, Boston, and New York. Founded in 1989, E3 helps utilities, regulators, policy makers, developers, and investors make the best strategic decisions possible in this period of transition in the electric and gas sectors. Because E3 works with clients from all sectors of the electricity industry across the Canada and U.S., we provide a 360-degree understanding of markets, planning, policy, regulation, and environmental factors. Just as important, we are committed to delivering clear, unbiased analyses that help clients make informed decisions often in complex and multi-stakeholder contexts.

Electricity markets will have to evolve to ensure reliability (capacity and security) while delivering renewable energy required by policy or economics. Widespread adoption of renewables across North America has changed how resources are being compensated. Generally, energy markets have historically been the primary avenue for compensation but given the zero-variable cost nature of renewables, it is expected that this will move to the bottom of the revenue stack and will be replaced by either renewable attribute value or capacity value depending on the resource. Canada is host to a wide range of energy market designs including energy only in Alberta, vertically integrated utilities across many provinces, and a hybrid market in Ontario. E3 proposes to show that while scarcity and carbon pricing combined with Alberta’s TIER credit regime provide adequate support for renewable energy, revenues are insufficient for flexible gas generation to remain profitable. Reliability payments and a strong capacity accreditation regime will be a required part of the market to maintain adequate capacity on the system. Increasingly granular settlement and ancillary service products will also be key to ensuring that the system has sufficient flexibility to handle large amounts of renewables.

Our talk will build on our recent long-term capacity expansion modeling analyzing Alberta's electricity sector, focusing on integrating renewable energy sources (wind and solar), storage technologies, geothermal power, hydrogen peaking plants, and carbon capture and storage (CCS) facilities. Our analysis incorporates expected Canadian carbon pricing and investment tax credit policies to reflect real-world conditions. The findings highlight that a significant investment in wind power, coupled with extensive storage capacity with increasing durations, emerges as the most cost-effective solution. Additionally, the outlook reveals that while modest allocations towards CCS infrastructure and hydrogen peaking plants are economically viable strategies for balancing the electricity system while achieving net-zero emissions, an incremental revenue source will be required to maintain the existing thermal fleet for reliability purposes.