©
E D C
A S S O C I A T E S
L T D .
⎯ “A Tale of Two Cycles” ⎯
Foreword
This document presents a distribution of possible future values for each of demand, supply and the
resultant pool price of electricity. These are developed from probabilistically combined scenarios, or
collections of assumptions, over a fifteen-year forecast period, expressed in terms of energy and peak
demand, for of all consumers in the province of Alberta as well as potential exporters. Each scenario for
future demand is convoluted with a matching set of assumption for electricity supply, including both
internal generation and import supply capacity, to derive probabilistic forecasts of the marginal supply
cost of power over time. This is modified by the addition of strategic offer strategies to yield the
wholesale electric pool price forecast. The range of forecast scenarios represents a range of possible
future outcomes that is approximately equal to ±1.3 standard deviation about the mean—equivalent to a
statistical confidence interval of 80 percent. The P10 and P90 levels represent reasonable upper and
lower bounds for these values, but tighter or looser bands could be developed, depending on the certainty
required.
Each year, EDC also presents a special topic. This year’s feature chapter will show the shortcomings of
the time-honored, but rough “Levelized Unit Electricity Cost (LUEC)” method for deciding the relative
economics of different generation technologies and how each should be used to grow the generation fleet
(e.g. Simple-Cycle vs. Combined-Cycle). “A Tale of Two Cycles”, proposes an elegant and more intuitive
adaptation of this approach. This discussion also addresses how the choice of technology oscillates over
the course of the “build cycle” for generation, from glut to scarcity. The modified technique also informs
the issue of concentration, the role of pivotal suppliers in minimizing the “missing money” problem and
the deteriorating adequacy of the $1,000/MWh price cap.
An independent consultant, EDC Associates Ltd. (EDC) has prepared the forecasts presented herein as
part of a multi-client study. The information is intended to be used by each participating client for the
purpose of business planning activities involving long-term electricity related initiatives in Alberta that
may currently be under evaluation. All assumptions, models, processes, historical electric energy data and
other public or proprietary data gathered by EDC, as an ongoing concern, relating to economic,
demographic, technological and other factors which affect the utilization of electric energy that have been
used to develop the results discussed in this study, are the proprietary property of EDC Associates Ltd.,
except where noted.
This document has been produced by:
EDC Associates Ltd.
April 15, 2008
Copyright © EDC Associates Ltd., 2008
No section of this study may be copied or reproduced in whole or in part without
the written consent of EDC.
EDC Associates Ltd.
10th Floor, 888 – 3rd Street S.W.
Calgary, Alberta T2P 5C5
Phone: (403) 444-6868 • Fax: (403) 444-6688
i
©
E D C
A S S O C I A T E S
L T D .
Acknowledgments
The project manager, would like to acknowledge the input of several staff that made specific
contributions with respect to the research, computer modeling, graphics, writing and final editing that
have resulted in this report:
Erika Goddard,
US, Canadian & Alberta macroeconomics, energy demand forecast analysis and
text.
Christian St. Arnaud, Oil and natural gas market review, analysis and text.
Ricardo Rangel,
Energy demand forecast analysis and text. Generation supply review, modeling,
analysis and text.
Kris Aksomitis,
Electricity industry modeling and review, analytical methodology research and
analysis, electric energy price modeling analysis and text.
Allen Crowley
Overall Project Manager, Levelized Unit Electricity Cost research and text.
The above noted individuals have spent many hours to deliver this report. We hope you find it both
informative and useful in your particular endeavors in the Alberta electric energy industry.
ii
©
E D C
A S S O C I A T E S
L T D .
Disclaimer
The information provided in this report is of a forecast nature and is based on what are believed to be
sound and reasonable methodologies and assumptions, however cannot be warranted or guaranteed with
respect to accuracy. Therefore, any use of the information by the reader or other recipient shall be at the
sole risk and responsibility of such reader or recipient.
The information provided in this report and the facts upon which the information is based may change at
any time without notice subject to market conditions and the assumptions made thereto. EDC
Associates Ltd. is under no obligation to update the information or to provide more complete or accurate
information if and when it becomes available.
EDC Associates Ltd. expressly disclaims and takes no responsibility and shall not be liable for any
financial or economic decisions or market positions taken by any person based in any way on information
presented in this report, for any interpretation or misunderstanding of any such information on the part
of any person or for any losses, costs or other damages whatsoever and howsoever caused in connection
with any use of such information, including all losses, costs or other damages such as consequential or
indirect losses, loss of revenue, loss of expected profit or loss of income, whether or not as a result of any
negligent act or omission by EDC Associates Ltd.
iii
©
E D C
A S S O C I A T E S
L T D .
⎯ Table of Contents ⎯
Introduction ....................................................................................... 1 The Year in Review ......................................................................................... 1 Demand ..................................................................................................... 1 Transmission Infrastructure ..................................................................... 2 Supply ....................................................................................................... 2 Emissions .................................................................................................. 3 Market Regulation .................................................................................... 3 Study Design and Scope ........................................................................... 4 Risk Analysis Methodology ............................................................................. 4 Short-run Risk Variables ........................................................................... 4 Expanded Long-run Risk Variables .......................................................... 5 Executive Summary ........................................................................... 8 Macro Economics............................................................................................ 8 Electric Load Forecasts ................................................................................ 10 A Tale of Two Cycles .................................................................................... 12 Supply Resource Development ..................................................................... 13 Electricity Price Forecasts ........................................................................... 15 Macro Economics ............................................................................ 17 US Economy ............................................................................................ 18 Canadian Economic Outlook .................................................................. 22 Alberta Macroeconomic Outlook............................................................ 34 Oil and Natural Gas Market Outlook ............................................................. 40 World Oil Supply and Demand Outlook ................................................... 41 Oil Price Forecasts ................................................................................. 42 Alberta Oil Production ............................................................................ 47 Natural Gas Forecast ............................................................................. 55 US Natural Gas Market Outlook ............................................................. 56 Natural Gas Price Forecast .................................................................... 58 Alberta Natural Gas Outlook .................................................................. 60 Oil and Natural Gas Price Distributions ........................................................ 63 iv
©
E D C
A S S O C I A T E S
L T D .
Large Industrial Project Profile ..................................................................... 64 Macro Economic Summary ........................................................................... 71 Alberta Electric Load Forecasts...................................................... 73 Electric Energy & Demand Forecast ............................................................. 73 Alberta Internal Load versus AIES Demand .................................................. 74 Energy and Demand Growth ......................................................................... 78 Residential Energy Sales ........................................................................ 78 Commercial Energy Sales ...................................................................... 81 Farm & Irrigation Energy Sales .............................................................. 82 Industrial Load Growth ........................................................................... 83 Behind the Fence Load Forecast ........................................................... 85 Transmission and Distribution Losses ................................................... 87 Export Sales ........................................................................................... 88 Electricity Demand Forecast Summary ........................................................ 93 “A Tale of Two Cycles”- When to Build What ................................. 98 Levelized Unit Electricity Cost ..................................................................... 98 Current Approach .......................................................................................... 99 Levelized Unit Electricity Costs ........................................................... 100 Findings – Current Model ...................................................................... 101 Sensitivity to Gas Price ........................................................................ 103 Shortcomings of the LUEC .......................................................................... 104 EDC’s Modified LUEC .................................................................................. 107 Calculating the “Margin Duration Curve” ............................................. 108 Dynamic Effects across Phases of the Glut/Scarcity Cycle ................ 113 Optimal Blend of Technology ............................................................... 114 Crucial Role of the Pivotal Supplier ..................................................... 115 Pivotal Supplier Portfolio ............................................................................ 118 Deteriorating Adequacy of the Price Cap............................................. 120 Limitations and Future Research ......................................................... 120 Summary ..................................................................................................... 121 Supply Resource Development ...................................................... 122 Current Generation Supply.......................................................................... 122 Installed Capacity................................................................................. 122 Forecast Unit Retirements ................................................................... 126 Fuel Supply & Generation Technology ........................................................ 127 v
©
E D C
A S S O C I A T E S
L T D .
Natural Gas-Fired Generation............................................................... 127 Coal-Fired Generation ........................................................................... 132 Hydro Generation.................................................................................. 134 Wind Generation ................................................................................... 136 Nuclear Generation .............................................................................. 138 Biomass Generation ............................................................................. 139 Increased Interconnections ................................................................. 140 Generation Supply Methodology ................................................................. 141 Project Probabilities ............................................................................. 142 Project Capacity ................................................................................... 142 Project Timing ...................................................................................... 143 Feedback from Other Random Variables ............................................. 144 Future Supply Resources ............................................................................ 145 ‘Base’ Forecast Assumptions ............................................................... 145 Total MW Capacity Break Down ........................................................... 147 Relative Market Share .......................................................................... 149 Base Supply/Demand Balance .............................................................. 151 Reserve Margin ..................................................................................... 153 Supply Resource Forecast Summary .......................................................... 155 Electricity Price Forecasts ............................................................ 157 Historical Alberta Pool Prices ..................................................................... 157 Forecast Assumptions ................................................................................ 160 Imports and Exports ............................................................................. 160 Supply Offer Strategies ........................................................................ 162 Green House Gas Emission Costs ........................................................ 162 Scheduled Supply Outages ................................................................... 167 Electricity Price Forecast Results .............................................................. 170 Forecast Energy Production ................................................................. 170 Forecast Price Levels ........................................................................... 172 Forecast Price Distributions................................................................. 174 Market Heat Rate Forecast Results............................................................ 176 Forecast Market Heat Rate Levels ...................................................... 176 Forecast Market Heat Rate Distributions ............................................ 177 Forecast Summary ...................................................................................... 179 vi
©
E D C
A S S O C I A T E S
L T D .
Appendices .................................................................................... 157 Appendix A – Risk Analysis Methodology ................................................... 181 Stochastic Modeling Concepts............................................................. 181 Short-run Risk Variables ....................................................................... 182 Expanded Long-run Risk Variables ...................................................... 182 Defining & Interpreting P10 and P90 Values........................................ 183 Appendix B - Generating Unit Statistics ..................................................... 187 Appendix C - P10 Data Tables ..................................................................... 191 Appendix D - P90 Data Tables ..................................................................... 201 vii
©
E D C
A S S O C I A T E S
L T D .
⎯ Table List ⎯
Table 1 - Electric Energy Forecast Annual Compound Growth Rates ..........................................................12 Table 2 - US GDP Growth Rate Results............................................................................................................21 Table 3 - Canadian GDP Growth Rate Results ................................................................................................26 Table 4 - Canadian Forecast Inflation Rate Results ........................................................................................27 Table 5 - Interest Rate Results ..........................................................................................................................30 Table 6 - Canadian Unemployment Rate Results ............................................................................................33 Table 7 - Exchange Rate Results ......................................................................................................................34 Table 8 - Inventory of Major Alberta Projects ..................................................................................................37 Table 9 - Alberta Real GDP Growth Rate Results............................................................................................37 Table 10 - Alberta Summary Large Industrial Project Profile ........................................................................65 Table 11 - Alberta Electricity Exports ...............................................................................................................92 Table 12 - Electric Energy Forecast Annual Compound Growth Rates ........................................................95 Table 13 - Annual Energy Forecast by Consuming Sector (P10) ..................................................................96 Table 14 - Annual Energy Forecast by Consuming Sector (P90) ..................................................................97 Table 15 - Assumptions for Total Annual Costs of Generation ...................................................................103 Table 16 - Comparison of Total 2007 Income for Three Technologies (Same CapEx = $960M)..............107 Table 17 - Assumptions and Crossovers for Total Annual Costs of Generation ......................................115 Table 18 - Current Installed Capacity Base....................................................................................................123 Table 19 - Non- Regulated Generation Projects (Completed) ......................................................................187 Table 20 - Regulated and Pre-Regulated Generating Unit Statistics ..........................................................188 Table 21 - Announced Non-Wind Generation Projects and Probabilities Base Case Assumptions .......189 Table 22 - Announced Wind Generation Projects and Probabilities Base Case Assumptions ...............190 Table 23 - Economic Assumptions & Commodity Prices (P10)...................................................................191 Table 24 - Population, Household & Employment Statistics for Alberta (P10) ..........................................192 Table 25 - Alberta Major Economic Variables (P10) ......................................................................................193 Table 26 - Alberta Electric Energy and Demand Forecast by Month (P10) ................................................194 Table 27 - Alberta Peak Demand and Electricity Imports by Month (P10) ..................................................195 Table 28 - 7x14 On-Peak and Corresponding Off-Peak Pricing (P10) .........................................................196 Table 29 - 6x16 On-Peak and Corresponding Off-Peak Pricing (P10) .........................................................197 Table 30 - Average Alberta Electricity Power Pool & Natural Gas Price Forecast by Month (P10) .........198 Table 31 - 6x16 and 7x14 On-Peak Heat Rates (P10) ....................................................................................199 Table 32 - Alberta Implied 7*24 Marginal P10 Heat Rate (P10).....................................................................200 Table 33 - Economic Assumptions & Commodity Prices (P90)...................................................................201 Table 34 - Population, Household & Employment Statistics for Alberta (P90) ..........................................202 Table 35 - Alberta Major Economic Variables (P90) ......................................................................................203 Table 36 - Alberta Electric Energy and Demand Forecast by Month (P90) ................................................204 Table 37 - Alberta Peak Demand and Electricity Imports by Month (P90) ..................................................205 Table 38 - 7x14 On-Peak and Corresponding Off-Peak Pricing (P90) .........................................................206 Table 39 - 6x16 On-Peak and Corresponding Off-Peak Pricing (P90) .........................................................207 Table 40 - Average Alberta Electricity Power Pool & Natural Gas Price Forecast by Month (P90) .........208 Table 41 - 6x16 and 7x14 On-Peak Heat Rates (P90) ....................................................................................209 Table 42 - Alberta Implied Marginal Heat Rate (P90) ....................................................................................210 Table 43 - All Stochastic Forecast Seeds ......................................................................................................211 viii
©
E D C
A S S O C I A T E S
L T D .
⎯ Figure List ⎯
Figure 1 - Typical Risk Analysis Process Flow Diagram..................................................................................5 Figure 2 - Annual Supply Demand Balance Forecast (Base, P10 and P90) .................................................14 Figure 3 - Electricity Price Forecast Price Summary ......................................................................................16 Figure 4 - Chain of Model Assumptions...........................................................................................................17 Figure 5 - US GDP Historical and Estimated Distribution ..............................................................................20 Figure 6 - Representative US GDP Growth Rates from P10 Forecast...........................................................22 Figure 7 - Canadian and US Historical GDP Growth Rates ............................................................................25 Figure 8 - Example of Random US and Canadian GDP Forecast ..................................................................25 Figure 9 - Forecasted Canadian GDP and Inflation........................................................................................28 Figure 10 - Canadian Interest Rate Random Forecast Example ....................................................................29 Figure 11 - Historical Unemployment Rate and GDP Growth ........................................................................31 Figure 12 - Unemployment and GDP Stochastic Forecast Example .............................................................32 Figure 13 - Unemployment Forecast Distribution ...........................................................................................32 Figure 14 - Oil Price Base Assumptions ..........................................................................................................43 Figure 15 - Distribution of 21 Long-Term Forecasts .......................................................................................44 Figure 16 - WTI Historical Price Distribution ...................................................................................................45 Figure 17 - WTI Stochastic Price Forecast Example .......................................................................................45 Figure 18 - Oil Price Scenarios..........................................................................................................................46 Figure 19 - Conventional Oil Production ..........................................................................................................48 Figure 20 - Synthetic Crude Oil Production .....................................................................................................52 Figure 21 - Non-Upgraded Bitumen Production ..............................................................................................52 Figure 22 - Alberta Crude Oil and Equivalent Production by Type (P10) .....................................................54 Figure 23 - Alberta Crude Oil and Equivalent Production by Type (P90) .....................................................54 Figure 24 - US Working Gas in Underground Storage....................................................................................56 Figure 25 - WTI and AECO-C Random Price Forecast Example ....................................................................59 Figure 26 - Natural Gas Price Results (P10 and P90) .....................................................................................59 Figure 27 - Alberta Coal-Bed Methane Production .........................................................................................62 Figure 28 - Alberta Conventional Natural Gas Production (P10) ...................................................................62 Figure 29 - Alberta Conventional Natural Gas Production (P90) ...................................................................63 Figure 30 - WTI Price Forecast Distribution.....................................................................................................64 Figure 31 - Natural Gas Price Forecast Distribution .......................................................................................64 Figure 32 - AIES and AIL Energy Concepts .....................................................................................................76 Figure 33 - AIL, AIES and Exports in Real Time ..............................................................................................77 Figure 34 - Residential Average Customer Usage ..........................................................................................79 Figure 35 - Residential Energy Forecast ..........................................................................................................80 Figure 36 - Commercial Energy Forecast ........................................................................................................81 Figure 37 - Farm and Irrigation Energy Forecast ............................................................................................83 Figure 38 - AIES Industrial Energy Forecast ...................................................................................................85 Figure 39 - Behind the Fence Energy Consumption .......................................................................................86 Figure 40 - AIES Export Forecast .....................................................................................................................92 Figure 41 - Summary of Attributes of Various Generation Technologies ....................................................99 Figure 42 - Estimated All-in Levelized Generation Costs .............................................................................102 Figure 43 - Sensitivity of Levelized Unit Costs to Gas Price by Technology .............................................103 ix
©
E D C
A S S O C I A T E S
L T D .
Figure 44 - Average Received Revenue ($/MWh) 2000-2007 ........................................................................105 Figure 45 - Changing Relative Capacity Factors (2000-2007) ......................................................................105 Figure 46 - Received vs Required Revenue of Different Technologies 2010 vs 2015 ...............................106 Figure 47 - Received vs Required Revenue of Different Technologies 2010 vs 2015 ...............................107 Figure 48 - LUEC vs Received Price for three Technologies (2007) ...........................................................108 Figure 49 - LUEC Calculation Flows ...............................................................................................................109 Figure 50 - Price Duration Curves (1997-2007) ..............................................................................................109 Figure 51 - Revenue Duration Curves (1997-2007) .......................................................................................110 Figure 52 - Margin Duration Curve .................................................................................................................111 Figure 53 - Typical Revenues and Margins for three technologies.............................................................111 Figure 54 - Profit by Technology.....................................................................................................................113 Figure 55 - Comparison of Profit Across Different Technologies ...............................................................114 Figure 56 - Crossover MW for Total Annual Allocated Costs by Technology ...........................................115 Figure 57 - Optimal Blend of Pivotal and Non-Pivotal Suppliers by Technology Type.............................118 Figure 58 - Margin Duration Curve ($ Cum) for Pivotal and Non-Pivotal Suppliers at Optimal Blend ...119 Figure 59 - Optimal Portfolio of Fuel Types ...................................................................................................120 Figure 60 - Breakdown of Total Production (GWh by Type (2008 vs 2013)) ...............................................123 Figure 61 - Capacity Utilization by Fuel Type ................................................................................................124 Figure 62 - Alberta Historical Supply Demand Balance ...............................................................................125 Figure 63 - Additions to Net-to-grid Capacity by Fuel Type (1996 - 2007) ..................................................126 Figure 64 - US Electricity Generation by Fuel 1970-2020 .............................................................................129 Figure 65 - Illustration of Posted ATC at various Dates in 2006-2007 ........................................................141 Figure 66 - Illustration of Random Timing and Capacity for Coal Plants ...................................................143 Figure 67 - Annual Net Capacity Additions by Technology Type (Base) ...................................................146 Figure 68 - Total NTG Generation by Fuel Type (Base) (1996-2022) ...........................................................147 Figure 69 - Total Generation Capacity (Base, P10 and P90 Level of Supply) ...........................................148 Figure 70 - Relative Market Share by Fuel (Base) .........................................................................................149 Figure 71 - Relative Market Share by Key Fuel Type (Base, P10 and P90) .................................................150 Figure 72 - Annual Supply Demand Balance Forecast (Base, P10, P90) ....................................................151 Figure 73 - Annual Reserve Margin (Base) ....................................................................................................153 Figure 74 - Annual Reserve Margin (Base, P10, P90) ...................................................................................154 Figure 75 - Annual Supply Demand Balance Forecast (Base, P10 and P90) .............................................156 Figure 76 - Historical Alberta Electricity Prices ............................................................................................158 Figure 77 - 2005 to 2007 Alberta Electricity Prices .......................................................................................158 Figure 78 - 2005 to 2007 Alberta Average Heat Rates ..................................................................................159 Figure 79 - Road Map for Price Forecast Methodology ................................................................................160 Figure 80 - Progression of Fund Rate ($/t) and % of Compliance from Market-Based Credits ................166 Figure 81 - 2008 Forecast Planned Maintenance Outages ...........................................................................168 Figure 82 - 2009 Forecast Planned Maintenance Outages ...........................................................................168 Figure 83 - Annual Planned Maintenance Outages .......................................................................................169 Figure 84 - Forecast Generation Output by Plant Type (Base Assumptions) ............................................170 Figure 85 - Forecast Capacity Utilization (Base Assumptions) ...................................................................172 Figure 86 - Alberta Electricity Pool Price Forecast .......................................................................................173 Figure 87 - Alberta Real 2006$ Electricity Price Forecast ............................................................................173 Figure 88 - 2010 & 2015 Alberta Electricity Pool Price Forecast Distribution ............................................174 Figure 89 - 2008 & 2018 Alberta Electricity Pool Price Forecast Distribution ............................................175 Figure 90 - Alberta Marginal System Heat Rate Forecast ............................................................................176 Figure 91 - Highest (2013) and Lowest (2021) Single-Seed Heat Rate Years .............................................178 Figure 92 - Years with Highest (2013) and Lowest (2021) Single seed Heat Rate .....................................178 x
©
E D C
A S S O C I A T E S
L T D .
Figure 93 - Electricity Price Forecast Price Summary ..................................................................................179 Figure 94 - Stochastic Forecast Distribution Concept .................................................................................182 Figure 95 - Typical Risk Analysis Process Flow Diagram............................................................................183 Figure 96 - Final versus Sub-Distributions ....................................................................................................184 Figure 97 - Schematic of Stochastic Results.................................................................................................186 xi
©
E D C
A S S O C I A T E S
L T D .
Introduction
1
Introduction
CHAPTER KEY
1. Introduction
2. Executive Summary
3. Macroeconomics
4. Electric Load Forecasts
5. “Tale of Two Cycles”
6. Supply Resource
Development
7. Electricity Price
Forecasts
8. Appendices
This report constitutes the tenth annual up-date to the original study issued in
1997. This series of reports has helped keep readers up to date with the ever
changing Alberta electricity market fundamentals, regulatory events and policy
changes. It also looks beyond the Alberta jurisdictional boundary, analyzing key
geo-political and international economic events that may influence the Alberta
electricity market.
The Year in Review
During 2007, the electricity industry saw its fair share of unfulfilled expectations
and unanticipated developments. These changes affect both demand and supply,
and ultimately price. The effects sometimes cancel and sometime amplify each
other. EDC sorted this collection of newsworthy 2007 happenings into categories
corresponding to each section of the Annual Report. It also guided our choice of
this year’s special chapter, “A Tale of Two Cycles”
Demand
Against the surprising backdrop of $100/bbl oil, gas swinging between $4 and
$8/GJ, labor and materials shortages and the Canadian dollar flirting with parity
against a languishing US economy, internal demand growth (AIES) slowed to a
mere 0.51% over 2006. Admittedly, 2006 itself was a very strong year, raising the
bar for last year’s growth. But even beyond that, growth experienced some onetime difficulties. Dow Chemicals shed 180 MW by closing its Bruderheim plant.
Suncor and Scotford both experienced refinery fires and Firebag had to scale back
after exceeding emission limits. Delays in commissioning several new large plants
also dampened expected 2007 growth but should be back on track in forward
years. While the 2007 winter saw slightly fewer than normal Heating Degree Days,
it was still higher than 2006, ameliorating the demand sluggishness. Summer
Chapter 1
1
©
E D C
A S S O C I A T E S
L T D .
Cooling Degree Days were up significantly over normal but flat to 2006 and a
lengthening of Daylight Saving Time may have caused a slight reduction.
Housing starts backed off to half of their blistering 2006 pace as house prices
retreated slightly from record gains in 2006 and early 2007. New NW and NE
oilsands mining, refining and Heartland upgrading continue with ambitious
expansion plans, despite the government announcement of a more aggressive
royalty scheme, although this growth potential did little for 2007.
Transmission Infrastructure
The N-S transmission line, fully approved and scheduled for
commissioning in 2011, ran afoul of landowner concerns,
spawning an entirely new application and hearing process and
indeterminate delays. This affects both southern reliability and
export capacity and will postpone savings from reduced system
losses. Even the non-contentious KEG conversion was
delayed from Q3 2007 to Q2 2008 by a manufacturing flaw in
a new transformer. The SW line, which will eventually support
more wind, received approval of its Needs Application in
2005, but is still waiting for approval of its Facilities
Application. A revised 2009 commissioning date counters the
benefit of AESO lifting the 900MW cap on wind.
The new AESO 10-year Transmission Plan outlined an increase in transmission
rate base by 2016 of almost $4.5 Billion. They also initiated an ambitious slate of
detailed plans by 5 regions, all now in various stages of completion. The AESO
has not announced any immediate plans for increasing regulated AB–BC tie-line
capacity. The merchant Montana Alberta Transmission Line received most of its
approvals and has some key components pre-assembled, but will still likely miss its
2008 debut. The NorthernLights line is still indefinite but tentatively scheduled
for Q2, 2012. Except for July and August, average Available Transmission
Capacity for imports was off about 150 MW from 2006.
Supply
Commissioning of the innovative Opti-Nexen gasification generator was delayed
well into 2008. The Balancing Pool postponed its 2006 and then 2007 dates for a
Genesee PPA auction, waiting for passage of the government’s highly contentious
new Electric Utilities Act governing market power, information sharing and stiffer
sanctions, even for inadvertent violations. Summer cooling pond derates affected
several coal plants.
On the plus side, Keephills 3 kept on its schedule for a mid-2011 commissioning.
Developers announced several new generators, including coal, cogens, a raft of
wind turbines, several combined and simple-cycle northern and southern gas units
and even a serious nuclear contender. Rainbow may retire while Wabamum and
Milner may be life-extended and expanded. BC Hydro floated its Long-Range
Resource Plan, calling for energy self-sufficiency, raising the specter of increased
Chapter 1
2
©
E D C
A S S O C I A T E S
L T D .
imports into Alberta and a new N-S tie-line from BC to the Pac NW. Enmax
announced a comprehensive Advanced Metering Infrastructure (AMI) initiative
that will enable hourly metering and increased small customer demand response.
Epcor received an $11 Million grant from the Alberta Energy Research Institute to
study clean coal power.
Consultations continue on the AESO’s contentious proposal to conscript ILRAS
service (a Remedial Action Scheme to automatically shed load to compensate for
an outage on the AB-BC tie-line).
Emissions
The Province began charging for CO2 emissions on July 1 and the Feds
announced a tentative national scheme, effective 2010. Ottawa hopes to create a
coherent national framework but have yet to turn it into legislation. The
environment has definitely made it to the Federal agenda. From the magnitude of
the differential1 costs and credits it will create for old and new generators and
between fuels, EDC anticipates a round of aggressive lobbying which may or may
not reshape the current proposal.
Market Regulation
Several initiatives were completed in 2007. In early December, the AESO
implemented its price fidelity initiatives (so-called “Quick Hits”) including: MustOffer/Must Comply, lock-in of prices at T-2, Dispatch Down Service, marginal
supplier compensation, mandatory rolling 24-month outage reporting, price
neutral TMR and placed a priority on enabling import dispatchability. The longstanding Long Term Adequacy committee reached a tentative consensus and
published a draft report on Reliability Metrics and Thresholds which should have
minimal impacts on pool price but will give the government assurance that system
reliability will not be compromised. In November, the AEUB moderated a
negotiated settlement of the long-standing issue of compensation to providers of
Transmission Must Run generation (Article 11). The regulated rate exposure to
spot prices for small customers will rise to 40% on January 1, 2008.
Still to come, the AESO will study possible redesign of the market and contract
terms for Operating Reserves in light of comments that the current single
purchaser model does not allow market liquidity. Bill 46 was introduced to mixed
reviews. The Liberals even adopted a plank in their election platform calling for
re-regulation of the electricity market. Restructuring of the AEUB realigned and
clarified various mandates between the new Alberta Utilities Commission and the
Energy Resources Conservation Board. Although this reorganization may
momentarily distract the new AUC, it may improve their throughput. Participants
were less enchanted with other aspects of the bill including imposition of onerous
new penalties (up to $3 Million/day), a complicated market power mitigation
procedure which could inadvertently send a generator into non-compliance and a
1
Perhaps as much as $60/MWh by the end of the study period between wind credits and coal charges
Chapter 1
3
©
E D C
A S S O C I A T E S
L T D .
restriction on which stakeholders would be eligible to intervene on new
transmission projects.
Study Design and Scope
This year’s annual study, as all those in the past, continues to focus on the long
term Alberta electric industry market fundamentals—along with other influencing
factors. EDC deploys a collection of integrated forecasting models to assess
future market supply, demand and price dynamics. Besides developing these
forecasts through the use of scenario analysis, using a collection of discrete input
assumptions that defined a single deterministic “most likely” forecast, EDC also
incorporates probabilistic Monte-Carlo techniques. These allow the reader to also
assess and quantify the potential range of future market supply, demand and price
dynamics by describing the various input assumptions as probabilistic ranges
rather than discrete events.
Typical P10 and P90 bands (a 10% or 90% probability (or confidence interval) that
the actual value will be lower than that expected value) are shown in the report.
The reader can also derive his own appropriate confidence interval around the
mean value of the outcome and better quantify the risk associated with the
forecast result. This is not to say that deterministic modeling is outdated or
incorrect, but simply that stochastic modeling through the use of Monte-Carlo
techniques describes the inherent risks more fully. The pool price distribution is
intended to represent the range of future possible outcomes resulting from a range
in future electricity supply and demand input assumptions (see Appendix A for a
full description and interpretation of the EDC proprietary probabilistic process, its
applications and limitations).
Risk Analysis Methodology
In order to quantify the potential range and magnitude of the deviation in the price
profile that could result, EDC incorporates several key risk elements into its
generation dispatch and energy price forecast model, using typical Monte-Carlo
techniques.
The model convolutes the various stochastic risk elements
collectively, to arrive at a composite price profile. Alternatively, each input can be
varied in isolation to assess its importance, or sensitivity, to the overall variability.
Variables are categorized as either short-run or long-run.
Short-run Risk Variables
The short-term risk variables reflect the typical range of demand and supply
variance resulting from short-run influences such as weather, intra-month natural
gas price volatility, variability of wind energy production and forced outages of
generation units and tie-lines. These parameters are varied about historical mean
values and typically produce a small dispersion of the total price distribution.
Chapter 1
4
©
E D C
A S S O C I A T E S
L T D .
Expanded Long-run Risk Variables
The EDC models are designed to assess the impact of significant changes to
longer term assumptions which can potentially produce a much more dramatic
impact in the future electricity price forecast. EDC has identified five key
assumptions, in rough order of impact, that typically represent the most significant
amount of risk in any future electricity price forecast: generation timing and
probability, potential environmental costs, natural gas and other fuel prices, AIES
energy and demand growth and Mid-C market prices. EDC also makes specific
assumptions on the supply-side such as strategic bidding behaviors and planned
maintenance scheduling, and demand responsiveness on the load side. Typically,
each of these inputs is varied on a mutually exclusive basis, relative to one another
and from year to year, but any unique correlation or relationship can also be
modeled.
Each variable can either be varied from its mean value using a uniform selection
criteria applied to a symmetric range of input values or using a non-uniform
selection criterion applied to an asymmetrical range of input values. Typically, the
variations in the input assumptions are designed to be mean reverting so as not to
induce a bias in the forecast directly from a bias in the input assumption. For each
sensitivity, the Monte-Carlo process can be executed from a typical minimum of
10 iterations up to 1,000 iterations, largely dependent on the number of years
included in the forecast and the degree of accuracy required. The following chart
illustrates the Monte-Carlo process within the generation dispatch and energy
pricing model that produces the final pool price result of the overall forecast
process.
Figure 1 - Typical Risk Analysis Process Flow Diagram
Long-term Monte-Carlo
Risk Variables
Energy Demand
(MWh)
Supply Additions
(MW, Timing)
Nat Gas Volatility
Unit Availability
Weather
+/-1% to +/-5%
Wind Energy
Production
Profile
Short-term MonteCarlo Inputs
Generation Supply
Additions & Other Base
Case Assumptions
Unit Bidding
Behaviors
+/-25%, +/-1 Yr
Generation Dispatch &
Energy Pricing Model
Environmental Costs
(On/Off)
P
L
E
H
Outputs
Natural Gas Price
($/GJ)
-$2/ to $6/GJ
Unit MWh’s
Mid-C Import Pricing
(Heat Rate GJ/MWh)
Chapter 1
+/-1.25GJ/MWh
Pool Price
Distribution
5
©
E D C
A S S O C I A T E S
L T D .
Each key input assumption has its own distribution of values that, when allowed
to randomly vary from one iteration (or seed) to the next, produces a unique price
forecast distribution. Each variable can be varied independently to produce a
“tornado chart” which graphically demonstrates the sensitivity of the price profile
to specific changes in each variable.
The quantitative results reported in this study are the output of EDC’s proprietary
long-term integrated electricity models. The integrated model set includes several
sub-models that assess Alberta’s demographic and economic outlook, oil and gas
production and export potential, electricity demand (by sector, utility and
transmission point-of-delivery), generation supply, bulk transmission and tie line
availability and pool price, as well as costs for air-borne emissions such as Hg,
NOx, SOx, Particulate Matter (PM) and CO2 equivalent. The EDC model
discretely models the interaction of the Alberta market with its adjacent markets,
especially important if additional tie capacity is deployed. The Mid-C and BC
market models also discretely model the supply demand fundamentals for each
market that interact to produce real-time import and export volumes based on
strategic behaviors of specific market participants and regional market price
differentials.
This year’s report contains 8 chapters:
Chapter Two presents an executive summary of the key findings of the analysis
and the quantitative results from each chapter.
Chapter Three presents an overview of the underlying macro economics and
demography in Alberta, including an outlook for the key industry segments and a
review of oil and natural gas prices. The probabilistic inputs developed in this
chapter drive the demand forecast in the next chapter.
Chapter Four examines the output of the quantitative electric load growth model
with some discussion of the key forces driving the results. Domestic load growth
across the key consumer groups—residential, commercial and industrial—is
presented and discussed. A commentary on export opportunities and transmission
and distribution losses rounds out the total Alberta electricity requirements for
domestic generation and import supply.
Chapter Five, this year’s feature chapter, “A Tale of Two Cycles”, proposes a
more elegant, intuitive and useable adaptation of the time-honored but rough
“Levelized Unit Electricity Cost (LUEC)” method for
comparing the relative economics of different generation
technologies when growing the generation fleet (e.g.
Feature Chapter:..
Simple-Cycle vs. combined-cycle). In the face of all the
new demand, supply, infra-structure and regulatory
“A Tale of Two Cycles”
uncertainty, generation developers must somehow
determine the optimal strategy for adding new capacity.
This discussion also addresses how the choice of
technology oscillates over the course of the “build cycle”
Chapter 1
6
©
E D C
A S S O C I A T E S
L T D .
for generation, from glut to scarcity. The modified technique also informs the
issue of concentration, the role of pivotal suppliers in minimizing the “missing
money” problem and the deteriorating adequacy of the $1,000/MWh price cap.
Chapter Six discusses electric energy supply fundamentals. The examination of
the future electricity supply starts with an overview of existing generation capacity,
cost structure and the expected timing of unit retirements. Future supply options
and availability, generation technologies, supply demand balance and reserve
margin are then discussed. The chapter also presents a discussion on the key
elements that will define the range of future supply additions. The discussion also
addresses the key drivers of future generation costs.
Chapter Seven brings together the discussion of supply and demand for the
purpose of forecasting the wholesale price of electricity. All of the probabilistic
parameters of supply and demand are used in this chapter’s analysis to define the
distribution of future price forecasts. The quantitative results are presented and
discussed—noting key assumptions and conclusions.
Finally, Chapter Eight contains the appendices of the report, including
supplementary charts and tables. Subscribers can also obtain this information
electronically by contacting EDC.
It should also be noted that all financial forecast data is presented throughout this
report in nominal terms or “Money of the Day”, unless otherwise noted.
Chapter 1
7