Happy Birthday Alberta Electricity Market!

Alberta’s wholesale electricity market turns 25 years old this month and the competitive retail market reaches a somewhat more youthful 20-year milestone. I am not aware of any official celebrations to commemorate these events but nonetheless will raise a glass to what has proved an interesting journey, and while not without its issues, it is in my view a glass more full than empty.

The wholesale market has for the entire 25 years of existence been under a transition. Moving from a regulated electricity system dominated be three large generation companies in the mid 1990’s to one which is attractive to a far wider range of investors was no simple task. The method of transition in Alberta was a special system of power purchase arrangements that shifted control of thermal power plants from their owners to other parties. The purpose was to increase competition through attracting new participants to the market but also maintain (more or less) the regulated returns to owners that they would have been entitled to, had the transition to competition not occurred. If that sounds complicated, it was and the special power purchase arrangements that resulted have created a variety of problems over the last twenty years. Those arrangements expired on December 31, 2020 and as we head into the new year that transitionary mechanism has run its course. Whether there was a better way to structure that transition is a question that seems rather moot. I think a more useful observation is that the competitive market structure that the power purchase arrangements enabled has been a fundamental part of attracting lower-cost generation and enabled a transition away from coal-fired generation more rapidly than I believe would have occurred under a regulated system.

Some of Alberta’s wholesale market success is attributed to the stability of its design. The basic structure of the wholesale market remains much unchanged and for investors stability of rules and structures is obviously desirable. However, in my view the period to 2010 saw a significant number of refinements introduced and these adaptions to emergent issues were really the key to success. The period from 2010 and 2020 has been marked by less adaption and a planned shift to a capacity market design, now abandoned. To be successful for the next 20 years, Alberta’s market needs to re-discover its ability to adapt, during a time when technological change appears to be accelerating not diminishing, or else the transition becomes more awkward and more costly. It is also worth observing, many of the details of the past were codified in legislation and regulation and the difficulty in changing these now risks being a limiting factor on adaption elsewhere. The simplistic but costly way congestion is dealt with and the weak locational signals for new generation is one notable area that needs further consideration.

Retail market competition began on January 1, 2001. This is sometimes described as enabling full customer choice, with residential and smaller customers being able to choose suppliers rather than receive supply from their local distribution company. The driver for retail competition was a belief that it supported wholesale competition by creating a vibrant mix of retailers who would purchase from the wholesale market and in turn create innovative products for small customers. In contrast to the bold approach adopted in the wholesale market, Alberta chose a more cautious path in introducing competitive choice while maintaining a regulated option from the local distribution company. Despite recommendations to move to just competitive options in 2012 the odd mix between customers choice and regulated offerings persists. A regulated rate cap was introduced between June 2017 and November 2019 to limit prices paid by regulated (but not competitive) customers as part of the transition to a capacity market (albeit one that was later abandoned).

After 20 years of full customer choice about 55% of residential electricity customers have chosen a competitive retailer, although in some cases this is affiliated retailer of the local distribution company. At the current rate of change the transition might take another 15-20 years before 90% of residential electricity customers have chosen a retailer. Part of the reason for the slow transition is the absence of coordinated attempt to inform customers of choice (a feature seen in other electricity markets). An innovative fringe of retailers persists despite the shadow cast by regulated option. In contrast to the wholesale market even defining what success looks like in the retail sector seems less clear in 2021 than it did in 2001.
Joining our electricity system together is a regulated system of wires largely untouched by the forces of competition. There are good reasons for this but with the advent of distributed generation the pressures on the regulated and competitive parts of the industry to work together have never been in more focus.

The next 25 years seem to promise a transition for Alberta’s electricity market every bit as dramatic as that experienced since 1996. The wholesale market established in Alberta over the last 25 years can play a valuable role in minimizing the costs of that transition, but it must adapt to the challenges that present themselves. I am less optimistic about the role the current retail market might play in the next 25 years. The benefits that competition might bring risk being muted by regulated options and the benefits that simple regulation might bring are muted by a, half-hearted, commitment to competition.

Dr. Matt Ayres is an Executive Fellow at the School of Public Policy and an Adjunct Assistant Professor in the Department of Economics at the University of Calgary. Matt has over 20 years experience working in a number of electricity markets, including as the CEO and Chief Economist of Alberta’s electricity watchdog, the Market Surveillance Administrator. Any views expressed are those of the author and not the views of any organisation to which they are affiliated.