Opinion: Alberta’s electricity consumers aren’t out of the woods yet

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In 2016, the Alberta Electric System Operator, or AESO, filed a report recommending that Alberta’s electricity market transition from an “Energy Only” to “Energy and Capacity” markets. The previous NDP government accepted this recommendation, but on July 24 the UCP government scrapped the idea.

Electricity markets are complex. They require a constant balance between supply and demand. There are no electricity warehouses (yet), we don’t go down to the electricity store and pick up two dozen Kilowatts for the weekend. When you put your bread into the toaster in the morning, the electricity is either there, or it’s not.

AESO’s 2016 report expressed concern that a mandated coal phase-out by 2030 and a target of 30 per cent renewables meant Alberta’s market might not ensure enough future electricity supply. Put simply, when you put your bread into the toaster the electricity might not always be there.

This concern is legitimate. The prevailing consensus among Alberta energy economists is that we should be concerned about future supply adequacy. Not only do we have to replace our coal plants, we also need to ensure our system can accommodate projected demand growth. On the week the UCP reversed course (July 22-28), coal accounted for about one-third of total generation. In July 2009, we had an average load of 7,800 MWs. This July, the average load was 9,500 MWs, an increase equivalent to the size of four big coal plants. Without action, supply will fall and demand will continue to rise.

It is an open question whether our current energy-only market produces prices that can attract new investment. Over the last decade, Alberta hourly wholesale electricity prices have been cut in half, fluctuating between about $20 and $50 per MWh. These prices are capped at $999.99 per MWh (this cap is different from the one the NDP put on retail prices). We rarely hit the cap (four hours total in the last year), but the hours of high prices are very important to current and potential generators. It is during these high-priced hours that generators can pay back the costs of constructing new power plants. The rest of the time, when prices are low, they are just covering fuel, maintenance and operating costs.

As an electricity consumer, the prospect of paying more for electricity is not attractive. But neither is the prospect of facing rolling blackouts (I take my morning toast and coffee very seriously). If the choice is between paying low prices and suffering blackouts, or paying a bit more and having secure supply, I think most Albertans would join me in choosing the latter.

So, given that we must pay more for electricity if we want stable future supply, the question is how much more and how exactly should we be paying it?

The capacity market option adds a second market where generators supply “capacity” rather than “energy.” It functions like a retainer paid to generators to be on standby to ensure that enough capacity exists. This probably wouldn’t have been as big a disaster as some are claiming. While a capacity market would have been new for Alberta, they are common in other jurisdictions. In fact, Alberta’s current energy-only market is comparatively unique.

Staying with an energy-only market will not be a disaster either, but we need to take AESO’s concerns about supply adequacy seriously.

To do so, even though we don’t hit the cap very often, AESO and the government should consider increasing the wholesale price cap. The $999.99 cap has been in place since 1996, so adjusting for inflation, its real value has shrunk. If the cap had been indexed to CPI it would be equal to about $1,600 now, which might be sufficient to entice new investors.

Just because we have chosen to “stay the course” with an energy-only market doesn’t mean we can ignore our future problems. Consultations must continue on how to adjust our current market to deliver on future needs. We need to make plans to ensure the lights stay on in Alberta. It’s a complex, technical set of problems and will require contributions from many players.

Kent Fellows is a research associate at the University of Calgary’s School of Public Policy.

A reference to average loads has been corrected as MWs.

Source: Calgary Herald