Understanding Alberta’s Electricity Market – Part 3

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In this mini blog series, we will shed light on why the cost of energy charged by Alberta generators doubled in recent months. Generators earned an extra billion dollars compared to the same time period in 2020.

The 1st Quarter Report, published by Alberta Market Surveillance Administrator (MSA), is now available. If you connect the dots, the report provides evidence that some generators are using the concept of economic withholding as a pricing strategy to drive up prices.

The goal of this blog, as always, is to help consumers more fully understand what is currently happening in Alberta’s energy market and help them make educated decisions when it comes to their electricity bills.

Welcome back to our mini blog series on the Alberta Electricity Market! To recap:
● In the first entry in this series, we explored the fundamentals of the price-setting mechanism used by the Alberta Electric System Operator (AESO), called the ‘Merit Order,’ which describes how generators bid their supply of electricity into the market.

● The setting of Power Pool prices is akin to a real-time auction. Generators offering the lowest price are dispatched first by AESO, and the last price bid to meet demand determines the price all generators are paid.

● It was reported by the MSA in its Q1 report that the behaviour of some larger suppliers has been a factor in the higher prices recently seen in Alberta.

Want more detailed background information? Check out Understanding Alberta Part 1and Understanding Alberta Part 2. In this entry, we examine why prices have been on the rise and the role of renewables when it comes to energy pricing.

This year we celebrate 25 years since the deregulation of Alberta’s energy market.

Alberta’s Independent Power Producers have invested over $20 billion in building a fleet of generation services to meet the needs of Albertans. This should be celebrated as one of the successes of deregulation. Yet consumers are frequently expressing concern about all the other charges found on a bill. Keep in mind that these other charges (delivery, transmission, and taxes) have nothing to do with deregulation but are regulated by the government. In the next blog, we will dive into the delivery and transmission charges.

The fundamental design and concept of deregulation in Alberta is one of the reasons we have a resilient market. It continues to evolve and attracts new private sector investment into Alberta. It’s because of the design of our ‘Energy Only’ market (where generators are paid only for the power they produce) that both foreign and local corporations are willing to invest in our province as we move forward towards a lower-carbon economy.

There are currently 15 major projects under development. These include natural gas, wind, solar, cogeneration, and bioenergy facilities, approved and managed by AESO, totaling another $2 billion earmarked for investment. There are also scores of other energy projects in the proposal stage.

In spite of this positive news, consumers are questioning the recent and dramatic increase in the price of energy being charged today by our fleet of generators.

From 2014 onwards, during Alberta’s economic slump, supply outpaced demand. Consumers benefited as retail prices fell. By 2016, the market bottomed out at $18/MWh (1.8 cents/kWh). But today, the average price in 2021 is fast approaching $100/MWh (10 cents/kWh).

What caused Power Pool prices to jump five-fold over the last five years? The recent uptick in the market is both concerning and costly.

Market Stress and Price Spikes
The market is under abnormal stress. In 2020, Power Pool prices were spiked by generators 719 times above the annual average price of $46.69/MWh. As a point of comparison, during the first 16 weeks of 2021 alone, generators spiked their prices above last year’s average Pool Price over 1,000 times!

What is going on? Let’s take a broader look.

The market has seen many changes:

  1. The Balancing Pool (BP) was closed on December 31, 2020, thereby removing its stabilizing influence on the market. See page 16 of the MSA Q1 Report. Market control and influence was increased, and what the BP had control over is now in the hands of TransAlta, Capital Power and Heartland Generation. Who is controlling Alberta’s market? See page 32 of the MSA Q1 Report.
  2. The closure and conversion of coal plants to natural gas, driven by the government’s carbon-reduction and green energy goals is currently taking place. But coal generation in Alberta will continue, with a goal of ending its use in the production of electricity by the end of 2023.
  3. The increase in the Federal Government carbon tax has had an influence on the cost of generation. But as coal generation in Alberta closes, the impact of carbon prices in the future may be reduced. See page 13 of the MSA Q1 Report.
  4. Renewables (like wind and solar) have increased, which tend to be intermittent in supply.
  5. There is also a new wrinkle that is stressing the market. Every time there is an interruption in the supply of renewable energy (read: wind generation is down), generators use these opportunities to spike Power Pool prices.

Here is an example – over the last week, Albertans have been enjoying lovely temperatures. The load in the province is down as people spend more time outdoors and there has been little wind. During this time one of the generators has exercised market control by spiking the Power Pool price up to over 70 cents per kWh. If it’s not due to increased demand, why is it happening?

There has been much discussion about the role of renewables in Alberta’s energy market, and the impact they have on electricity prices. In AESO’s recently released “2020 Year in Review” document, they note that over 30% of the installed capacity in 2020 was attributed to cogeneration, and that just over 10% was attributed to wind generation.

Wind generation plays an especially interesting role in Power Pool prices, given its intermittent generation patterns. In the following chart, it’s clear that when wind generation (green line) declines, the Pool Price (blue line) increases. We believe that a pricing strategy referred to as ‘economic withholding’ is at play here.

(Don’t believe us? Click here and see for yourself! You can toggle the different generation sources off and on by clicking on each type below the graph. You can also adjust the zoom level using the toggles in the top left corner.)

What is Economic Withholding?

We briefly touched on the topic of economic withholding in Part 2 of the series of this series.

Economic withholding is the practice of offering energy generated at prices too high to be taken to meet demand, which lowers supply and increases the final price that gets paid to all generators in the merit order. (For more information, we also recommend this article by Professor Nigel Bankes from the University of Calgary.)

Alberta’s MSA manages an important set of guidelines known as the Offer Behaviour Enforcement Guidelines (OBEG) which govern how generators offer into the merit order. The Guidelines do not prohibit economic withholding, but in 2017, the MSA notified market participants that it was reconsidering its position on this in light of a number of developments including “proposals to supplement Alberta’s energy-only market with a capacity market.” The proposed shift to a capacity market was shut down by the UCP as part of their election platform in 2019.

An important question that should not be overlooked is: Are the higher prices we have seen recently justified?

What is the Solution to Rising Prices?
It is anticipated that with an increase in new generation coming online in the next couple years, the Power Pool prices should stabilize and settle back down by 2022/23. But in the midst of a global pandemic that has wreaked havoc on people’s livelihoods, that may be too far away.

What is the solution? We recommend that consumers sign up for a NewGen Fixed Electricity Rate that will help to bridge them over the next couple of years until the market stabilizes.

We may be a small retailer in Alberta, but we are committed to speaking up on behalf of our customers. Our commitment to you is that we’ll continue to press entities like the MSA and the Department of Energy for answers and possible solutions to issues such as this that directly affect consumers.

Stay Tuned for Part 4

In our next entry of this mini-series of blogs on Alberta’s Energy Market and how it works, we’ll be taking a look at some of the other charges that are found on a bill, with a focus on the costs of delivery and transmission.