Winds of Change Coming to Alberta’s Electricity Market

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If you haven’t been following the saga that is Alberta’s electricity market, now is the time to get caught up, as the government has just made an important decision that will have significant impact on consumer’s wallets. In fact, it will save consumers upwards of half a billion dollars per year. Well done!

During the last four years, many changes to the structure of Alberta’s market were made; forced closures of coal generation plants; carbon taxes; subsidizing renewables; the intention of adopting a capacity payments scheme paid to generators; and trying to marginalize independent retailers by artificially subsidizing the government’s regulated utilities. It has cost Alberta consumers billions of dollars and stagnated private investments being made in the province.

The UCP promised winds of change and blue skies ahead during the election. So far, they have made good on their election promises, cancelling the carbon tax and discontinuing the Renewable Electricity Plan, stating that in the future Alberta will welcome “market-driven” renewables that can compete with other forms of power production.

And, on July 24, the UCP government announced that after a 90-day consultation with industry experts it has decided to return to the cost-effective energy-only market that Alberta has been operating with for over 20 years, rather than create a complex capacity market.

“When we started these consultations we asked for specifically three areas we wanted input on: affordability, reliability of the electricity system and the ability to attract investment,” Energy Minister Sonya Savage said during the announcement. “We heard from all stakeholders that an energy-only market provides more affordability and it’s a simpler structure.”

The key difference between the markets is how electricity generators are paid.

In energy-only markets, electricity generators are paid only for the electricity they produce in real time when electricity is required. In a capacity market, in essence, generators, selected through an auction process, would be paid to be on standby. Being paid not to produce, but to be ready to turn on the switch when needed.

This is a change that will be welcomed by many in Alberta. The introduction of a Capacity Market (Bill 13) would have had significant implications on the overall market structure for not only generators, but also retailers and consumers. Warning flags had been raised by a number of consumer advocate organizations as well as retailers in the market.

The worry was that the Capacity Market would needlessly cause retail prices to all consumers to increase. It was estimated that if the Alberta Electric Systems Operator (AESO) procured too much power in the future, it would leave consumers on the hook for billions of dollars in unneeded expenses.

Alberta has a reliable fleet of generation. Wholesale prices are competitive, consumers have benefited with access to long-term competitive contracts, flow-through rates, micro-gen options, and green energy services, and, investment risk is born by the industry without the need to add extra subsidized costs which are taken out of the pockets of taxpayers.

“I think Albertans understand competition and choice, and that’s something that this particular design enables the most,” said Evan Bhary, Executive Director of the Independent Power Producers Society of Alberta, in a recent CBC article. “It enables efficiency, it welcomes in new suppliers, and it enables supply to be added very quickly.”

Although this announcement is a step in the right direction, there is still one dark cloud looming over Alberta’s electricity industry.

It’s Time to Discontinue the Subsidy on the Regulated Rate Option (RRO) for Electricity

As part of its Climate Leadership Program, in June of 2015, the government of Alberta announced its decision to close or mothball coal plants and begin the transition to a goal of having 30% of Alberta’s electricity generation come from renewable energy sources by 2030.

There were unintended consequences of moving too fast down this path and not understanding the contractual liability with the cancellation of Power Purchase Agreements. Alberta consumers are on the hook for about $2 billion, which will they will see as a charge under the “Balancing Pool” on their electricity bill for years to come. Additionally, electricity prices increased. This is a reality that we are still dealing with today.

To mask the price volatility in the market, which the government itself caused, a subsidy on the Regulated Rate Option (RRO) was introduced (Bill 16). This was promoted as a government 6.8 cent/kWh “cap”, but it was simply a subsidy paid to its own regulated utilities, including a 10% premium paid to rural co-operatives, out of the carbon tax.

The word “cap” is misleading. A “cap” leads people to believe that generators of electricity are being forced to lower their prices, reducing the cost of electricity overall. This is not what happened.

You can see the dark cloud forming.

The reality is that generators and Regulated Rate Providers (ENMAX, EPCOR, and Direct Energy) are still charging full price for the electricity they sell as the RRO.

This is voodoo economics, designed to hide the facts from consumers. The only winner in this scenario is the government’s own regulated utilities.

This month, the average retail price of the RRO is 9.3 ¢/kWh. Since the carbon tax has been cancelled, the difference between the actual rate and the 6.8 ¢/kWh charged to RRO customers will be paid by all tax payers out of general revenues collected. The so-called cap is simply a sea-side shell game of taking money out of the consumer’s other pocket.

You can hear the rumble of thunder in the distance.

In July 2019, Bill 16 will cost taxpayers about $20 million. Over the life of the bill, unless it is cancelled, Albertans could be on the hook for up to half a billion dollars and it will eventually spell the end to the competitive market.

What’s fundamentally wrong with Bill 16? The government should never be allowed to use tax-payer dollars to unfairly compete against the private sector by artificially subsidizing the profit margins of its own RRO providers. Especially when there are over 30 retailers in the market offering competitively priced choices.

The subsidy isn’t only costing consumers money, but it is also having a negative effect on small businesses active in Alberta.

Was that a flash of lightning?

This policy was used to tilt the playing field, and restructure the retail market in favor of the big government regulated utilities.

Today, the reality is much different. We are continuing to invest in Alberta and expanding. Every day, another consumer wakes up and realizes the benefit and value of all the other features offered by competitive Energy Marketers like NewGen Energy. Today there are more than 20 retailers offering a number of energy products for sale plus supporting community partners and projects across more than 400 communities in Alberta.

Winds of Change.

We have encouraged the UCP to aggressively move forward and kill Bill 16 as soon as possible. During its announcement Savage said the government will be reviewing the price cap in the fall.

If the government chooses to continue with the RRO subsidy it will be putting a nail in the coffin of small local businesses that are employing Albertans and who were responsible for the introduction of a number of unique and innovative customer centric programs in today’s energy industry.

More winds of change are needed to completely push the dark clouds away.

Cancelling Bill 16 and moving forward in a competitive and fair manner will be beneficial for all and is an essential step towards clearer skies that we can enjoy together.

Remember, failure to act today will cost tax payers $20 million in July alone. This money could be better used to promote economic diversification or social programs in the province rather than subsidizing the profit margins of the regulated utilities. Why wait until the fall to make this decision?