By Nick Clark
Don't panic if you can’t predict future energy prices in Alberta.
You are not alone.
On June 7, 2016, the Alberta Government passed the Climate Leadership Implementation Act. Everyone in the below government photo op is all smiles and patting each other on the back. What does it all mean?
The underlying fundamentals to Alberta’s electricity market are hinged to the deregulation policies, now approaching 20 years in the making. Two of the key players are the Generators and the Balancing Pool.
This blog gives you a thorough explanation of Alberta’s energy market. Yet before I dive into the details, let me give you an important tip: Today, you can buy electricity for under 3 cents cents on the Floating Rate - or lock in until the end of 2020 at a guaranteed rate below 6 cents per kWh. If you fear the future: Lock into a fixed rate, sit back, and wait and see what happens.
Generators and the Electricity Market
New generation over the last couple of decades in our province was funded by the private sector (not government) which invested $16 Billion in building facilities to meet growing consumer demand for energy. Today, there is a surplus of available generation. This has resulted in wholesale prices paid to the generators falling dramatically over the last few years:
- $80/MW in 2013;
- $49 in 2014;
- $33/MW in 2015;
- $17MW during the first 6 months of 2016.
Balancing Pool
The Balancing Pool is a public agency that operates under the Electric Utilities Act (Alberta), to help manage the transition to competition in Alberta’s electric industry. Starting in the mid 1990's, our province began a restructuring process through the implementation of Power Purchase Arrangements (PPA) covering the vast majority of the regulated thermal electric power plants. This was a mechanism used to give the previous owners of the power generating facilities a reasonable opportunity to recover their fixed and variable costs of generation while transferring the right to offer the output of the plants into the power pool to intermediaries (buyers).
The PPAs were auctioned to buyers in August, 2000, with 5 successful bids assuming the rights to 4,249 MWs of generation capacity which was built in the regulated environment. And the Balancing Pool became the default buyer for the 2,146 MWs of capacity of the unsold PPAs (Clover Bar, Sheerness, Genesee and H.R. Milner). Over the ensuing years, this number fell to 562 MW. Consumers saw the wisdom of this decision on their monthly utility bill: It is called the Balancing Pool Rebate (a credit on every utility consumer's monthly utility invoice).
When the auction took place, there was a termination clause in the contracts that allowed the buyers to turn the PPAs back to the Power Pool, if the PPAs became unprofitable or more unprofitable as a result in a change-in-law.
There was a significant drop in wholesale prices over the last couple of years PLUS the change in law regarding the Climate Change Emissions Management Fund (the Carbon Tax on coal plants). What happened as a result: Enmax, ANC, TransCanada, AltaGas, Capital Power all terminated their PPAs and the coal generation assets were turned back to the Balancing Pool to manage. As reported by the MSA (Market Surveillance Administrator), the government now operates 4,653 MW of generation facilities in the province and hold 29% of the market capacity. Our government, as a result, became the single largest energy provider in Alberta.
Who is the largest emitter of CO2 in Canada?
By default, as strange as it sounds, it’s now the Alberta Government’s Balancing Pool. Some would consider this a black eye for our province. Generation facilities managed by the Balancing Pool are now actually producing more than twice as much CO2 emissions compared to Suncor (previously reported as the largest CO2 emitter in Canada).
Unintended consequences and new questions
The political movers and shakers, I am sure, thought that industry would be stuck with the payment of the new carbon tax!
Ok, what happens now? The government is on the hook for the PPAs that were terminated. Serious questions arise:
- Will they now move forward and force the closure of the coal plants for which they are now responsible?
- How much will it cost to close down the plants?
- Who will pay the new increase in carbon levies on the 4,653 MW of generation for which this Government is now owns?
- Will the Balancing Pool Rebates that you have been seeing on your utility bill now turn into a new charge line item?
If the government withholds generation or forces the closure of the plants given the PPAs, it will result in shorting the market on the supply side of the equation. Alberta will risk returning to higher volatility in energy prices. This is one scenario that will push up the cost of energy. New investors will be happy and consumers will pay more. We hope that the MSA will hold the government to the same acid test of scrutiny as it did with others in the past in regards to withheld generation production.
It is hard to believe that private sector investors will flock to Alberta to invest in Green Generation based on these conditions:
- Wholesale cost is at historic lows;
- Uncertainty in the market given current legislative changes;
- Not knowing how much Alberta will subsidize investors in terms of access to financing capital;
- How much the AESO or the administrator of the new Carbon Levy fund might pay new generators for the purchase of Renewable Energy Certificates.
In the past, Alberta generation was funded by the private sector to the tune of billions. Is this going to change? Early indications say, “Yes!”
The CCEMC recently helped finance $15 Million to subsidize the GE solar project in Brooks, another $10 million to an Enbridge solar project in Vulcan, $11 million to TransAlta for a wind project. On the surface, it seems this government’s new tax on carbon will be spent helping to build new generation.
Members of IPPSA (Independent Power Producers Society of Alberta) undoubtedly will be investing in new generation required to achieve the Climate Leadership Plan (CLP). Collectively, this industry has been the private investment backbone behind the market as we know it today. A significant amount of capital is needed to develop new renewable generation and new gas generation to replace retiring coal plants plus to meet growing demand.
Specifically, at least 4,200 MW of new renewable generation and 9,000 MW of gas generation will be needed by 2030. Possibly as much as $20 Billion or more will be needed. Who is going to finance this?
To put this into perspective, IPPSA recently painted the magnitude of impact in their response to the Climate Leadership Plan:
- Alberta will need the equivalent of 7 Shepard Energy Centres (at 860 Megawatts) to replace the coal fleet by 2030;
- Another 4 similarly sized plants would be needed to meet growing demand in the same period;
- It can take over 5 years to build a plant the size of Shepard, which alone cost $1.4 billion.
- Billions are needed to fund new investments in generation;
- A few billion more probably will be needed to fund the closure of our coal fleet;
- The government implemented the largest tax increase in recent memory to help fund the money needed (You will see the cost of almost everything going up including the cost to fill up your car in 2017 and the cost of heating your home, likewise, will increase.);
Regardless of how you feel about climate change, there are those who can clearly see the “blue sky” on the horizon. If the government implements its planned coal plant closures and helps to finance new green generation facilities, this will open up Alberta to one of the biggest business opportunities we’re likely to see since our oil boom. Billions upon billions will be spent. Not only here but around the globe; trillions of dollars will pump into the global economy. Global manufactures of Green Energy technologies undoubtedly will be the beneficiary winners.
When the dust settles in 2030, here in Alberta, we either will be bankrupt or be sitting back and marveling at the wise decisions being made today by our political leaders.
As Lee Goldberg, Editor of PD&D and MDT, said recently: “Rather than rely on another war to drag us out of our current economic doldrums, the next boom could be fueled by the demand for clean energy, energy-efficient products, and the other tools we need to create a lower-carbon economy.”
In our opinion, we have urged our government to proceed with caution. And our advice to consumers: Don’t need to wait till 2030. You can participate in making a difference today by doing three things:
- Participate in energy efficiency programs. On this topic, our government is doing absolutely the right thing. On this topic, our government is doing absolutely the right thing;
- Focus on buying wisely and lowering the cost of the energy you are using;
- Invest what you save in helping to green the grid.