Power to the People

Alberta’s electricity system is unique in Canada. Government doesn’t own it and it is a competitive market. The Alberta government is working hard to shake up the status quo in the market place.

In its Climate Leadership Plan, the Government pulled the plug on coal fired electricity generation by the year 2030.   But this post isn’t about that!

That sparked a fight when power companies handed back contracts to purchase electricity that were no longer economic. At the end of a nasty name calling spat taxpayers are on the hook for about $2.25 billion for a loan to cover potential losses and $350 million in interest. But this post isn’t about that!

Government ‘amped’ up the cost of carbon emissions from $10 to $20 and now (2018) $30 per tonne for big industries. And the carbon tax on gasoline increased from 4.49 cents to 6.73 cents per liter. Home heating with natural gas will be taxed an extra 50 cents a gigajoule. (About $5 buck a month for an average household) The indirect costs for everything else you buy is about $100 more per household annually.

To reduce this shock, the government will distribute the revenue from the tax:

  • 28% of the revenue will go out in rebates to low and mid income families
  • 20% will subsidize ‘green’ energy development
  • 25% will go to ‘green’ transit
  • 10% to reduce the small business tax rate
  • 11% for free light bulbs and other energy efficiency grants for homeowners
  • 6% to pay off the loan for the power contracts and help indigenous communities.

But this post isn’t about that!

In December 2017, government announced a surge of program funding to recycle some carbon tax money to provide grants to big carbon emitters for projects that reduced their carbon footprint and emissions. The program will also fund R&D projects and provide loan guarantees for green projects. The $1.4 billion program will be phased in over the next few years. But this post isn’t about that!

When industry abandoned the contracts to purchase electricity the government suddenly found itself managing 4,000 megawatts of electricity capacity. As the biggest player in the market, it began selling wholesale power at the cost of producing the power but not including anything for capital reinvestment. This means that the private sector sellers of power also have to sell at a cost that doesn’t recoup capital or replacement costs.  But this post isn’t about that! 

Government intends that 30% (5,000 megawatts) of electricity will come from renewable sources by 2030 (currently 8%). In December 2017, based on funds from the carbon tax, Government awarded 3 contracts for 600 megawatts for an average price of $37 per megawatt. Government was thrilled about this low price. It got this price by assuming the risk if the average price of electricity falls below a threshold. On the upside if the price is high then companies pay government. But this post isn’t about that!

In June 2017 government set a cap on costs that consumers could be charged per kilowatt-hour. The maximum will be 6.8 cents. This is aimed at making sure consumers don’t get jolted if a sharp rise in prices occurs. But this post isn’t about that!

A Capacity Market

No this post is about Alberta’s decision to transform the system by moving from a nearly purely competitive market to a more regulated one.

Back to the day when the PC government de-regulated the electric energy industry. This resulted in private investment that saw the system grow by 50% to meet Alberta’s growing demand. Multiple generators get a wholesale price for electricity through contracts or spot prices and those prices fluctuate. Prices can be quite volatile when demand peaks or a plant shuts down.

The risk to the taxpayer is low, if companies over build, it’s their shareholders, not the taxpayers that take it on the chin. And less efficient generators don’t get to increase prices, but instead they get lower profits.

The Alberta government doesn’t trust the current model. It believes the risks of fluctuating prices are too high for consumers. They worry that the market would not move to the ‘green’ electricity future by itself. They believe a stable price with predictable revenue will attract investment. ($25 billion is needed in next 15 years)

So they are moving to a model called Capacity Market. In this model, the government determines the capacity the system will need in the future (maybe 3 years out). Then, in an auction of sorts each generator bids to supply chunks of that power at an offer price. Generators also get paid another revenue stream to make sure the capacity is available.

The government then just keeps accepting bids until it has the future supply and certainty it thinks will be needed. There is much devil in the detail related to this shift and government’s role in the system. The system is expected to be in place by 2021.

Public policy objectives are transforming. The policy objective of low cost energy with public risk will be replaced a policy focused on reducing carbon intensity.

Severely Normal Albertans might expect that not all electricity sources will be treated equally. Perhaps the central planners will decide that separate auctions for “green energy” will be held. Perhaps co-generators who produce power from using carbon intensive processes will find that the market for them is very limited. Almost certainly the cost of greening our electricity system will be more expensive than we had hoped and likely at public expense.