Winds of Change Coming to Alberta’s Electricity Market
By Nick Clark
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 marginalized 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 arecent 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 taxpayers 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 competitive
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
favour 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 Sandstone
Energy. Today there are 20 Energy Marketers in our network 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 on Wednesday, 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?
Consumers
on the government RRO have lots of choices today – and can switch to a
competitive Energy Marketer. This is the message that we hope Minister Savage
will endorse.