Alberta Electricity Market Review

Sheldon Fulton

President, Forte Business Solutions

25 Years Later

Twenty-five years ago, the Alberta government took a decision to de-regulate the electricity sector as a commitment to the power and efficiency of markets over regulation, and as a means to attract future investment in generation and allow competition to establish fair and reasonable prices for consumers. Although the sentiment may have been well placed, in practice the results have not been stellar. For each of the last two and half years Albertans have experienced the highest prices ever with a doubling in 2021, trebling in 2022 and new highs in 2023 despite falling gas prices.

In addition, the current government is planning to get the grid to Net Zero - i.e. zero net emissions per MWh. Electricity is also expected to be used to produce hydrogen, to power EVs, and to displace natural gas heating for combined heat and power projects. Getting to net zero means that 45 million tonnes of C02 currently emitted from electricity generation need to be displaced with a continued 85,000 GWhs of generation, not including any growth in demand. Adding incremental demand to the electricity system to provide power for other sectors to reduce emissions is going to be problematic.

My concerns for the electricity market in 2023 are set out in two blog posts. The first is today’s post discussing the current state of affairs in the Alberta electricity market and the serious need for a market re-design to protect consumers.

The second blog post will be about the effort to achieve Net Zero by either 2035 or 2050 and the rationale for such an effort.

Part One – The Alberta Electricity Market in 2023 and the Need for Change

I am a strong believer that if electricity is going to be a major component of achieving elements of Net-Zero by 2050 then some serious discussions and market design issues need to be considered. But we first need to recognize that the electricity marketplace in 2023 is not the same as it was in 1995 when the first musings for de-regulation were in debate, and that clearly the objectives for the market are very different today than twenty-five years ago.

In 1995, the objectives were for pricing to attract new investments in generation and for retail competition to deliver low-cost energy to consumers. Concerns for carbon intensity per MWh, de-centralized generation, and a role for renewables were side topics. The real objectives were how to dispatch coal units and to bridge concerns for exercise of market power in a commodity that is hypersensitive to price manipulation.

The evolution and demise of PPAs as a failed case for reducing market power, a policy decision to burden two-thirds of consumers with 100% of transmission costs while exempting large industrials that are 'behind-the-fence', and employing a pricing mechanism that rewards inefficient burning of gas, higher carbon-intensive MWhs and discounts wind and solar due to a paranoia on reliability are the remnants of this market design from 1995.

In mid-year 2023 we have a market heat rate (Power Price in $/MWh divided by Gas Price in $/Gj) at 75 times. An efficient combined cycle generator like the Shepherd Energy Centre uses some 7.5 Gigajoules to produce one Megawatt hour so why is the market seeking a ten times margin over fuel cost? In the first quarter of 2023 the Market Surveillance Administrator (MSA) reported that Solar generation received at 37% discount on the average Pool price and wind a 32% discount, yet these are the very renewables targeted to lead the way to Net Zero.

2001 to 2023 Electricity and Natural Gas Prices

The electricity market in Alberta, from generation to delivery, is a $15 to $20 billion annual enterprise. $12 billion for energy (85,000 GWhs at $150/MWh), $3 billion in annual transmission tariffs and a similar amount in distribution charges. All the elements of the market have been designed from a centre out perspective, such as:

• Pricing on a minute-by-minute basis with one price for all supply.

• Large-scale generation located by fuel choice more-so than consumptive demand (coal units near coal supply, wind turbines where the wind blows).

• Transmission built on 50-year reliability criteria with assured returns to capital irrespective of usage.

• Distribution that lacks the discipline of competition to keep rates fair.

Most of these costs are borne by Alberta's residential, farm, commercial, small industrial and institutional sectors (MUSH) yet they no longer have a seat at the table for any of the key elements. There is no AESO Board with consumer representation (just political appointments), no ability to intervene in the actions of the AESO for project approvals and locational sitings.

There are limited resources for tariff intervention funding for rate applications before the AUC by distribution and transmission providers (although ironically all the costs of the hearings can be passed through to the consumer on their monthly bills - including mistakes that attract rate riders). The consumer has become disenfranchised over the past twenty-five years, and they have developed a well-earned skepticism for any new ventures that will cost more.

Any discussions for the next twenty-five years must deal with the legacy of the current market that causes poorly designed price caps for RRO consumers, such as this past winter’s 13.5 cent cap to 30 cent rates that resulted in deferring $200 million to future billing and that puts the retail market in disarray. Collection of this $200 million from RRO consumers is an on-going surcharge for the next 18 months despite RRO Rates in July exceeding 26 cents/kWh.

We now have a market design that rewards big-name investors with the ability to extract renewable benefits but charges all of the transmission costs (other than initial connections) to two-thirds of Alberta consumers on their monthly bills. Every other jurisdiction in North America has the generator responsible for a portion of the transmission costs from new projects, except Alberta.

Without a clear vision of how to tackle net-zero electricity in Alberta, certain areas of the sector are experiencing unprecedented pace of change while other areas are seeing slow and under-realized progress. We also see confused and disgruntled consumers, and uncertainty in the market about what the future will look like.

Fundamentally, I am a market-first proponent for implementing policy. Markets are more fair and more expedient than other policy levers such as government regulations or heavy-handed command-and-control options, and market solutions are much lower cost than regulations. 

Any discussions on future initiatives should consider the current dysfunctional market design and envision how to re-shape it to achieve the objectives for 2025 to 2050, including the following:

• A pricing mechanism that sends price signals for lower emission intensity fuels, minimizes needs for new delivery infrastructure and can attract capital with firm financial forward pricing (pricing for reliable delivery should be the responsibility of the supplier - not the buyer CIF pricing not FOB)

• An ability for all market participants to earn benefits from a lower carbon intensive megawatt hour, including those that pay for the transmission as well as those that invest the capital (if special facilities are built to facilitate hydrogen extraction or CCUS then those costs should accrue to the project, or the benefits of offsets should be shared with the rate payers)

• A pricing and tariff system that treats all participants fairly and equally and shares costs on a usage basis more so than as an infrastructure charge. (If I have rooftop solar meeting half my demand then my utility charge per kWh should be half as much as prior)

In the next post in this two-part series I’ll lay out what needs to be done to leverage market mechanisms on the path to achieving Net Zero and other worthy social objectives in Alberta.