Will This Spark Fly?
When it comes to Alberta’s retail market for electricity, competition isn’t working as well as some had hoped. One group of entrepreneurs thinks it’s time for some co-operation
by Max Fawcett
Check out our Alberta Venture podcast this month featuring Spark and its journey from short feature to cover story
Jeff Senger is a driving force behind one of Alberta’s newest and most promising green ventures, but he’s hardly your typical environmentalist. It’s not just the fact that the 33-year-old’s day job involves shooting and butchering animals at Sangudo Custom Meat Packers, a small meat packer that he co-owns and operates. It’s not even the fact that he’s unapologetically enthusiastic about the virtues of capitalist enterprise and the financial possibilities associated with it. No, the thing that really sets Senger apart is that he’s willing to make compromises. It’s a good thing, too. Spark Energy Co-operative, the fledgling electricity retailer that he co-founded, almost certainly wouldn’t be around today if he were more ideologically inclined.
The idea behind Spark is a simple one: find generators of green energy and pair them up with customers who are willing to pay a premium for the product. It came, in part, from the fact that Senger’s previous employer, Whitecourt Power LP, was failing to do just that. “It struck me as impossible that we were burning bark from the pulp and paper industry, producing 25 megawatts, and selling it at coal prices,” Senger says. “These bills are crossing my desk, and I’m thinking, ‘This is craziness. This is a premium product, and yet it’s not differentiated in this market.’ So, I quit soon after, and Paul [Cabaj] and I started talking with the Alberta Electric System Operator to see how far we could push it.”
There was just one problem with their idea. The fund that owned Whitecourt Power LP, Macquarie Power Management Ltd. (now called Capstone Infrastructure Corporation) wasn’t interested in selling its product to a bunch of theoretical customers, even if they were willing to pay a higher price. “We had a beautiful set of spreadsheets and a great business plan,” Senger says, “but when we went to a generator and said, ‘Hey, we have a hypothetical load of 1,000 customers, and we think we want to buy one to two megawatt hours from your generation plant,’ the investment bank that owned the place said no. It didn’t want to tie up load with a hypothetical.”
It’s at this point that Senger’s pragmatism – and a bit of timely advice from one of his early supporters and current suppliers – helped save Spark from becoming another casualty of uncompromising idealism. Nick Clark, the Calgary-area IT entrepreneur behind the UTILITYNet billing system that Spark uses, encouraged Senger and Cabaj to focus on where they wanted to go instead of on how they wanted to get there. If Macquarie wouldn’t sell them the green energy they wanted until they had 1,000 customers, Clark said, then they’d just have to go out and get 1,000 customers, even if that meant not selling green power in order to do it. “Just change your vision,” Senger remembers Clark telling them. “Don’t be so stupid.”
Selling green power isn’t a new idea. Ontario-based Bullfrog Power, for example, has been doing it for some time now with considerable success. But while Senger supports Bullfrog’s mission, he’s not quite as enthusiastic about its structure. “Our stance at Spark is that Bullfrog’s good,” Senger says. “But Bullfrog’s model? Maybe not so good. It’s corporate, it’s Ontario-based, it’s marketing, it’s renewable energy certificates. I thought, ‘How can we be even truer to the green cause?’” The answer, Senger says, is co-operation.
He didn’t know much about co-operatives when, in 2009, he first met Cabaj, an expert on the co-operative model and a long-time consultant in the field. “What the hell’s a co-op?” Senger remembers wondering at the time. “How does it work?” Senger’s community of Sangudo was exploring the possibility of creating a co-operative to encourage a greater diversity of cultural activity in the community – something beyond rodeos and hockey games, he says – and he was tasked with bringing his “nerdy math stuff” to finding some funding for the project. A grant application that he wrote to the Alberta Community and Co-operative Association resulted in a grant of $50,000, but the community didn’t know quite what to do with it. That’s where Cabaj came in.
There was disagreement within the community over how and where to spend the grant money, but Cabaj presented them with a win-win solution: why not do more than one thing with it? He suggested that rather than focusing on one project, they should create an investment co-operative that could fund a wider variety of projects. After taking what was left of the $50,000 grant and passing the proverbial collection plate around the community, the Sangudo Opportunity Development Cooperative was officially born. So, too, was the bond between Cabaj and Senger, who quickly decided that the co-operative model they’d deployed in Sangudo could be applied to the sale of green energy in Alberta.
From a distance, the idea of running their venture as a co-operative might seem like a form of economic suicide. Senger doesn’t necessarily disagree with that assessment, either. After all, if an outfit like Bullfrog does well, its shareholders reap the rewards of that success. They can, in other words, get rich – and quick. That’s not possible for companies like Spark that rely on a co-operative model. Instead, Spark’s profits are either reinvested in brand-building activities like education campaigns, community outreach and consultations with potential suppliers, or redistributed equally to the co-operative’s members. “That’s the power of a co-operative,” Senger says. “Nobody can get rich.”
More important than its ability to suppress the creation of new billionaires is the fact that the co-operative structure tends to succeed in situations where traditional private enterprise has failed. “Co-ops work best where there’s market failure, where the traditional markets and traditional structures in place aren’t responding to what people see as a need,” Cabaj says. According to Rick Cowburn, one of Spark’s early supporters and the chair of its board of directors, there isn’t an area of economic activity in Alberta more beset by failure than electricity. Cowburn thinks that in virtually every aspect of the province’s electricity market, be it transmission, generation or retail, there are problems that can’t – or won’t – be addressed by market players.
He should know, too: as a former vice-president at Epcor (he retired in 2007), he played a part in implementing the policies and programs that led to some of those failures. “I’ve since been out on the street consulting and just watching what’s been going on,” Cowburn says. “The glorious experiment that we’ve tried with competitive electric markets is severely challenged –
and I’m being polite about it.”
Those challenges have been manifested publicly by the emotionally charged public hearings the Alberta Utilities Commission held for the Heartland Transmission Project. Cowburn describes the project as “an insane overbuild” (for example, there is a single pair of transmission lines rated to carry 6,000 MW of continuous electricity that will go into the Heartland substation, while peak provincial demand is 10,000 MW), but he says this is more a function of the failure of previous policies than a reaction to a real problem. “What the heck could [Premier Ed] Stelmach have done? I don’t fault these guys, but now it’s become an intolerable market failure.”
Cowburn understands the intricacies of Alberta’s deregulated electricity market, and he has a rare talent for presenting the history behind each misstep that he believes has been made to date. But while he can deliver a downright Shakespearean soliloquy on the accumulation of minor tragedies that got us to where we are today, in the end he thinks it all comes down to a fundamental misunderstanding by both government and industry with respect to electricity. “Electricity is, God forbid, a communistic, holistic environment,” he says. “If you flick that light switch, the lights in California will change in the same micro-second. It’s that interconnected. People have no way of understanding the difference between the we’re-all-in-this-together reality of operating a power system versus the I’m-in-it-for-me [philosophy] that we tried to impose on a highly integrated system.”
One of the outcomes of that imposition has been an almost complete absence of competing electricity retailers. “The balancing that we were hoping was going to happen – that there’d be strong retailers who could get some sort of stability and balance in policy – isn’t there,” Cowburn says. As a result, the retail market remains dominated by the same players that were around before deregulation began. “They’re the only ones that have the size to be able to function in this thing,” he says, “and they have all the infrastructure they inherited from the old monopoly system.”
This is bad news for anybody who tries to compete with these behemoths, and Cowburn has seen his share of casualties. “I’ve seen so many retailers fail. Who wants to be a part of another funeral?” So why, then, does he believe that Spark can succeed? It’s all about the co-operative model, he says. “The co-op model doesn’t depend on having great big, fat margins on a product that intrinsically has low margins, if any.”
It’s still early days for Senger, Cabaj, Cowburn and the rest of the team behind Spark. They’re in the process of building the customer base they need in order to satisfy the requirements of power producers like in Whitecourt. But they’re well on their way to meeting that goal, and they’re making money in the meantime. “We’re already profitable,” Cabaj says, “because our [cost] margins are so bloody low.” They’re even exploring the possibility of applying the co-operative model to other public goods that might one day be deregulated, such as drinking water.
Regardless of how big its membership rolls get, Spark doesn’t plan to get into the business of power generation itself. Instead, as Senger suggests, it will act as a consumer advocate, the equivalent for green energy producers of the Lemon-Aid series of books. “We’ll evaluate, on behalf of our members, a group of green energy providers, and we can put out a bid,” he says. “‘Hey, we have a thousand members and they all want something like wind. Show us your stats.’ As a generator, they compete for our business. It’s almost like a group buy.” As a co-operative, the shape of those bids will be determined by the members themselves. “It doesn’t matter if I like biomass,” Senger says. “If the collective doesn’t like biomass, then it’s off the agenda, and if they like wind because it’s really well-marketed then I’ll be bidding – to my chagrin – on wind contracts.”
As such, while they won’t be in the business of power generation, they will be able to provide access to small-scale producers that have been largely shut out from the market thus far. “Those are the plays we really want to support, the small plays, the guys who want to put solar on rooftops in a bunch of neighbourhoods or something,” Cowburn says. “Those kinds of guys have no way to get to market. The market wasn’t set up for small guys, not because of some sort of conspiracy but because the system was set up 15 years ago and we haven’t had a chance to go back and revisit it.”
In the process, they hope they can expand the conversation around how Albertans interact with and consume electricity. “It’s so easy through social media and technology now to make this a living thing, so that the utility bill isn’t going to the bank and getting a letter stamped,” Senger says. “It’s about an event in your community. It’s about starting a discussion.” They’re hoping that others will join that discussion, too. “Ideally,” Cowburn says, “Spark can be a lightning rod for other similar kinds of co-ops to come in and do this kind of thing.”
Read Albertan Pastoral: A web exclusive profile of social entrepreneur and Spark co-founder Jeff Senger.
Check out our Alberta Venture podcast this month featuring Spark as well as a breakdown Alberta’s deregulated market from one of the 15 people in Alberta who really understand it. Why does he understand it? He helped deregulate it.