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How is Alberta’s deregulated electricity market holding up?

It’s been nearly two decades since Alberta made the change

Jan 8, 2014

by Max Fawcett

011_market_story
Photo courtesy of Capital Power

It was a Monday just like any other – right up until the moment that it wasn’t. On July 9, 2012, Albertans across the province cranked their air conditioners, turned up their fans and did anything else they could to help them contend with the 30-plus degree temperatures and sweltering humidity blanketing the province. In the process, they drove demand for electricity to an all-time summer high of 9,885 MW – and at 2:10 in the afternoon the grid finally buckled. That’s when the Alberta Electricity System Operator declared a power emergency and triggered rolling blackouts across the province in an effort to prevent a more catastrophic outcome.

For most Albertans, the blackouts were just an inconvenience. But for those who take more than a passing interest in Alberta’s electricity market, it was a sign – another one – that it wasn’t working as planned. On the same day that the grid was coping with record-high demand for electricity, four of the province’s generating plants went down. As NDP MLA Rachel Notley said at the time, “We better darn well have some answers as to why we have this coincidence of everybody not producing power on the same day.”

Notley hasn’t been the only one sounding the alarm about the state of competition in what is nominally an open and free market for electricity. “The key thing that seems to be problematic is the level of competition in the market,” says David Gray, an energy economist and the former CEO of Canadian Control Works. “There seems to be players in the market that are able to move their price, which is something you don’t want in a market that you rely on. I don’t doubt that it’s competitive, but you play poker against guys day after day, year after year, you get to know each other’s hands pretty well.”

Indeed, this past August the Market Surveillance Administrator (MSA) – an arm’s length watchdog that monitors the health of the province’s electricity market – suggested that Notley and Gray are on to something. In a report titled Co-ordinated effects and the Historical Trading Report, it said some sort of anti-competitive behaviour was taking  place in the province’s electricity market. “The MSA was struck by the precision of the competitive interplay between some of these large suppliers that sometimes resulted in much higher market prices than would have been expected had there been uncertainty about a counterpart’s competitive intentions,” it concluded.

Gray says that’s something that may be difficult to change, given that the rules of the game have already been determined. “They’ve allowed people to own up to 30 per cent of the [generating capacity] in one company, and there are three [TransAlta, Capital Power and Atco] that are over 20.” And while much of the attention has been focused on those rolling blackouts from 2012, Gray says it’s the less publicized events that should really worry people. “The problem isn’t when it hits $1,000 per MWh when there’s an outage, or when you have a supply crunch,” he says. “It’s, ‘Why did it hit $600 last Tuesday? Why did it hit $900 the week before?’ The price spikes don’t seem to bear any relationship to supply and demand anymore.”

But according to Evan Bahry, the executive director of the Independent Power Producers Society of Alberta, this obsession with the spot price is distorting the conversation about the province’s electricity market. “The spot market is volatile, but electricity is volatile,” he says. But he also claims that the deregulation of Alberta’s electricity market has been a success. “In our province, all of our infrastructure is facing the strain of demand,” he says. “Power supply has met consumer demand far better than other pieces of infrastructure. It’s working to add supply quickly, it’s shifting investor risk from consumers to developers and it’s producing
a fair price outcome.”

That outcome does involve higher prices, he says, but that’s not a function of market collusion or some other anti-competitive force. Instead, it’s a reflection of the fact that the demand for electricity in Alberta has grown substantially since the market was deregulated in 1996. “Prices would have risen in our market had we been regulated or not because we’ve had to add new capacity, and these plants come on at half a billion [dollars] a pop,” Bahry says. “That would have pushed the price up for consumers no matter what market design we had.” It’s not like electricity is the only commodity that’s seen prices rise over the last decade or so, either. “We’ve seen wholesale electricity prices from 2001 to 2013 increase by 40 per cent. The average price of a house has increased by 140 per cent. A barrel of crude has increased by 250 per cent. And capacity-wise, we’ve increased our fleet by 63 per cent.”

Joe Anglin, the MLA for Rimbey-Rocky Mountain House-Sundre and a longstanding critic of the way the deregulated market functions, doesn’t share Bahry’s view. Instead, he says a recent report from the MSA is a sign that things aren’t working properly– and that something needs to be done. “In any other venue, in any other situation, this [price signalling] is called theft, or some sort of crime,” he says. “In our market, it’s not considered a crime. If you were to correlate this to the stock market and you caught someone doing this, they’d be facing a significant fine – if not a jail sentence.”

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Anglin thinks the best way to do discourage this behaviour would be to introduce something called day-ahead pricing, a situation in which contracts are made between the seller and buyer for the following day. “If Atco says it will sell 300 MW for $45 per MW every hour for the next two days, if they lose a generator, they have to go out into the market and find electricity, whatever price it is, and sell it into the market at $45,” Anglin says. “I will guarantee you they’ll make sure they have generation available.”

But here, too, Bahry says critics like Anglin are missing the forest for a few particular trees. Economic withholding is, after all, technically permissible in Alberta’s electricity market. It is considered a form of rational profit-maximizing behaviour, and the MSA justifies it on the basis that it leads to the kind of profit margins that allow for the creation of new generation capacity – capacity that the province needs in order to meet both growing demand and the ongoing retirement of older coal-fired plants. “This is simply what occurs in every market,” Bahry says. “You can offer to take all your generation plants and put them at the price cap, and if your competitor puts their plants at $50, guess what? They just undercut you, and you’re not going to sell any volume.”

The proof of that, he says, is in the pricing itself. “That strategy – withholding – produced prices last year of $65 per MWh. That’s below the cost of new entry. You cannot build a power plant for $65, no matter which technology you want to use. Ninety-five dollars is the price signal to build. We’re not exactly returning windfall average prices against the average cost of supply.” And if anyone doubts his math, Bahry says they only need to talk to a shareholder of one of those companies. Shares of TransAlta, for example, are down more than 50 per cent from their peak in 2008, while Capital Power sold all of its New England assets to Emera in late August for US$541 million to shore up its balance sheet and focus on its Alberta operations.

What can – or should – be done, then? For its part, the MSA concluded that changes to the Historical Trading Report – a document that, it said, “acts as a coalescing instrument in Alberta’s oligopoly market, when market conditions are propitious, to the detriment of competition” – would go a long way towards reducing any co-operation between market players. “The root of the problem is the report and therefore its removal or alteration is the most effective and expedient remedy,” it said. David Gray, though, doesn’t think that will work nearly as well as the MSA appears to think. “I can understand why they want to do that. It makes it more difficult for companies to readily get a handle on what the other companies are doing. But the point of fact is that they have guys doing nothing but looking at energy markets 24 hours a day. They’re pretty bright, and so they’ll figure out where the opportunities are to raise the price.”

Instead, he’d like to see the province take a page from the Federal Energy Regulatory Commission in the U.S. and allow load to bid into the balancing market (where supply and demand are matched up) “as if they were generation,” something that would both dilute the so-called “offer power” of the existing generators and more powerfully incent conservation during peak usage periods. “There is a certain amount of price-responsive load in the province, mostly pulp and paper mills,” he says. “If you’re pulp and paper mill A and you drop off [that is, temporarily shut down operations], it reduces the price for pulp and paper mills B, C and D, without them having to do anything and without you getting any compensation for it. Having a program like the one they’re developing in the United States would aid that, because the guy who drops off actually gets paid.” That, he says, would make it a truer and more efficient market – but he’s not holding his breath. “Producers have opposed this for a long time. They’re abjectly against demand-side participation in the energy market. But I think their arguments are fallacious.”

Bahry, who represents those producers, thinks the focus should be more on educating the public about Alberta’s deregulated market than on convincing them that it doesn’t work. “The one thing I struggle with is the lack of public awareness or education about how our market works and what the drivers of price are. There is a gap. We ask consumers to contract at the door, but have we told them what five cents or 10 cents or 20 cents means – do they have any frame of reference for what they’re signing? There are good websites that help put prices in context, but we’re not actually actively arming consumers with knowledge, and I’d be all for that, because I believe this thing has worked well for Albertans.”

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