More uncertainty ahead for province’s electricity market

Restructuring always brings a risk of useless and unintended consequences

Albertans of a certain age might feel as if they’re trapped in a season of the television series Dallas.

Back in 1980-81, an entire season was consumed with the question of who had shot one of the show’s main characters, J.R. Ewing. When the fourth season began, it was revealed J.R. had, in fact, not been shot. It had all been a dream of his brother’s.

And so it could be with Alberta’s electricity system after the NDP government announced Wednesday that it will shift the market from an “energy-only” structure to one based on capacity.

In other words, the deregulated era in Alberta is all but over. In this case, the dream lasted 16 years, not one season.

The decision is tied to a report from the Alberta Electric System Operator (AESO), also released Wednesday. Reading between the lines, it’s easy to see the shift to a capacity system is the only way the government could achieve its goal of having 30 per cent of the province’s electricity generation derived from renewable sources.

Conversations with stakeholders found a lack of confidence for investing in Alberta’s electricity market, the AESO report states; an energy-only market wasn’t attractive given the government’s stated desire to increase renewable power generation.

What the report didn’t say, of course, is the source of investors’ lack of interest in Alberta’s wholesale electricity market.

That would, in large part, be the provincial government’s hand in creating uncertainty for investment in Alberta — which extends beyond the electricity sector — due to the lawsuits it launched against the holders of power purchase arrangements.

The upshot of the legal action, whether or not the government wants to acknowledge it, has been to drive investment dollars away. Economies are built on the sanctity of contracts, and when governments state their intent not to honour agreements made in good faith, the result is uncertainty and a lack of investment.

A capacity market will mean higher electricity prices for consumers and a different risk profile for investors.

Consumers will be charged a fixed price for electricity — no matter what — because they’ll pay for power that’s always available but not always needed. The trade-off is reliability and decreased volatility, with investors gaining a stable — albeit lower — rate of return.

The troubling aspect to all of this is that market volatility was addressed by the retail market through consumer programs that evened out the cost curve for their electricity consumption.

Ironically, the risk of greater pricing volatility is resident in the province’s plan to shut down coal-fired power while adding 30 per cent renewable generating capacity.

The retirement of coal and its replacement with renewables has the potential to create pricing volatility, which led to Wednesday’s announcement.

Think of it this way: renewables don’t always generate electricity when consumers need it most. Solar isn’t available in the dead of winter, when days are short and electricity consumption goes up. That’s an element of what would contribute to the pricing volatility.

The decision matrix under a capacity structure is different. The tendency to be more conservative when it comes to ensuring power needs can be met means the probability of the system having excess generating capacity is high.

There is also a significant issue of how a capacity system, with added renewable generating capacity, will affect existing renewable players with older infrastructure. There will also be a need to build infrastructure that can take renewable power from where it’s generated to where it’s used. Wind power isn’t generated in urban settings.

When the Klein government moved to deregulate the electricity markets in the late 1990s, it made sure to include all stakeholders. Everyone was pulled into the room — government officials from the departments of energy and environment, company executives and members of the Alberta Utilities Commission and AESO.

Enmax released a statement late Wednesday on the government’s announcement, saying it was critical the process to shift to a capacity market is “comprehensive, inclusive and transparent.”

The world of electricity is a complex one, with many interconnected variables. Any restructuring carries a huge risk of triggering a host of unintended consequences, of no benefit to consumers, investors or government.

It is not a mandate to be undertaken lightly, nor ideologically.

The retirement of coal and its replacement with renewables has the potential to create pricing volatility.