Power market remake could cut into city profits

Medicine Hat is an insulated power market controlled by the municipal power company, but emerging changes to the Alberta power market could affect export profits and also drag down prices for local consumers, local administrators tell the News.

Premier Danielle Smith has said for more than a year that she wanted to revisit some facets of Alberta’s unique bid-in energy market that set records last summer in cost to consumers.

This week, Utilities and Affordability Minister Nathan Neudorf announced some interim changes to address concerns about “economic withholding” whereby generators essentially limit supply to get better prices.

As well, the Alberta Electrical System Operator said Tuesday it will study longer term changes to smooth out volatility, and therefore prices, and recommend changes next winter.

Those could be implemented by 2026, which city power officials say while the grandfathered city-owned company is not large enough to affect the overall market, or be largely affected by new regulations, the prices it receives for export sales are important to the municipality.

“We’ll definitely be an active stakeholder in what’s being called the ‘restructured energy market,’” said Travis Tuchscherer, the city’s manager for energy marketing and business analysis.

“It’s still going to be an energy-only market, but with some tweaks to help it succeed in the long-term.”

In the short term, the affect has been to lower price forecasts in the province that were already falling.

Tuchsherer recently told council’s energy committee that the forecast price for 2024 is now about $69 per megawatt, about 20 per cent lower than forecast by the city in December, and less than half the high-point last summer.

If that holds, it would put local prices near a floor set last fall after council addressed high power price complaints with relief program, a new rate-setting formula and a third-party review of business philosophy, now underway.

“Our government is committed to Alberta’s unique and investor-driven energy-only market,” said Neudorf in a statement. “However, the market’s rules were designed 25 years ago, and some are no longer optimal for the system today. This will truly make a difference by helping lower Albertans’ utility bills.”

Since last fall, Medicine Hat single power rate has been set at the forecast average price paid in the wholesale market (power contracted to retailers who then apply a mark up).

That’s a break in practice after 12 years of offering local non-contract rates equal to default rate paid by other Albertans — a system that saw the floating price rise above 30-cents per kilowatt hour last summer, nearby double the local contract rate.

Going the other way, however, the city also captured those high prices when it sold power onto the Alberta grid.

Medicine Hat’s power interests forecast a record dividend on more than $130 million for 2023. It recently updated a year-old 2024 forecast stating even at decreased local and grid prices, profits could top $80 million even with lower prices.

That assumed an average price per megawatt on the grid of $91 this year (9.1-cents per kilowatt), down from $150 per MW in 2023, with administrators warning that softer prices were expected in the near term.

Alberta, along with Texas, is a rare power market in North America where private sector generators agree to supply power at bid prices based on market demand rather than on longer term contracts.

Newly announced changes include bidding changes — generators can now bid in prices in real time, traders would now be required to register bids one day in advance, potentially allowing companies to better allocate power and avoid shortages.

“The negative impacts of economic withholding are usually offset by competition,” read the utility ministry’s statement. “Longer periods of higher prices, like Albertans have seen over this past year, signal the need to increase competition in the province’s electricity market and help lower prices again.”

Companies that supply more than five per cent of the market could face a clawback of profits if they reach above a certain threshold, though Medicine Hat wouldn’t face the feature based on relative size.

In the case weather-related emergencies and price spikes, the AESO could legally require gas-powered facilities to come online.