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Varcoe: Alberta's electricity price cap about to face its first test

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Something unusual is about to hit Alberta’s electricity market next month, and it’s going to cost the government millions of dollars.

But it will also save consumers millions of dollars in return.

For the first time since it was instituted by the Notley government last summer, the province’s price cap on retail electricity prices is about to kick in.

For some consumers, it will help shelter them from rising rates; for a province grappling with a massive deficit, it’s going to mean money going out the door.

“It has merit as a political decision. In terms of an economic decision, it’s less than optimal,” said energy economist David Gray, former head of Alberta’s Utilities Consumer Advocate.

“Does it make sense to levy a tax on the one hand, and then give a big refund on the other?”

Albertans are about to find out.

After several years of depressed prices, the province’s topsy-turvy electricity market has seen prices move upward this year, averaging $36 per megawatt-hour (MW-h) until the end of last week.

During the recession, prices were in a deep funk due to oversupply and weak demand. Alberta pool prices, which averaged $80 per MW-h in 2013, plunged to only $18 in 2016.

Prices have rebounded this year due to a combination of factors: cold weather from a bleak winter that won’t end, increasing demand, the mothballing of older coal-fired plants, higher carbon taxes and the termination of some power purchase arrangements (PPAs) by the Balancing Pool.

Forward markets show Alberta electricity prices are expected to jump above $70 per megawatt-hour in April.

That’s significant because the Notley government announced in 2016 it would create a price ceiling of $68 per MW-h (or 6.8 cents per kilowatt-hour) for residential consumers, farms and small businesses on the regulated rate option.

(Under Alberta’s deregulated electricity system, households can sign up with retailers or stay under the default regulated option, with those rates set monthly by the Alberta Utilities Commission based on wholesale prices.)

High prices next month mean the government will have to start paying out, likely to the tune of about $5 million to $10 million for April, said Blake Shaffer, a fellow-in-residence at the C.D. Howe Institute who has analyzed the issue.

“I think we’re going to see our first bind of the retail cap,” Shaffer, a former energy trader, said Tuesday.

“In 2018, a very rough estimate of how much the cap is going to cost the government is around $50 million.”

Shaffer notes several forces are propelling prices upward next month, including the planned outages of natural gas-fired plants and the mothballing of some coal-fired generating units by TransAlta.

According to his number crunching, the province’s price cap will kick in for seven months between April and the spring of 2019. That means the government would fork out $30 million to $50 million this year, and another $15 million to $25 million in 2019.

Courtesy Blake Shaffer on Twitter (@bcshaffer)

Other estimates for electricity prices — and the potential impact on the payout — are more aggressive.

A recent report by electricity consultancy EDC Associates projected the cost to Alberta’s treasury of capping power prices could approach $700 million by the time the policy expires in 2021.

“We are seeing load growth year over year sopping up some supply, and a turndown in existing supply, tightening the supply-demand balance,” EDC president Duane Reid-Carlson said Monday.

“The bigger impact is in 2019 and 2020.”

The province says the price ceiling will protect consumers and small businesses from unexpected power spikes. The government will pay for it with revenue from the carbon tax.

With the cap, an average household on the regulated rate would pay just over $40 a month — at most — for the electricity portion of their monthly bill.

A spokesperson for Energy Minister Marg McCuaig-Boyd said over the near term, the province doesn’t expect the cap to be breached for “any considerable length of time.”

More details about the potential cost will be revealed during the provincial budget later this week.

While the province will be on the hook for making more payments, it’s worth noting higher electricity prices will help limit the mounting losses that Alberta’s Balancing Pool faces from money-losing power purchase arrangements it’s still holding.

Some consumers will enjoy protection from price volatility until the ceiling expires, but Gray doesn’t think it makes for great public policy.

“On the one hand, if you’re trying to encourage energy efficiency, it’s sort of exactly the last thing you should want to do — you want to see people pay the real price of power,” he said.

“I think it’s going to bite them.”

From industry’s perspective, the price cap is just another piece in a very large electricity jigsaw puzzle, which includes Alberta’s drive to increase renewable power, develop a new capacity market by 2021 and phase out all coal-fired generation by 2030.

Gianna Manes, chief executive of Enmax Corp. — the largest electricity retailer in Alberta — agrees the price cap will likely be tested this year and hopes government and industry will closely examine its design to ensure the policy is working as intended.

“This is new, it’s untested,” she said in an interview.

“The interesting thing about the price cap is it immediately protects consumers — but the cost of that is borne by the government, which is funded through taxes and Albertans. So we need to look at it on both sides, to make sure that in its application, it actually works.”

Alberta power prices are on the move.

The government will soon get a chance to see just how much it’s going to cost to absorb the cost.

Chris Varcoe is a Calgary Herald columnist.

cvarcoe@postmedia.com


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