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Jan 28 2012

Alberta electricity “market” is broken

Back in 2000, the PC government of Ralph Klein purported to “deregulate” the electricity industry, with the promise that more competition and the free market would provide more choice and better prices for Albertans.   But something went wrong.

Today, although many power plants have been built and the total installed base of power generation exceeds even the highest peak demand, the current “regulated rate” power price being charged to most customers has risen to $150 / MWh ($1.50 / kWh), from prices as low as $35 / MWh just a few years ago.

This is particularly difficult to understand if one looks at the sources of power generation in Alberta.  Most power is generated by coal thermal plants, which is a low cost supply because the fuel is very cheap and the plants are mostly old enough to have been paid off a long time ago (with the exception of KeepHills 3 and Genesee 3).  Yes, TransAlta shutdown and decommissioned the old Wabamun plant in the last few years, but the new coal and gas fired power have more than made up for that loss.   And I do recognize that the Sundance plant is down for extended maintenance (which leads me to think they have an unexpected problem to be down that long in the winter…

The bulk of the remaining power generation in Alberta comes from gas-fired power generation.  And as was reported yesterday, the price of natural gas at AECO hub fell below $2.00 / GJ this week.  Since every additional megawatt needed in Alberta comes from natural gas, this should be driving the spot price of power DOWN.  But it’s not.  At $2.00 / GJ natural gas, a combined cycle power plant should be able to generate electricity for $16 / MWh fuel cost.  Since fuel cost is about 70% of the cost of generating electricity, that means the marginal cost of putting another MWh of power into the grid is currently about $23 / MWh.  Yet consumers are asked to pay SIX TIMES this level.  Why?

TransAlta has admitted to “manipulating” the power market to it’s own benefit, but claims it only did so for 31 hours.  I think the Province should be investigating this very carefully – based on a review of the power pricing over 2010-11, it appears to me that the producers can see through the market and tune the production to demand in an effort to drive up prices.  Why is it that the regulated rate option averaged 3% ABOVE the spot market price for the duration of 2011?  Shouldn’t the regulated rate be based on long term production contracts that drive the price down instead of paying all the producers some marginal rate?

Another aspect of power deregulation that seems fishy is the transmission system.  AltaLink, which operates the power transmission, is a regulated utility so that the government lets it charge enough to make a “reasonable” profit.  The problem I see is that AltaLink is now a wholly owned subsidiary of SNC-Lavalin.  And AltaLink gets all of it’s facilities built by it’s parent company’s engineering and construction division.  There may be the appearance of competitive bidding, but I don’t think that is real – why?  Because the numbers that SNC-Lavalin themselves has made public tell the story.   Based on the forecast values, the profit margin that SNC-Lavalin is making on AltaLink projects is about 12-13%.  In the engineering and construction business, gross margins rarely get about 4%.  One only needs to look at the annual reports of other firms, particularly those that are less diversified and more focused on E&C.   In my opinion, AltaLink is overpaying for it’s facilities, and it’s parent company is the beneficiary.  And AltaLink can afford to pay because the Alberta Utilities Commission lets them set prices to cover costs.  The net result is that Alberta consumers are subsidizing SNC-Lavalin’s bottom line.  Now, if AltaLink did bid these projects competitively and saved 10% of the costs, that wouldn’t significant change the price for consumers.  But it would move it in the right direction.

 

 

5 comments

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  1. Ken Moore

    Good presentation. The evidence you dug up to explain the price gap between $MWH sales and $MWH costs for gas-powered generation feels out of scale, not quite enough to explain the large difference. Is there a perverse incentive or policy that’s overlooked?

  2. Freddy

    The Alberta Liberal Party has been saying this since 2001. It only took a dopey Tory like you 11 years m to catch up.

    1. Taliesyn

      The problem is not deregulation. It’s that the market was never properly deregulated. There are still too many points where the government interferes in the market, and they set up the pricing of power such that it could be manipulated by the producers and carriers. The consumer doesn’t have access to the same level of information as the producers. The fact is that power in Alberta should NEVER cost more than about $25 / MWh when gas prices are under $3 / GJ. There should be clear linkage between those values.

      1. Freddy

        Okay…let me get this straight…you knew for 11 years that Tory claims of deregulation were a lie since it was “properly” deregulated. So my question still stands. Why are you squawking now? What did you say nothing for 11 years?

  3. Cynical Bard

    When long distance phone rates were de-regulated the prices dropped dramatically. But the government did not regulate who could get into the business or how it would be priced. But neither of those ideas apply to power. Even after TransAlta admitted to manipulating prices the Minister of Energy still said: “There is nothing we can do.”

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