The Evolution of Alberta’s Competitive Electricity Market and Changes Needed

By Larry Charach
Strategic Results Consulting Inc1

The founding principles and goals of Alberta’s competitive electricity market, established in 1996, aimed to encourage innovation, attract investment, and provide a reliable power supply at competitive prices. However, recent changes, including the termination of Power Purchase Arrangements (PPAs) and shifts in market conditions, have led to challenges such as rising prices, the early retirement of coal generation, and increased reliance on intermittent sources such as wind and solar.

The founding principles and goals of Alberta’s competitive market remain unchanged. It was believed that Alberta’s competitive market would encourage innovation,  attract new investment and deliver a reliable electricity supply at competitive prices. What has changed are today’s market conditions, which require changes to the structure of the deregulated market.

In 1996, the Electric Utilities Act came into effect and required that power generation would flow through a competitive power pool, generation would no longer be regulated other than for environmental purposes, and transmission would be overseen by an Independent Transmission Administrator. However, the Act did not address two key issues on which an Advisory Committee could not reach a consensus:

“When the Alberta NDP introduced their carbon tax in 2015, they triggered something called the ‘Change in Law’ clause. The result was that the Balancing Pool line item on Albertans’ utility bills changed from a credit to a charge. A monthly charge will be added to a consumer’s utility bill until 2030 to pay off the debt incurred.”

  1. How to introduce retail choice for customers, and
  2. How to move the existing generation from a regulated service to a competitive market.

These issues were addressed through the Electric Utilities Amendment Act (EUAA), which led to the creation of Power Purchase Arrangements, what most of us know as PPAs.

  • Marketing rights to the generation was auctioned off to PPA buyers. The initial auctions in 2000 raised approximately $2.2 billion to be paid out to consumers in Alberta.
  • Unsold PPAs were turned over to the Balancing Pool, who received the income from these unsold PPAs. The Balancing Pool sold the marketing rights to the generation from these PPAs or offered the generation directly into the market.

Initially, there was a net income which appeared as a credit from the Balancing Pool on a consumer’s monthly utility bill. When the Alberta NDP introduced their carbon tax in 2015, they triggered something called the “Change in Law” clause, which led the PPA buyers to terminate the Power Purchase Arrangements and turn them back over to the Balancing Pool. According to the Power Purchase Agreement Review report by Deloitte, the combined total estimated Balancing Pool (BP) loss was pegged at $2.1679 billion. The result was that the Balancing Pool line item on Albertans’ utility bills changed from a credit to a charge. A monthly charge will be added to a consumer’s utility bill until 2030 to pay off the debt incurred.

AESO’s Market Pathways Initiative

Alberta’s competitive electricity market, developed over 20 years ago, never contemplated today’s market conditions. Market conditions have changed, and regulations governing the market have not kept pace.

Power prices have increased by over 200% over the last few years. Many consumers have felt the pain of higher electricity rates. This summer, RRO prices spiked to over 30 cents/kWh.

The Alberta Electric System Operator (AESO) has begun their Market Pathways Initiative to evaluate Albertans’ future power requirements. This report will develop recommendations for significant market design updates to meet the challenges facing Alberta’s electricity market. Challenges include:

  • The end of the Power Purchase Agreements.
  • The early retirement or conversion of all Alberta coal generation by the end of 2023, seven years ahead of the legislated deadline.
  • A significant increase in intermittent generation sources (i.e. wind and solar).
  • The legislated yearly increases in the federal carbon tax.

These factors, and others, have added to the complexity and challenges of managing the reliability of Alberta’s electricity system.

Without question, changes in the market design are necessary. Minister Neudorf and his officials have a key role to play in ensuring the government supports the required regulatory changes. New regulations, policies, and guidelines will be integral to the pathway discussions.

[1] From 1986 to 2003 Larry Charach headed the Alberta Government unit responsible for dealing with electricity policy issues. Beginning around 1994, the Government decided to restructure Alberta’s electricity sector. Larry’s responsibilities included directing the planning and process for the design and implementation of the Power Purchase Arrangements. Since his retirement from government in June 2005, he has consulted (http://strategicresultsconsulting.com) for the public and private sector on a number of policy and regulatory issues mainly related to the energy industry in Alberta. His current clients include UTILITYnet who commissioned this article.