Alberta govt caps electricity prices as part of power market reform

NDP govt moving from energy-only market (low price, high volatility) system to capacity market (higher price, low volatility)

The Alberta government has introduced legislation that would see the Regulated Rate Option electricity cost capped at 6.8 cents per kilowatt. The bill would be over a four year period from June 1, 2017 to May 31, 2021, according to a Government of Alberta press release.

The Regulated Rate Option is the default electricity contract for Albertan’s who do not have a fixed electricity rate through a contract from companies such as Enmax or Direct Energy.

In the past six years, the Regulated Rate Option has been as high as 15.3 cents per kilowatt hour(kw/h) and as low as 2.7 cents, and increased month-over-month by as much as 65 per cent, or $28 for the average residential bill.

“The four-year period for this cap was chosen because it’s the period where there’s going to be some pretty extensive overhauls to the electricity system in Alberta, moving to what’s called a ‘capacity market’ and I think power producers are going to be much more involved and interested and concerned about that transition than they are bout this cap,” said Trevor Tombe, an economist with the University of Calgary.

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During the four-year period the rate cap will be in effect, consumers on the Regulated Rate Option would pay the lower of the market rate or the government’s rate of 6.8 cents per kilowatt hour.

When electricity rates go above 6.8 cents per kw/h, the government will be paying electricity generators the difference, according to Tombe.

The government claims it will work to keep rates below 6.8 cents through a variety of market and other tools, including the transition to a capacity electricity market.

“The vast majority of job creators in Alberta aren’t eligible for the RRO being capped under this Bill, and will bear the full cost of the NDP’s reckless electricity policies. The devastating impact of these decisions will risk further job losses in our province at a time of unprecedented economic uncertainty,” said Don MacIntyre, Wildrose electricity and renewables minister.

MacIntyre said the NDP’s mismanagement on the electricity file is a bad re-run of the electricity disaster in Ontario.

“The only thing the NDP learned from the disaster in Ontario is how to hide the high cost of an irresponsible transition to renewables,” MacIntyre said.

“The taxpayer and the ratepayer are the same person. Rapidly amassing unnecessary debt and saddling our job creators with exorbitant electricity rates does not protect Albertans.”

“This cap, to some extent, is pure politics because it is not anticipated that it will ever bind. It’s a mechanism that the government can use to say, “Don’t worry, power prices won’t rise,” because if they do as we’ve seen in Ontario, that can present a challenge to the government,” said Tombe.

In a capacity market, private power generators are paid through a mix of competitively auctioned contracts which pay their fixed capital costs and revenue from the spot market. A capacity market reduces wholesale price volatility, including reducing the likelihood of price spikes as a result of capacity shortages, according to the government press release.

“As an economist, I definitely prefer the energy-only market (instead of capacity market). Buyers of electricity who are concerned about volatility have always had the option to buy fixed price retail electricity contracts so your exposure to the volatility is a choice,” said. Tombe.

“But objectively speaking, it’s a tradeoff. The capacity market will probably result in a higher cost electricity system but one with lower volatility. And people can disagree with that tradeoff.”