Not so silent screams – Generators in Alberta

I can tell you, sure as the sun will rise tomorrow, that some of the major generators in the province will be calling for changes to the market, to the existing PPA agreements and to the information available through the AESO. Why do I know this? People have told me as much, but it is verified by our own analysis. (see www.GrayEnergyEconomics.com/Publications)

In 2012 & 2013, economic withholding by certain market participants was successful in driving up prices during periods of high demand and low reserve margins. We saw this end mid-2014, and 2015 & 2016 are likely to see very limited opportunities for economic withholding to work.

Economic withholding (when generators price their power so high that large parts of it aren’t dispatched) is unique to the Alberta electricity market. When the system is close to capacity, generators are allowed to price their power up to $1 per kilowatt hour, which is roughly 20 times its cost. We don’t allow that in other markets. If 7-11 put up the price of batteries, milk or water 20 times after a big storm, there would be an entirely different kind of storm facing that company.

But in the Alberta electricity market, this sort of behaviour is labelled shortage pricing and is allowed - even encouraged. It is expected that shortage pricing will help to pay for the capital cost of new plants, to make up for prices being close to operating cost much of the time. This only works if there are producers in the market that can drive the price up and want to drive the price up. Over the next few years, the producers that are increasing their market share are unlikely to want to drive prices higher.

Our analysis of major market participants show a clear picture of the strategies of each producer. It is clear, both from their behaviour and from our review of publicly available information on each company, that the market can be divided into producers that are generally short (have lots of customer contracts signed for future power sales) and producers that are long (are relying more on spot market prices than forward contracts). ENMAX and Capital Power each demonstrate strategies of offering their power into the market at low and stable prices. Both companies have developed extensive forward sales portfolios and would not benefit from driving prices higher. And combined, they are building significant new generation in the province, increasing their influence on prices.

We seem to be heading for a period where the prevailing market price for power will be well below the levels needed to justify new plant construction. Combined with uncertainty over continued growth in the province (and potentially unfair competition from simple cycle “co-generators” in the oilsands), I am concerned that many of the plants that have been announced by companies other than ENMAX and Capital Power will remain on the drawing board.

I can foresee delays in adding new, reliable capacity in Alberta. The consequence would be that our market prices will only be driven up by failures in the fleet of old generating stations in the province. Periods of low prices will be punctuated by periods of very high shortage prices following plant failures. In the interim, I expect to hear lots of noise with regards to the need for capacity markets, or pricing rule changes, or both.

I was asked by one market participant what my agenda is in discussing economic withholding and market power and highlighting it in our market reports. Well I’ll tell you. I don’t think the system we have is sustainable or efficient in creating a reliable and competitive market for power in Alberta. I don’t want to hear screams from generators. I don’t think the market should be designed to go up and down like a roller coaster. I want a boring, predictable and reliable electricity market for Alberta.

I don’t want to see the electricity market having to rely on plant failures and periods of ridiculous prices to move forward. Electricity is a good that we literally cannot live without, so let’s figure out a better way to ensure its reliability and stability into the future.

For full details on Major Market Participant strategies and results, download our Q3 - 2014 reports at www.GrayEnergyEconomics.com/Publications

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