Varcoe: Power market changes could add $1.4B in costs for consumers


The overhaul of Alberta’s electricity sector could end up costing consumers hundreds of millions of dollars — up to $1.4 billion — in unnecessary and additional costs, according to consumer groups and key players in the power sector.

While the Alberta Electric System Operator (AESO) insists a new electricity capacity market being designed for the province won’t bring higher costs, groups representing a wide range of consumers aren’t convinced.

At an electricity conference in Banff this week, several market players predicted the upcoming changes would lead to higher bills and recommended a revamp of the provincial power market should slow down.

“No consumer group in Alberta asked for this change in the first place,” Vittoria Bellissimo of the Industrial Power Consumers Association of Alberta told more than 400 people at the Independent Power Producers Society of Alberta conference on Monday.

“The uncertainty and the risk for consumers at this point is daunting.”

In November 2016, the NDP government announced it would restructure the province’s deregulated electricity system, part of a plan to transform the sector by adding more renewable energy and phasing out coal-fired power.

Under the existing market structure, power generators receive payments for electricity produced and sold into the grid.

Acting on recommendations from the independent AESO, the government decided to shift toward a “capacity” electricity market, which is used in several U.S. states.

By 2021, Alberta power generators will also receive “capacity payments” for having electricity available on demand, regardless of whether it’s used.

The province says this will ensure there’s enough spare electricity in the coming years to guarantee the system’s reliability.

“We’re confident these common-sense reforms will . . . keep bills stable and affordable over the long term without increasing overall costs for consumers,” government spokesman Mike McKinnon said in a statement.

The AESO has been busy developing rules for the new system over the past two years. The market design will be evaluated by the Alberta Utilities Commission this spring.

Several consumer groups and experts are concerned about the switch.

In filings to the AUC, the Consumers’ Coalition of Alberta raised worries the system’s design “will impose significant cost to consumers.”

In a study for the group, electricity consultancy EDC Associates said the transition to a capacity market in November 2021 appears to be proceeding earlier than is required, as existing power supply more than satisfies the government’s minimum electricity reserve targets.

The new system would effectively require new supply immediately, requiring consumers to pay 40 per cent more for electricity in 2021-22 than under the current market, the study states.

“This would mean consumers could potentially pay an extra $1.44 billion in direct costs,” it said.

The higher costs reflect the AESO’s requirement to have a larger reserve cushion in place earlier than would have been needed under the existing market.

“Over-procurement kind of makes sense from a government perspective because there’s no backlash from consumers that we ever run out of power,” said EDC chief executive Duane Reid-Carlson.

“If people flip the lights on and they don’t go on, MLAs get phone calls.”

In its own AUC filings, Enmax Corp., the largest electricity retailer in Alberta, raises some of the same concerns.

“The additional cost to Alberta customers is expected to be hundreds of millions of dollars per year. These additional costs are primarily due to the expected over-procurement of capacity,” Enmax states in its report.

Even analysis done for the Utilities Consumer Advocate — a provincial government agency that advocates for residential, farm and small business power users — flags similar issues.

A submission by DePal Consulting for the advocate said its review of the capacity market design “finds that the AESO has chosen elements that are overly focused on reliability to the detriment of consumer costs.”

The Notley government has argued changes to the market will help ensure Alberta has stable electricity supply, while removing the volatility in current power prices.

With an election coming soon, it’s uncertain what will happen with the capacity market plans if there’s a change in government. The United Conservative Party has previously said it would review the matter.

“Albertans are going to pay over a billion dollars more for their electricity and sooner than needed. The draft rules as they stand appear to be an NDP cash grab,” UCP energy critic Prasad Panda said in a statement.

For its part, AESO is stuck in the hot seat.

Its mandate is to ensure the system is reliable, while power prices are kept at a reasonable level.

The grid operator has long contended the shift in market design won’t lead to higher costs for Albertans.

AESO chief executive Mike Law said that hasn’t changed.

During a speech to the conference, he insisted the reasons behind switching to a capacity market haven’t wavered.

The sooner the new system is put in place, the better it will be for the industry as $20 billion in new investment in generation will be required in the next two decades.

As for concerns the capacity market will create higher consumer costs of up to $1.4 billion, Law said that’s contrary to what the AESO expects.

“Ultimately, those decisions are considered in front of the (AUC) and the commission gets to determine at the end what the appropriate level of procurement is,” he said.

But slowing down the transition to the capacity market makes sense, providing more time to make sure a proper structure is in place, said Bellissimo, whose group represents oil and gas producers, pipeline operators, and steel and agricultural firms.

“From a consumer perspective, why buy something we don’t need yet?” she asked.

“I think there’s a lot of merit to delaying.”

Chris Varcoe is a Calgary Herald columnist.

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