On April 3rd, David Swann will introduce Motion 502 to the Legislature, which will move that the Regulated Rate Option be replaced by a new default rate for electricity, calculated based on the current wholesale price. This is the implementation of a policy proposed by the Liberal Opposition in January that is expected to deliver significant savings to consumers in electricity costs. You can find the official media release and full backgrounder here.
Since 2001, Albertans have been able to choose to receive their electricity either from a retailer that is regulated by the Alberta Utilities Commission (AUC), or from a competitive retailer. In which case, they would sign a contract for a set price structure for electricity.
The Regulated Rate Option was established to provide a “default option” for consumers who decide not to choose a competitive retail product. In 2006, the RRO Regulation was changed to encourage customers to switch to competitive retail products, and, thereby, develop a new competitive energy market.
The price that consumers pay under the RRO is determined using what is called the “forward pricing.” In a forward market, power plant owners (electricity producers) announce the amount of power they will produce 120 days prior to the month the power is used, and power companies (electricity retailers) bid, like an auction, on how much they are willing to pay for that power. They then charge consumers based on how much they paid in the forward market.
Since the price is determined several months in advance, what consumers pay for their electricity is often higher than if they had bought it directly from the power plant (wholesale price). Historical pricing data has shown that consumers have overpaid for their electricity since the Regulated Rate Option Regulation was changed in 2006. Motion 502 aims to address this issue. It proposes that the RRO be calculated based on the monthly wholesale price of power.
Q: How does this affect me?
A: If you pay for your electricity on the Regulated Rate Option like most Albertans, Motion 502 would immediately lower your power bills by roughly $12-16 per month. That means a savings of $144-192 per year – significant savings for the average Albertan, but a huge difference for low-income families.
Q: Why hasn’t this been done already?
A: When the system was set up in 2006, the government of the time used a forward market system to encourage new electricity companies to enter the market. Now that a competitive retail market has been established, it is time to update this policy to reflect current realities.
In addition, RRO pricing is extremely complicated. It has taken several years of research and consultation with electricity market stakeholders to come up with this innovative solution. Alberta Liberals are proud to be the first to propose this small change that will immediately benefit Albertans.
Q: The last thing I heard about Alberta’s electricity market was the Power Purchase Agreements. Does this motion have anything to do with that?
A: As explained here, the NDP government failed to do their due diligence on their climate change legislation, leaving the taxpayer on the hook for billions of dollars. For political reasons, the government chose to pay this off by borrowing. This will put the costs of their decisions on Albertans even after the PPAs in questions expire by 2020. By making the small change of Motion 502, however, the government could pay off the costs of the PPA debacle without resorting to creating more debt.
Q: Will Motion 502 cause any sudden price spikes on my power bills?
A: On average, the long-term savings from Motion 502 will greatly outweigh any costs to consumers due to changing electricity prices. However, consumers will still have the option move to fixed price contracts, which are specifically designed to mitigate price volatility.
Q: What’s wrong with what the NDP government is already doing?
A: The NDP government is considering adding a price cap to compensate for any problems caused by the switch to renewable energy. This masks the true cost of power. It also means that the difference between the capped price and the true price of electricity will have to be paid off at some point in the future. If electricity gets too expensive, the government could provide short-term rebates or subsidies to offset these prices, but hiding the real cost of power means that people will make decisions based on inaccurate information.
Primer on How Energy is Bought, Sold and Priced
There are generally three ways in which electric energy is bought, sold, and priced. These are: 1) the Power Pool, 2) the forward market, and 3) the grey market.
The Power Pool
- The Power Pool is a physical market operated by the Alberta Electric System Operator (AESO).
- All energy in Alberta is bought and sold through the Power Pool.
- Generators offer blocks of energy at prices ranging from $0 to $1000/MWh.
- The AESO stacks the offers from the lowest price to the highest price in what is referred to as the “merit order”.
- The AESO then dispatches generating units sufficient to meet demand. The last block of power dispatched sets the Pool price.
- The operation of the Power pool is instantaneous. Generators inject power into the system on a continuous basis (once dispatched) and consumers draw power off the system as soon as a light or other appliance is switched one. The injections and withdrawals are metered on a continuous basis.
- The AESO operates a financial settlement system. It determines how much to pay generators and how much to charge retailers at the end of the month.
- The retailers then determine how much to charge individual customers. (In the Alberta market, large industrial and commercial customers can be “self-retailers”.)
- The AESO handles all the financial transactions between generators and retailers.
- The Pool price represents the actual cost of power and is the only market price for power. All other prices are derivatives of the Pool price.
- The Pool price is anonymous at the time it is determined; however, generator offers become known after the fact.
The Forward Market
- The forward market is an organized, financial market operated by NGX (Natural Gas Exchange).
- The purpose of the market is risk management and it allows buyers and sellers of forward contracts to hedge the price of energy.
- It is an anonymous market where the identity of buyers and sellers is not known.
- Sellers submit offers and buyers submit bids. Bids and offers are posted on a trading system managed by NGX. Buyers and Sellers can accept offers that they like.
- Typically forward contracts start to trade 18 to 24 months ahead of the month when the actual physical product is delivered. Forward contracts are settled against the Pool price.
- For example, trading has already started for the month of September 2018. The forward market could trade for longer time periods but is constrained by the lack of liquidity in the Alberta market.
- Pursuant to the RRO regulation, RRO retailers purchase forward contracts in the 120 days prior to the month of consumption. Retailers spread purchases over the four month period to prevent being “cornered” by the sellers. Purchases are also random, also to prevent being cornered.
- The RRO is based on the weighted average price of the forward contracts purchased during the 120 period.
- The forward contracts that are purchased by the regulated retailers are settled against the Pool price.
- If there is a large divergence in the forward and Pool price there is a risk that we could get very large increases in the deferral account that will be associated with a price cap.
The Grey Market
- The grey market is an informal, unregulated market where buyers and sellers get together and negotiate forward and/or other types of contracts to hedge the price of electricity.
- The forward contracts are typically “contract for differences” (CfD) and can have terms ranging anywhere from a few hours to 20-years. A CfD is a contract that has a fixed price and either the buyer or seller pay the other the difference between the Pool price and the fixed price depending on whether it is above or below.
- The contracts offered in the competitive retail market by companies such as Direct Energy and ENMAX essentially fall under the grey market.