Alberta Electricity Prices – Things you absolutely must know

Gary Holden CEO at Pulse Energy Ltd

https://www.linkedin.com/pulse/alberta-electricity-prices-things-you-absolutely-must-gary-holden

Recent news on PPA settlements, the steady flow of rhetoric on carbon taxes, pending solar feed-in tariffs and fears of shifting away from coal has confused and angered everybody. As you know from my previous blogs, when confusion reigns, I recommend falling back on the arithmetic. The numbers tell the real story in most cases, and this story is no exception.

To start off with - a little anecdote: I was looking at my parent’s power bills in Calgary the other day. They live in a three-bedroom bungalow in the north end of town. When all is said, and done, they paid about 22¢/kWh in a summer month and 18¢/kWh in a winter month; which is pretty much as high as any place on earth.

My son, who owns a condo in Calgary, analyzed his last 12 months of bills and had a low of 19¢/kWh, a high of 24¢/kWh and an average of 20¢/kWh; twice as expensive as BC, Quebec and Manitoba and, yes, higher than even Ontario.    

To be sure of this, I had a friend in Toronto send me the last three years of her Toronto Hydro accounts.  It showed that they paid about 16¢/kWh, 18¢/kWh 20¢/kWh, over the past three years in a typical winter month.  The increases (25% over three years) were partly price hikes and partly the removal of rebates, but it was still cheaper than for the average home Calgary. 

The actual consumed electricity charge at my parent’s house was about 6.5¢/kWh, the other 12 to 16¢/kWh came from fixed charges for transmission, distribution, metering, and administration. The fixed charges were so dominant that it was nearly no longer important how much they actually consumed!

On the subject of market confusion, like many who are influenced by marketing messages, my parents thought the price they were paying was about 6¢/kWh, not 22 to even 18¢/kWh. A similar discussion with my brother-in-law in Edmonton revealed he also thought he was paying 6¢/kWh plus a wee bit more for fixed charges, when apprised of the arithmetic, he was shocked to learn he was paying 20¢/kWh, give or take – the same as he would if he lived in Toronto. 

Of course larger homes pay less in Alberta. A consumer on a 5.99¢/kWh retail contract and using more than 600 kWh per month would pay less than 14¢/kWh. Those on spot price would pay even less.   Opening the door to much discussion about fairness, as a large family home clearly taxes the grid to a greater extent than a small apartment. 

It says a great deal about inter-fuel competition, as how sublime to ridiculous that with spot prices at 3¢/kWh, on the right contract you could fill an electric car for about 40¢/100 km – an astounding 5¢/litre (equivalent) – even if the car is plugged in on-peak!    

It also means the concept of energy efficiency is nonsense when the only savings is 3¢/kWh – even if the technology sheds peak power such as LED lighting.  

All of these economic distortions suggesting the need for a major overhaul in how electricity prices work in Alberta.

Having said all that, this blog is not about that. It is to discuss how the the energy (generation) portion of a residential consumers bill in Alberta evolved over time.  Much can be learned from this look at history and I think it will surprise you. 

So here is what Alberta electricity prices have done since the very beginning of electrical distribution in 1910. At first it may not seem relevant, but I think upon reading it you will see the point in the end.

There was five distinct periods in electricity pricing over the past 120 years. They are summarized as follows (with all prices expressed in $2016 unless otherwise noted):

1.      The hydro energy and rural electrification era from 1910 to 1955. During this period, energy prices were about 6¢/kWh for energy and about 2.5¢/kWh for delivery (comprised transmission, distribution, billing, metering and administration). For more than 40 years it essentially followed inflation; growth in demand tracked well with growth in investment. Residential, commercial, industrial and municipal consumers were offered the same basic price and the introduction of price regulation about half way through, in 1938, added surety to prices. Given the simplicity of the technology and general trends of labor, material and efficiency, the variation in price from plant-to-plant was negligible; and the averaging of revenue requirement smoothed any difference out.

2.      The coal years of 1955 to 1995. During this period, prices for residential consumers were lower than the previous period, about 5¢/kWh for energy and about 2.5¢/kWh for delivery. But there was a caveat:  for the first time, the regulator was comfortable letting costs be deferred until way into the future. For example, actual land reclamation costs for cleaning up a coal plant site, would be borne by the consumers at the time cleaning up coal occurs. Carbon, NOx, SOx, mercury and particulate matter was not priced at all. The societal impact of these pollutants was priced separately – mostly as health-related costs. Had deferrals and externalities been accrued for, the electricity price during the period would have been closer to the 6¢/kWh price available prior to the coal years of 1910 to 1955. (To illustrate, almost all attempts to capture NOx and SOX failed due to economics (TransAlta’s attempt at a low NOx/SOx burner was shelved in 1989). Attempts to filter mercury, a legal requirement today, add material costs to coal plants; at least 0.5¢/kWh. Carbon capture is thought to add 2¢/kWh to 3¢/kWh and is otherwise priced in today at at $15 to 30 per tonne. And finally, the PPA settlement of 2017 was essentially a payment for land reclamation or “residual value” of $1.4 Billion.) 

This period also saw the introduction of “load factor” price differences; meaning industrial customers were offered better rates than residences. Roughly 65% of the residential price in fact.

3.      The deregulation transition years of 1996 to 2005. During this period, prices were set every half hour, were indexed to natural gas prices and averaged for consumers over various time periods; monthly, yearly and multi-year.  Prices became volatile (as natural gas is inherently volatile), with monthly averages ranging from 3¢/kWh to 9¢/kWh for energy. Annual averages were less volatile and settled in the 6¢/kWh to 8¢/kWh. For delivery, they remained the same as usual at about 2.5¢/kWh during this period. The numerical average monthly RRO price across the period was just over 6¢/kWh.

It should be noted that this era saw the transfer of wealth to generators to the holders of PPAs and neighboring BC Hydro. With high gas prices, PPA holders received a win fall, at the ultimate expense of consumers. The BC government had a win fall by capitalizing on buying Alberta’s night time coal power and selling back at a profit – to the highest bidder between Alberta and California. Had these win falls not occurred, prices would have been the same as the previous era, about 5¢/kWh for energy and about 2.5¢/kWh for delivery. The value of that win fall was about $1 Billion per year for about 10 years running; an NPV of $8 to $10 Billion – more or less.  This amount of value could have built 6 gas-fired plants the scale of Shepard Power that ran during the day instead. 

4.      Full deregulation years of 2006 to 2015. During this period, prices were defined by contracts. A carbon penalty of $15 per tonne was introduced in 2008, but had no effect on residential prices. Volatility was removed and all consumers could choose prices that were one-way options; fixed for five years, could be switched to a floating monthly price at no cost and could be canceled with 30 days’ notice. Five year contract prices for energy settled in at 6¢/kWh to 8¢/kWh. Floating prices were better than the previous era and with the addition of Shepard Power Plant to the market, floating prices dropped to as low as 3¢/kWh and contract prices around 6¢/kWh again. With low gas prices, consumers received a win fall this time, at the ultimate expense of PPA holders. Interestingly, over the entire period, energy prices would have averaged the same as 100 years, about 6¢/kWh.  With a massive boom in transmission construction, delivery prices exploded. Starting at 2.5¢/kWh in 2005, they ended the period at 12¢/kWh for a large home and as much as 18¢/kWh for an apartment dweller. During this period, energy prices are split between day and night, with all of the return on capital for a gas plant being realized during the day; this split is roughly 9¢/kWh during the day and 2¢/kWh at night.

5.      The replacement of Coal Years – 2015 to 2030. This period looks like it will stay in keeping with the 120 year averages - on the energy side. Fully priced gas plants, with a price on carbon and current gas prices, can combine with wind farms for about 6¢/kWh (low gas prices) and 8¢/kWh (high gas prices). Rising carbon penalty costs will push prices to the high end of the range and will taper off as coal, and their penalties, retire. Delivery charges are truly a lost cause and the most shocking part of the history. Delivery pricing at 12¢/kWh for a large home and as much as 18¢/kWh for an apartment dweller is only going to get worse. Time-of-use pricing and varying fixed costs are sadly needed. To put a fine point on it: solar power is now cheaper by a material margin than the delivered price of power to residential homes. Clawing back stranded asset costs to the benefit of consumers may be the most important decision of all. Letting time-of-use pricing drive solar power uptake is clearly the answer to curb further stranded investment. You should be concluding the obvious: Current policies to replace coal have a minor impact compared to the regulated transmission and distribution side of the equation. 

So what can be extracted from all this?

1)     The price of energy in Alberta started out 6¢/kWh and stayed that way 45 years. 

2)     It got cheaper during the 40 coal years, to around 5¢/kWh, but only because costs were deferred and externalities were not priced in. To drive the point home, the last coal plant was uneconomic as it required about 9¢/kWh to get a rate of return. 

3)     The last 17 years widened the range due to the influence of gas prices, but retailers restored stability with contracts; extending the energy component of the price of 6¢/kWh further. The next phase of change will not make much of difference and will depend upon timing and gas price markets. With gas as abundant as it is, It is hard to imagine energy prices going much beyond 7¢/kWh on a five year rolling average basis.  The government also capped the price at 6.8¢/kWh for added security of this premise.

On a delivered basis, it is an unqualified derailment.  Regulation failed to govern at a critical time. $2 billion in transmission assets are ballooning to $14 Billion (or more). Delivered prices were about 8.5¢/kWh for over 100 years only to close out the story at 14¢/kWh to 30¢/kWh, with bigger homes getting the cheaper price. And yes, higher prices than Ontario for many Albertans.

Bottom line: You should conclude that carbon costs have virtually no impact on price trends, replacing old coal with new technology is a wash and prices are set to follow the pattern set over 120 years. Solar power is cheaper than the delivered price projection, so finding a way to reflect those prices and stimulate uptake is a good move.  And you can relax knowing that getting a green grid is as cheap or cheaper than otherwise. It should be noted that natural gas prices rising to $8 per GJ will drive delivered prices up – as much as 2¢/kWh; or 10 to 15%. This can mitigated by diluting gas by over-building wind power, adding lots of solar power or deploying large fleets of electric cars. Electric cars alone will reduce delivered prices by at least 10 to 15%; but let’s save that for another blog.  

Appendix – Some additional commentary on price movements over time

The hydro energy and rural electrification era from 1910 to 1955  

According to the minute books of Calgary Power Company found at the Glenbow Museum, the first large scale (13,500 Hp) power plant 50 miles away, cost approximately $2 million. Interest rates were, from the minute book, 5%, not unlike today. Using 40-year depreciation, water flow rates and converting to 2016 dollars, this would put this generation cost at about $260 per kW each year. Assuming a load factor of 50% for a residence, a residential energy contract, excluding transmission and distribution, in 1910 would have been around 6¢/kWh.  

From other references, it turns out the delivered sales price in Calgary, including transmission and distribution, was posted at $30 per horsepower, or 8.5¢/kWh in today’s terms. After netting off generation costs at 6¢/kWh, this left about 2.5¢/kWh for transmission, distribution, metering, billing and administration. 

Bigger houses, electric heaters and incandescent light bulbs meant the price of electricity could stay within inflation as load factors improved in synch with capital expenditures. Renewable hydro power, being free of fossil fuel, meant that prices were only on the capital installed and were not competing with the rapid deployment of automobiles and steam boilers. 

Even though Alberta grew rapidly in the 1930 to 1950 period, the large amounts of capital committed to expansion of the power system was kept pace by escalating demand. Hydro technology had little competition and the Pelton wheel was a simple device to produce in quantity. Improved construction efficiency was offset by rising costs of labor and materials, as power infrastructure was erected all over North America. 

The electrification of Alberta, which added more than $200 million in transmission and distribution costs, powered new radios, refrigerators and electric ovens as fast as it could be built. Upfront costs were shared by many rural electrification cooperatives and municipalities, and amortized.  Prices remained in check and the Public Utilities Board, which began regulating prices in 1938, ensured consumers were protected from monopoly pricing and wasteful expenditure.  In all of this, delivered prices to households remained pretty much the same at 8¢/kWh to 9¢/kWh in today’s dollars; with energy portion still in the 6¢/kWh range as the cost of new dams dominated the average and steady flow of cash for maintenance meant revenue requirements offset depreciation.

The coal years of 1955 to 1995

With rising industrial demand, few hydro sites, emerging steam technology and a geology packed with coal seams, the 1950s saw the entry of coal power. 

According to an in-depth study done by El Sevier Institute (39-2011-3042-3054) on coal power costs over the last century (1882 to 2006), generating power from coal, which started in Alberta in 1956, had improved to reach “best available technology” status by about 1970. The engineering gains and techniques polished over those years meant power from coal was the cheapest of the new technologies, and measurably cheaper than nuclear power.  Natural gas turbines were not yet good enough and besides, gas was considered a valuable export fuel and was made “illegal” for power production in Alberta. Hydro power, which remained as cheap as coal, was not available in large quantities and running power lines to hydro-rich BC or Manitoba was uneconomic and not politically possible. The economics in 1970 showed that the long run marginal cost (LRMC) of a coal plant in Alberta, in 1975 dollars, was about 1.2¢/kWh (2.75¢/kWh - 2016). This delighted new industry at the time because locating in nuclear powered Ontario meant higher power costs and their load profile matched a coal plants production. 

With the ability to defer future costs of reclamation, coal was able to remain competitive with hydro in neighboring British Columbia. With the cost of carbon, NOx, SOx and abating mercury, not yet on the radar, it meant coal was king in Alberta. This began a long run of steady coal plant construction from 1970 to 1985.

By the construction of Keephills 1 and 2 in 1983 and Sheerness in 1986, Alberta generators had the best combination of cheap mining, great boiler technology and proximity to population centers in the world. This enabled TransAlta to sell 1.3 million horsepower of capacity to the City of Calgary at $170 per Hp or $230 per kW per year. This also meant high load factor, directly connected customers could buy power on their rate 790 for about 3.25¢/kWh in today’s dollars.  

For residential customers, it fit in quite nicely.  A regulatory cocktail of depreciating hydro plants, growing population, new transmission, expanding distribution and new coal plants, meant that delivered electricity in Calgary was still obtainable at about 4¢/kWh; or, converted to 2016 dollars, in the order of 7.5¢/kWh, all in.  True to form, energy in the order of about 5¢/kWh and transmission, distribution, metering and billing the rest at 2.5¢/kWh.

It should be noted that the deferral of reclamation costs was not a trivial part of the equation.    The settlement of the PPAs in 2016 is largely to catch up on the cost of reclamation deferred all those years. Of course this means that consumers from 1970 to 1990 received a benefit paid for by tax payers today. It also should be said that the apparent low cost of coal was reliant upon cheaper steel costs, cheaper mining costs and ignored carbon, air pollutants and mercury. The latest coal plant, Keephills 3, is at least 50% more costly than the original Keephills units inflation adjusted.      

 

The deregulation transition years of 1996 to 2005

In 1996, concerns about the future sources of power were real. Climate change was an emerging issue. Baseload generation prices, holding at 3¢/kWh to 4¢/kWh, were poised to inch down as regulators clawed back depreciation on the plants built in the 1970s and 1980s. Trading power with BC and California started to produce interesting upside on these depreciating assets. Wind turbines were getting bigger and more cost effective, thanks to the European commitment to wind. Regulations in the US, called the PURPA regulations, were driving construction of many natural gas-fired cogeneration facilities and gas turbines were now the “best-available-technology”. They were cheaper and twice as efficient as coal.  They did not poison the landscape with mercury and the waste heat could feed factories and buildings. It was time to unleash this new technology and let the market decide on the most efficient choices. 

What it all meant was regulation was also no longer possible. Price could go up just as easily as down depending on the choices made. How could you regulate the price of natural gas? How do international traded power contracts benefit consumers? How could you choose one cogeneration site over another?  What if an enterprising company could actually lower the price of power or transmission, or both?  

With this new awareness, by the end of the 1990’s, deregulation came to Alberta and for many other electricity markets across the world. Rules were written to enable market participants to meet the new demand and compete with one another. International experts would come to Alberta, current generators sold their output to marketers at fixed prices and the energy component of the power prices were completely reset by market forces.

After a bumpy transition, which lasted about five-years, the market replaced regulation quite nicely. Retailers were offered long term price protection and the future price of natural gas meant 6 ¢/kWh residential power contracts were still available.  Worst case scenarios show that prices can drift up to 6 or 8 cents if gas prices rise; just as they would under regulation. With carbon costs built-in and $5 gas prices, the price settled at 7 to 8 ¢/kWh.  If a consumer chose to purchase monthly floating prices, the average they would have paid from 2005 to 2017 was just over 6¢/kWh, as it was when electricity first was sold in 1910.