History of the electricity market

Electric industry

History of the electricity market

Alberta's electricity market: deregulated since 1996

Alberta currently operates a wholesale power market that sets a price for electricity in each and every hour of the year, and this market is commonly referred to as a power pool. This market is operated by the Alberta Electric System Operator (AESO), which was established by provincial legislation known as the Alberta Electric Utilities Act. The large majority of power produced and consumed within Alberta notionally (financially) flows through this pool, and the hourly price determines the revenue for generators, as well as the cost for consumers. A wide variety of contractual arrangements also exist such that the hourly price does not impact everyone at all times, but these contracts are definitely influenced by the hourly price signal. It is this set of price signals, as opposed a regulated structure based on cost- of-service, that marks Alberta’s power market as deregulated.

A wide variety of fundamental factors influence the hourly price, and a key feature of Alberta’s market is that the price is volatile (fluctuates) from hour to hour. Short-term events such as outages at generation facilities and extreme weather can raise the price as high as $1,000/MWh for several hours, and surplus events can also occur such that the price falls as low as $0/MWh. Longer term prices, which can be thought of as an average of many hourly prices, are much more stable because overall price trends tend to be driven by big picture events such as provincial demand growth, supply additions and natural gas prices due to their role as a fuel for many generators.

While the presence of an open market price signal broadly marks Alberta’s market as deregulated as opposed to regulated, it is not so clear cut because there are several components to the market. Generally, the electricity market can be broken down into three distinct areas: generation, transmission/distribution, and retail. Though there is some overlap between the areas, generation is basically completely deregulated, transmission and distribution almost fully regulated and retail is a mix between regulated and deregulated.

Power generation market

The generation industry in Alberta is largely an open, deregulated market. The AUC approves generation at the facility level, i.e. a generator must comply with regulations such as safety, environmental, design standards and public consultation. The AUC does not regulate where generation is located in the broad sense, what type of generation is built, how much generation is built, who builds generation, nor ultimately the rate of return earned by owners.

Historically, generation was fully regulated under a cost of service regulatory model. Generators built and operated plants, and customers received a regulated power price that covered the costs plus a reasonable rate of return. New plants were approved by the regulator on the basis of economic need. This process continued until 1996, although no new substantial plants were added after 1994.

When Alberta began to deregulate the generation market in 1996, it was apparent that care had to be taken with how plants built under the previous regulatory compact were treated. Consumers and generators had previously had a relationship that guaranteed cost recovery for owners and access to power for consumers. In order to maintain this relationship while developing an open market, a set of complex arrangements known as power purchase arrangements (or PPA’s), were developed that guaranteed cost recovery for the original owners, but also captured the excess value created (in some cases the value was negative) of these assets consumers had a right to expect when the market was deregulated.

The PPA’s were put up for auction in 2000 and went into effect on January 1, 2001, and the last of the PPA’s expires in 2020. PPA buyers received financial rights to energy produced by the formerly regulated assets; the original owners received guaranteed returns and customers received the proceeds from the auction.

The end result as of today is that generation is largely a deregulated market, and all units compete for the right to sell energy into the market for the competitively determined price. New plants are built with private capital, and generation owners are financially at risk for their decisions.

Power transmission and distribution market

Transmission and distribution can be collectively termed the ‘wires’ business, and the difference between the two can be broken down as transmission serves to move large amounts of power from suppliers to load centres, while distribution serves individual customers at the local level. As noted, both transmission and distribution are largely regulated today, although there are several proposals in place for ‘merchant’ transmission projects. However, all existing transmission in Alberta is regulated under a cost-of-service model where customers pay for the full costs of operating the system plus a reasonable return, and transmission owners are guaranteed these costs and return on the other side.

The transmission grid is largely owned by public, for profit, companies, but its planning and operation are done by the AESO, which is non-profit. The AESO plans system additions to serve new load and generation, operates the system in real-time and determines the charge for using the transmission system. The distribution systems throughout the province are largely owned and operated by municipal governments and/or their public utilities.

The AUC regulates the transmission throughout the process. The need for new facilities is brought forth by the AESO to the AUC, as are the cost and location of these facilities if the need is verified. The charge for using the system is fully regulated based on a cost-of-service model. On the whole, the transmission system is still regulated in a similar manner to what it was prior to deregulation, although it now serves deregulated buyers and sellers rather than regulated utility providers. Distribution is also fully regulated and operates as it did under regulation, with minor changes to the regulatory structure to facilitate retail competition.

Retail power market

The retail part of the electricity market generally marks the final delivery and billing phase of the market. For the most part, the retail power market operates in a similar manner to the retail gas market in Alberta. For power, the retail market is fully deregulated for large consumers, but smaller customers still have access to a regulated power rate along with competitive retail contracts. 

On the deregulated side of the market, retailers can offer a wide variety of contracts to customers. Large commercial and industrial customers have a range of suppliers to choose from, and a variety of products have been developed to allow large companies to manage their power price risk. There is also a group of very large industrial and commercial customers that act as self-retailers, and interact directly with the wholesale market.

The regulated portion of the retail market is much smaller in terms of power volumes, but because it is made up of small, primarily residential customers, it has a very large number of actual customers. These customers have access to deregulated contracts offered by retailers, but those customers that do not sign a contract have access to a default supplier based on their physical location. These default rates are regulated, and are known as regulated rate tariff (RRT).

The RRT is regulated by the AUC for each of the three RRT suppliers. A monthly RRT price for power is approved by the AUC, and this price is based on market prices for power. In this sense, the RRT is quite similar to the regulated natural gas prices available to Alberta consumers; the prices are regulated, but the regulated price is determined based on a market determined commodity price. This is in contrast to the regulatory structure in the wires market, where prices are set based on a cost of service model. 

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