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Edmonton Journal Feature Letter to the Editor published September, 2014

Dear editors:

In April of this year I co-wrote an op/ed in the Journal called “Artificially Cheap Coal Hurting Albertans” which outlined how the Alberta Government has ridiculously low royalties for coal used for electricity generation.  At 55 cents/tonne, not only is it one of the lowest in North America, but it is also one-quarter of that legislated in the coal royalty legislation published in 1992.

Immediately following the publication of this article, I wrote the then Minister of Energy Diana McQueen aletter asking an explanation.  I finally got an answer four months later, which states in part “CRAF (Coal Royalty Adjustment Factor)  allows the Minister of Energy to adjust the subbituminous coal royalty rate annually to reflect current and anticipated economic and market conditions for subbituminous coal.  The royalty rate for subbituminous coal was introduced to enable Albertans to benefit directly from low electricity prices and indirectly through the economic benefits of low-priced electricity”.

We have a number of concerns with this concept.

1.  if coal power is not paying the fair rate for its coal, this is a subsidy for coal, even if this is to keep electricity prices low. If you want to keep electricity prices low, great, subsidize all electricity, don’t choose a single source to subsidize. This is like setting taxes lower for raising black angus to keep beef prices lower, but disadvantaging all other types of cattle, even if black angus is the highest-fat and least healthy beef. Why would you give preferential treatment to an established, ancient source of power that is provably causing health problems?

2.  It’s questionable how much you’re actually reducing electricity prices, rather than just padding coal generators’ profits.

*   First, coal only sets the price half the time — for the other half of the time, it is getting the system marginal price, which is higher than the price it bid in. So, it’s recovering significant profits and increasing the royalty would only cut into those profits.

*   Second, even when coal is setting the price, it is sometimes setting its price WAY above the marginal price of another MWh of coal. Coal’s operating costs are low enough that its marginal costs to produce another MWh are very small. Yet, coal is bidding in well above that because it is engaging in economic withholding, another profiteering practice that is not dependent on their input costs — i.e., if you increased their input costs, they would not increase the price of electricity in the pool.

*   For example, 55% of coal’s revenues come when it the electricity price is over $250/MWh. Coal’s marginal operating cost is WAY below that. In other words, increase the operating cost, and this mostly only reduces coal’s profits, it doesn’t increase consumer costs.

3.  If the CRAF is adjusted annually to “reflect current and anticipated economic and market conditions…” for coal, why has it remained constant for 22 years, through boom and recession, government after government?  It suggests inertia rather than a dynamic responsive royalty plan.

We are excited that we now have a new Energy Minister with Frank Oberle, under a new Premier.  Already, Mr. Prentice has publically expressed that a rapid phase out of coal will be one of his policy objectives. We ask them both remove this current subsidy for coal as part of a transition to a cleaner, healthier Alberta.

Dr. Joe Vipond on behalf of the Alberta Coal Phase Out group.