The Electricity Market is Broken: closing coal can fix it
By Dr. Joe Vipond and Dr. Alvin Finkel
With the recent brouhaha about the government’s decision to take the utilities to court over surrendering their PPAs, it is easy to forget that, globally, coal is being phased out en masse, due to climate and health concerns. If we look at the root causes of the PPA problem, it becomes apparent altering the Alberta market could result in a win/win/win for government, utilities, and Albertans, while accelerating our coal phase out.
The PPA debacle exists because of a recent oversupply of electricity on the market. Over the last year, the price has plummeted to about 1.5¢/kWh, from a recent historical average of about 6-8 ¢/kWh. Great for consumers (in the short term), but bad for utilities, and for encouraging replacement generation for upcoming coal retirements.
The recent carbon price increase for big emitters, cited by the utilities as reducing profitability, costs them about 0.12 ¢/kWh, and another 0.3 /kWh in 2017. Yet the drop in pool prices from 2013 was about 6.5 ¢/kWh, or 20-50 times more impactful. So the PPA buyers have been losing a bundle predominantly due to a depressed electricity market, not the change in carbon pricing.
The “Enron clause” permits the utilities to revert the PPAs back to the government (via the Balancing Pool), should any new regulation make their PPAs “more unprofitable”. The utilities are taking advantage of this clause to get out of arrangements that have been remarkably profitable on the whole, but are now losing money thanks to the low electricity price.
Why the oversupply? It starts with the Alberta Electricity System Operator, whose forecast for electricity projected a 2.5% per annum growth to 2034, in stark contrast to the flattened or decreasing demand in other comparable jurisdictions. With our stagnating economy, this growth hasn’t happened. So when Enmax brought on the massive 860 MW Shepard gas plant in 2015, the demand simply wasn’t there.
Almost simultaneously, Sundance 1 and 2 returned on line after having been closed in 2010, when they broke down and were deemed too old and decrepit to fix. TransCanada, the PPA owner, sued TransAlta, the plant owner, to revive the facilities… and won. Another unneeded 576 MW back on the grid.
Finally, the government itself has some responsibility for the oversupply. The Balancing Pool (an independent arm of the Alberta Government), owns the PPAs for multiple facilities. We have a government that acknowledges coal pollution causes serious health impacts, and catastrophic climate change, so much so that they need to be shut down early. Yet the Balancing Pool is mandated to keep them running as commercial entities, further exacerbating the oversupply issues the market faces. If the PPAs are publicly owned assets, why aren’t they being used to bolster the public’s self-interest, and help shut down these polluting plants?
In a functional market, if there is a drop in demand, supply would be cut back. Coal plants, the oldest and dirtiest generators, would be closed. But in Alberta, because of the PPAs, because of the dangling hope of compensation for plant closures and concerns over fairness, no one is willing to close a coal plant.
So, instead of fighting over who now owns the PPAs, why not fix the market? If there is too much coal-fired electricity, how do we shut it down fairly? The utilities themselves have proposed the dial down option, impacting all generators equally, with an absolute decrease of 20% this year alone, ending up at zero in 2030. Another alternative would be for the Balancing Pool, acting in Albertans’ interest, to terminate its PPAs, freeing the market to act on these plants. A final option is to reregulate the market… guarantee the utilities a price equivalent to the average of the last few years, in exchange for early shut down of plants, starting today.
Instead of bickering about who owns what, let’s look at the problem itself. Start dealing with the oversupply problem, by creating a fair system of early shutdown of coal, including those run by the Balancing Pool. Make the system work for Albertans, the government, and the utilities: generating clean electricity, at a fair price for all. And we’ll get cleaner air, and a safer climate, to boot.
Dr. Joe Vipond is an emergency physician in Calgary and a member of the Canadian Association of Physicians for the Environment.
Dr. Alvin Finkel is a prolific Canadian historian, professor emeritus of Athabasca University, and author of the blog ChangeAlberta.