Sky-High Utilities: Are Albertans Paying the Price for Deregulation?

Alberta's deregulated electricity market has been a subject of ongoing debate, with proponents touting increased competition and consumer choice, while critics point to price volatility and higher costs for consumers. This article delves into the impact of electricity deregulation on utility costs in Alberta, comparing rates with other provinces and analyzing the role of market volatility in shaping the province's energy landscape.

Historical Electricity Rates in Alberta Since Deregulation

Alberta embarked on the path of electricity deregulation in 2001, with promises of increased efficiency and potentially lower prices for consumers 1. However, the journey has been marked by fluctuating electricity rates and periods of significant price increases. In the summer of 2023, for instance, Albertans experienced a substantial surge in their electricity bills, with some seeing their costs more than double 2. This volatility stands in contrast to the initial assurances that deregulation would lead to lower prices 1.

While there have been periods of relatively low electricity rates, such as in 2015 when prices dropped below 4 cents/kWh 3 and in 2017 when a historic low of 2.88 cents/kWh was reached 3, these periods have been interspersed with price spikes. Notably, following the removal of the Regulated Rate Option (RRO) in 2019, which had capped electricity prices at 6.8 cents/kWh 4, electricity rates have experienced an upward trend 3. This has led to concerns about affordability, particularly for residential consumers who now face some of the highest electricity prices in the country 5.

A report by the Alberta Federation of Labour (AFL) paints a stark picture of the financial burden placed on Albertans due to deregulation. The report states that "since the province deregulated power generation in 2001, Alberta's electricity consumer price index increased by an average of 1.8 per cent per year higher than that of Canada as a whole" 5. This translates to an estimated $24 billion in extra electricity costs for Albertans compared to other Canadian provinces 5.

Electricity Price Determination in Alberta's Deregulated Market

Unlike most other Canadian provinces that operate under a regulated, cost-of-service model, Alberta utilizes a deregulated electricity market. This market functions as a wholesale power pool, where prices are determined on an hourly basis through a competitive bidding process 6. Electricity suppliers submit offers to the Alberta Electric System Operator (AESO), indicating the price at which they are willing to generate electricity 7. The AESO then selects the lowest-priced offers first and continues to accept progressively higher-priced offers until the total demand for electricity is met 7. The price of the last offer accepted to meet demand sets the market price for that hour, and all suppliers receive that price for the electricity they generate during that period 8.

This "energy-only" market design means that generators are primarily compensated for the electricity they produce, based on the fluctuating market prices 9. This exposes them to market risks and incentivizes them to seek higher prices to recover their capital and operating costs 9.

Within this deregulated framework, consumers have the option to choose between different types of rate plans offered by electricity retailers 4. These include:

• Guaranteed Rate (or Fixed Rate): This option provides a stable and predictable rate for a fixed term, regardless of market fluctuations. Consumers pay a predetermined price per kilowatt-hour (kWh) for the duration of their contract.

• Variable Rate (or Floating Rate): This option reflects the fluctuating market prices, with the rate per kWh changing based on supply and demand conditions. While potentially offering lower rates during periods of low demand, variable rates can also result in higher bills when market prices spike.

While this system aims to promote efficiency and attract investment, it also contributes to price volatility, as generators adjust their offers in response to market conditions 8. This can lead to price spikes, particularly during periods of high demand or limited supply 8.

Market Volatility and Electricity Price Fluctuations

Market volatility is a defining characteristic of Alberta's deregulated electricity market. Unlike provinces with cost-of-service regulations, where prices are more stable, Alberta's system leaves consumers more exposed to the dynamics of global commodity markets and supply and demand fluctuations 10. This volatility can be exacerbated by factors such as extreme weather events, changes in fuel prices (particularly natural gas, a key fuel source for electricity generation in Alberta), and shifts in electricity generation capacity due to factors like plant retirements or new additions 9.

The government has acknowledged the challenges posed by price volatility and has taken steps to mitigate its impact. These efforts include the introduction of a capacity market, which aims to ensure sufficient generation capacity to meet future demand and potentially moderate price swings 11. However, the design and implementation of this capacity market are still under development, and its effectiveness in reducing volatility remains to be seen.

Another factor contributing to price volatility is the practice of "economic withholding" 12. This strategy involves generators intentionally limiting their electricity supply to drive up market prices. While permitted under the current market rules, economic withholding can have a significant impact on consumers, leading to higher electricity bills. To address this issue, the government has implemented temporary regulations to limit economic withholding strategies, particularly by large natural gas generators 7.

Furthermore, the Market Surveillance Administrator (MSA) plays a crucial role in monitoring market participant behavior and ensuring fair competition within Alberta's electricity market 13. The MSA has the authority to investigate and enforce compliance with market rules, helping to protect consumers from anti-competitive practices and market manipulation.

While consumers can opt for fixed-rate contracts to mitigate some of the volatility associated with the deregulated market, these contracts often come with higher prices and may include cancellation fees 10. This can create a barrier for some consumers, particularly those with lower credit scores or limited financial flexibility 2.

Impact of Deregulation on Consumer Groups

The impact of electricity deregulation in Alberta has been uneven across different consumer groups.

Residential Consumers: Residential consumers have been particularly affected by price volatility and rising electricity costs. The AFL report indicates that Alberta's residential electricity rates have increased by an average of $690 annually since deregulation, resulting in an extra $7 billion in costs for households 14. This has raised concerns about affordability and energy poverty, especially for low-income households. The initial promises of lower prices under deregulation have not materialized for many residential consumers, who now face the challenge of managing fluctuating and often unpredictable electricity bills 1.

Commercial Consumers: Commercial consumers also face challenges with higher electricity prices, which can impact their operating costs and competitiveness 14. The AFL report highlights the overall increase in electricity costs for Albertans, including commercial consumers, since deregulation 5.

Industrial Consumers: Industrial consumers, particularly energy-intensive industries, are vulnerable to price fluctuations and may face challenges in managing their energy costs 15. The deregulated market can create an uncertain operating environment for businesses, making it difficult to predict and plan for future energy expenses 15. The growth of internet businesses and their increasing demand for electricity have further highlighted the impact of deregulation on this sector 16.

Impact on Labour: Beyond the direct impact on consumer costs, deregulation has also had consequences for the electricity sector workforce. The AFL report notes that deregulation has coincided with lower unionization rates and a decline in employment in the electricity sector compared to the rest of Canada 14. This raises concerns about the broader social and economic implications of deregulation.

Expert Opinions and Analysis

Experts have offered diverse perspectives on the pros and cons of electricity deregulation in Alberta. Some argue that deregulation has led to increased competition and innovation in the electricity sector, providing consumers with more choices and potentially lower prices in the long run 17.

However, others point to the negative consequences of deregulation, such as price volatility, higher costs for consumers, and increased market concentration 2. The AFL report advocates for re-regulation as a way to address the affordability crisis and ensure greater stability in the electricity market 14. Critics also highlight the potential for hidden fees and lack of transparency in deregulated energy markets, which can disadvantage consumers 18.

Government Initiatives and Policies

The Alberta government has implemented various initiatives and policies aimed at mitigating the impact of high electricity prices. These include:

• Electricity rebates: In response to price spikes, the government introduced a $500 electricity bill rebate to provide temporary relief to consumers 19.

• Market rule updates: The government has updated electricity market rules to address practices like "economic withholding," which can contribute to price increases 19. This includes temporary regulations enacted on July 1, 2024, to limit the offer price for large natural gas generators and provide the AESO with greater authority to manage electricity supply 7.

• Support for renewable energy: The government has supported renewable energy initiatives to diversify the electricity mix and potentially moderate price volatility 20. These initiatives aim to increase the adoption of clean energy sources, such as wind and solar power, which can contribute to greater price stability in the long run 9.

• Temporary price caps: The government has implemented temporary price caps to protect consumers from extreme price fluctuations 9.

These initiatives reflect the government's efforts to balance the goals of a competitive market with the need for consumer protection and affordability.

Comparison with Other Provinces

Alberta's experience with electricity deregulation stands in contrast to most other Canadian provinces, which have maintained regulated electricity markets with greater government oversight and price stability 21. This difference in regulatory approaches has resulted in varying electricity rates across the country.

Province/Territory

Average Electricity Rate (cents/kWh)

Data Source

Alberta

25.8

22

British Columbia

11.4

22

Manitoba

10.2

22

New Brunswick

13.9

22

Newfoundland & Labrador

14.8

22

Nova Scotia

18.3

22

Northwest Territories

41.0

22

Nunavut

35.4

22

Ontario

14.1

22

Prince Edward Island

18.4

22

Quebec

7.8

22

Saskatchewan

19.9

22

Yukon Territory

18.7

22

Canada Average

19.2

22

As the table illustrates, Alberta has the highest average electricity rate among Canadian provinces, significantly exceeding the national average. This disparity raises questions about the effectiveness of deregulation in achieving its intended goals of lower prices and increased affordability.

Ontario is the only other province with a deregulated electricity market, but it differs significantly from Alberta's model 21. Ontario's market is a hybrid system with greater government involvement in supply contracting and pricing 21. This has resulted in a more stable and predictable pricing environment for consumers in Ontario compared to Alberta.

While Alberta's deregulated market has presented challenges, it has also created unique opportunities for investors, offering greater choice and flexibility in how they procure electricity 23. However, the high cost of power in Alberta, driven by factors such as the province's reliance on fossil fuel-based generation and the volatility of the deregulated market, remains a significant concern 24.

The varying degrees of energy deregulation across Canadian provinces highlight the diversity of approaches to electricity market regulation 25. Each model has its own set of benefits and drawbacks, and the optimal approach may vary depending on the specific circumstances of each province.

The Alberta Federation of Labour's report further underscores the financial costs of deregulation in Alberta, estimating that Albertans have paid $24 billion more for electricity than other Canadians since 2001 18. This finding adds weight to the argument that deregulation has not delivered on its promises of affordability.

Synthesis and Conclusion

Alberta's journey into electricity deregulation has been a complex experiment with both positive and negative outcomes. While proponents initially touted the potential for lower prices and increased consumer choice, the evidence suggests that Albertans have faced higher electricity costs and greater price volatility compared to other Canadian provinces. This has raised concerns about affordability, particularly for residential consumers and energy-intensive industries, and has prompted government interventions to mitigate the impact of price fluctuations.

The experience of Alberta highlights the challenges of balancing market forces with consumer protection in a deregulated electricity market. The province's energy-only market design, while intended to promote efficiency and attract investment, has exposed consumers to the volatility of global commodity markets and supply and demand dynamics. This volatility can have significant consequences for households and businesses, making it difficult to manage energy costs and plan for the future.

While the government has implemented various initiatives to address these challenges, such as electricity rebates, market rule updates, and support for renewable energy, the debate over the optimal balance between market competition and consumer protection continues. Ultimately, the future of Alberta's electricity market will depend on finding a sustainable path that ensures both affordability and reliability for all consumer groups. This may involve further reforms to address market volatility, promote renewable energy, and enhance consumer protection measures.

The evidence presented in this article suggests that Albertans are indeed paying a price for deregulation, in the form of higher electricity costs and increased price volatility. To address these challenges, policymakers should consider a more balanced approach that combines the benefits of market competition with stronger consumer protection measures and a greater focus on renewable energy development. This would help to ensure a more stable, affordable, and sustainable electricity system for all Albertans.

Works cited

1. Electricity Deregulation - Alberta Views, accessed December 29, 2024, https://albertaviews.ca/electricity-deregulation/

2. Alberta's electricity prices surged over the summer due to its ..., accessed December 29, 2024, https://www.macewan.ca/campus-life/news/2023/09/news-conversation-jahangir-electricity-23/

3. Electricity policy of Alberta - Wikipedia, accessed December 29, 2024, https://en.wikipedia.org/wiki/Electricity_policy_of_Alberta

4. Alberta Electricity Rates & Prices | ATCOenergy, accessed December 29, 2024, https://energy.atco.com/blog/alberta-electricity-rates

5. Albertans overpaid on electricity bills for decades: report - CTV News Calgary, accessed December 29, 2024, https://calgary.ctvnews.ca/albertans-overpaid-on-electricity-bills-for-decades-report-1.7090813

6. History of the electricity industry - AUC - Alberta Utilities Commission, accessed December 29, 2024, https://www.auc.ab.ca/history-electric-industry/

7. How Wholesale Electricity Pricing Works - Utilities Consumer Advocate, accessed December 29, 2024, https://ucahelps.alberta.ca/electricity-market-pricing.aspx

8. Guide to understanding Alberta's electricity market - AESO, accessed December 29, 2024, https://www.aeso.ca/aeso/understanding-electricity-in-alberta/continuing-education/guide-to-understanding-albertas-electricity-market

9. Alberta's evolving electricity market - Canadian Climate Institute, accessed December 29, 2024, https://climateinstitute.ca/alberta-s-evolving-electricity-market/

10. The solution to volatile energy prices? Switching to clean electricity - 440 Megatonnes, accessed December 29, 2024, https://440megatonnes.ca/insight/solution-volatile-energy-prices-switching-clean-electricity/

11. Understanding Alberta's evolving electricity market: Volatility | The School of Public Policy, accessed December 29, 2024, https://www.policyschool.ca/understanding-albertas-evolving-electricity-market-volatility/

12. Alberta's Restructured Energy Market | AESO Engage, accessed December 29, 2024, https://www.aesoengage.aeso.ca/37884/widgets/156642/documents/125518

13. State of the Market: Framework for Analysis, accessed December 29, 2024, https://www.albertamsa.ca/assets/Documents/MSA-State-of-Mkt-Directions-120620.pdf

14. PRESS RELEASE: New report shows Albertans have overpaid $24 billion for electricity since 2001, when the province deregulated power generation - Alberta Federation of Labour, accessed December 29, 2024, https://afl.org/press-release-new-report-shows-albertans-have-overpaid-24-billion-for-electricity-since-2001-when-the-province-deregulated-power-generation/

15. Electricity Restructuring - University of Calgary, accessed December 29, 2024, https://www.ucalgary.ca/ev/designresearch/projects/EVDS663/electricity.pdf

16. Deregulation Issues - IBEW, accessed December 29, 2024, https://www.ibew.org/articles/01journal/0107/canadaderegulation.htm

17. Energy deregulation in Alberta, accessed December 29, 2024, https://www.directenergy.ca/en/learn/understanding-your-bill/alberta-history-gas-electricity-deregulation

18. Why the Canadian Energy Market Deregulated and How It's Working - EnergyRates.ca, accessed December 29, 2024, https://energyrates.ca/why-energy-market-deregulated-canada/

19. Province unveils plan to protect Albertans from power price swings — but not until 2025 | Globalnews.ca, accessed December 29, 2024, https://globalnews.ca/news/10432853/alberta-electicity-rro-legislation-april-2024/

20. How does government policy impact utility rates in Alberta? - Peace Power, accessed December 29, 2024, https://peacepower.ca/faqs/how-does-government-policy-impact-utility-rates-in-alberta

21. Electricity sector in Canada - Wikipedia, accessed December 29, 2024, https://en.wikipedia.org/wiki/Electricity_sector_in_Canada

22. Electricity Prices in Canada 2023 - energyhub.org, accessed December 29, 2024, https://www.energyhub.org/electricity-prices/

23. The Edmonton Region's unique deregulated energy market, accessed December 29, 2024, https://edmontonglobal.ca/news/dyk-edmonton-region-energy-market/

24. Which provinces have deregulated energy markets? - Peace Power, accessed December 29, 2024, https://peacepower.ca/faqs/which-provinces-have-deregulated-energy-markets

25. Is energy deregulated in Canada? - Peace Power, accessed December 29, 2024, https://peacepower.ca/faqs/is-energy-deregulated-in-canada