An independent study reveals that wholesale electricity prices are projected to be lower under deregulation than they would have been had the province stayed with a regulated electricity model.
The news comes as the Alberta Energy and Utilities Board (EUB) has given Direct Energy Marketing Ltd. the green light to take over the retail assets of ATCO Electric, ATCO Gas North and ATCO Gas South, giving the province a powerful one-two punch to bolster sagging deregulation fortunes.
Just about one month ago ,limited retail competition and strong concerns being voiced by small businesses convinced the provincial government to delay the next stage of electricity deregulation.
The transitional regulated rate option (RRO) for small and medium commercial operations – those using less than 250,000 kWh of electricity per year – was set to expire January 1, 2004. The new date is July 2006.
Had the change not been made, these businesses would have automatically defaulted to the pool price flow-through rate, where electricity charges would vary from month to month, depending on market conditions, if they had not signed a contract with a licensed energy retailer.
The problem was an extremely limited choice for that market segment: ENMAX Energy and iQ2 Power Corp., the latter only seeking clients that aggregate together for bulk buys as opposed to individual users.
These new developments, however, indicate a more favorable light is shining on the province’s plans.
According to the study from Cambridge, Mass.-based Tabors, Caramanis & Associates (TCA), not only is deregulation meeting Alberta’s power needs, but the provincial government’s foray into electricity deregulation will start to yield positive results at the wholesale power price level as early as next year.
TCA, an engineering and economics firm with expertise in the energy and utility sectors, looked at whether the restructuring of Alberta’s power market is on the right track. The answer, it said, is that deregulation is meeting the province’s needs with additional power being brought online.
It also studied the question of whether remaining with a regulated power market would have been a better solution.
Presenting the results to an Independent Power Producers Society of Alberta luncheon in Edmonton, TCA’s Kevin Wellenius said deregulation means “wholesale prices will yield direct price advantages over regulated rates by 2005.”
TCA’s projections show that starting in 2004, wholesale regulated rates would hover around the $50 per MWh mark – slightly more than $50 per MWh for natural-gas-operated generating plants and just below that mark for facilities that use 50-per-cent coal for their operations.
On the other hand, the deregulated wholesale rate in place is expected to continue its drop from a 2003 peak of about $85 per MWh to around $48 per MWh.
In 2005, that deregulated wholesale pool price benchmark is projected to drop slightly lower, while regulated rates would remain at levels almost identical to their 2004 figures.
(Because the pool price projections are based on limited forward market volume, a second comparison level was created for the study. When both are employed, price differences between the deregulated and regulated markets shift the timeline to 2005 for the deregulation advantage to take effect.)
The wholesale market is working, said Wellenius, because “high prices signalled the need for new generation; new generation was built and prices fell.”
More than 3,000 MW of new generation has been added to the province’s power grid since 1998 and another 1,980 MW is under way or planned by 2005.
That 3,000 MW is enough to meet the needs of all the homes and businesses in Edmonton and Calgary, and represents a 30-per-cent increase, said Alberta Energy officials. Further, the government adds that this represents billions of dollars of investment from the private sector rather than taxpayer debt.
Energy Minister Murray Smith, in attendance at the luncheon, hailed deregulation as a success. He pointed to a need to get a handle on bringing in new power to “North America’s fastest-growing jurisdiction” and said, “we have the solution in Alberta and we’re not going to choke it off by a lack of electricity generation.”
But that deregulation success is not trickling down to the retail level, a concern that is not unique to Alberta. American jurisdictions that have moved forward with electricity deregulation have also seen a lack of competition when it comes to selling the power to consumers, said Wellenius.
“The retail experience in the U.S. is not particularly glowing,” he said, with the exception of Texas.
Wellenius mentioned the state’s large market size and a number of distributors that was already in place as reasons for its success, pointing out the advantage existing players had over new ones that face the challenge of entering a market with no customers in place.
For Direct Energy, this recipe could also prove to be successful. It will have ATCO’s existing customer base to draw from as the result of its $128-million purchase. “We’re certainly pleased with the EUB approval, but it is one of a number of decisions that need to be approved,” said Lori Topp, Direct Energy’s senior vice-president for the western region.
Three more EUB decisions, including Direct Energy’s application for regulated rates, must be handed down before the company launches its retail services in Alberta, said Topp.
As a result, the company’s market-entry timing is not yet known.
The company’s plans are to serve Albertans in the ATCO gas and electric service territories through Direct Energy Regulated Services, and on the deregulated side, Direct Energy Preferred will offer fixed-price retail energy services provincewide to small commercial, residential and farm customer segments.
Direct Energy had anticipated being active in the Alberta marketplace for the fourth quarter of this year.