Wednesday, January 16, 2008

Alberta electricty pressures.

Following my lead-in there is an excellent evaluation of Alberta's electrical power situation. The web link to the journal article has been taken down so I have copied here.

Not covered in the Article by Joseph Doucetis is the Fording Coal dilemma which is huge and should get some air.

1. Fording was purchased by Sherritt (Ontario teachers assn pension)
2. Fording kept title to the Anthracite (tool) coal.
3. Sherritt took the title to all the lower quality heating coal.
4. Fording is presently completing or has completed the environmental studies for the Genesee like generating unit at Brooks AB. (4000 mv, half of the present generation capacity of Alberta)
5. Fording will buy coal from Sherritt for the generation at prices that Sherrit set as a seperate entity.

Depending on the price the Ontario Teachers assn charges Fording for the coal, the prices of electricity should come down!

The Government has allowed the prices to escalate by constricting growth forcing gas generation on line in the meantime.

When Fording comes on they will peg their prices at the "market" which will allow them huge, unprecedented profits.

The environmental studies should be complete. That means an announcement will be made shortly after an election.

Consider: When Fording owned all the coal they tried to build the plant and got shut down by what appears to be government sponsored environmental complaints allowed by a Government who had every interest in killing the project. Fording was prepared to build the power lines to Calgary and South to Southern Alberta. Trans Alta fought this. (who would have guessed?)

On a different line the City of Edmonton fought the Province for permission to build the expansion of Genesse and were like Fording, denied permission until the scalping PPA agreements were in place.

In short the Conservatives again have autored a rip off situation for Albertans.

John Clark

Wednesday » January 16 » 2008

Alberta's power play difficult to assess
Government's electricity restructuring results can't be measured simply by comparing prices

Joseph Doucet


Saturday, January 12, 2008 - Edmonton Journal

In a letter to the Journal, "6 years later, deregulation hasn't lived up to the promises" (Jan. 10), a former provincial electricity planner suggested that the restructuring of Alberta's electricity industry and markets has not delivered on its "promises." Of particular interest to consumers is Keith Provost's statement that "Albertans have paid more than $16 billion more for their electricity needs than if the system had not been deregulated."

Despite his contention that "the cost can be easily calculated by anyone with a cursory knowledge of the economics of electricity generation," I would suggest that calculating the costs and benefits of restructuring is anything but an easy exercise.

One of the all-too-common mistakes made in this type of discussion is to simply compare prices today with prices in previous years. Electricity prices in Alberta, as in almost every other jurisdiction, are higher today than they were in 1995, the year in which Alberta's first piece of restructuring legislation, the Electric Utilities Act, was passed.

Why can't we simply compare 2008 with 1995? Well, the makeup of the industry is actually quite different today. For instance, in the mid-1990s about 75 per cent of Alberta electricity was generated with coal. Today the figure is a little under 50 per cent. Natural gas, on the other hand, makes up about 40 per cent of today's generation capacity; in 1995 it accounted for less than 15 per cent. Thus we can't expect underlying costs, and the resulting prices, to be directly comparable.

Informed readers will point out, quite correctly, that coal prices are both lower and less volatile than natural gas prices. Thus, the greater reliance on natural gas is bound to have had an impact on electricity prices. This is certainly true. But is the increased use of natural gas in Alberta attributable to restructuring? I'm not so sure. In the 1990s North American electricity planners believed that natural gas was going to remain cheap for a long time. We were wrong.

But I don't believe that a regulated generation sector in Alberta would have seen things any differently.

The real question to ask in order to begin to understand the price impact of restructuring is this: What would our electricity industry look like today had the Government of Alberta NOT embarked on the restructuring exercise? What fuels and technologies would have been chosen in a regulated system? What types of plants would have been built, and where? What research and development would have been undertaken? Which risks would have been allocated to electricity consumers and which to the regulated firms?

There are no straightforward answers to these questions, despite the best intentions of Monday morning quarterbacks. In truth it is impossible to know exactly what our electricity industry would look like today had the government not introduced restructuring. As a result it is very difficult to say what price we would be paying under the "old" system.

That being said, the retail price is just one measure of the efficiency of the electricity industry. It is certainly an important one and understandably the main focus of attention of residential consumers. But retail prices can be deceiving, such as in Ontario where retail prices have been regulated to artificially low levels well below the wholesale prices. This hides the true costs of electricity and shifts the burden to taxpayers. This doesn't happen here.

To suggest that prices in some non-restructured jurisdictions have risen less than in restructured jurisdictions misses the important point that the underlying costs and technologies differ a great deal between different provinces and states and that, for the most part, low-cost North American jurisdictions did not embark on restructuring.

Many very-low-cost jurisdictions, notably those with large hydroelectric capacity, continue to benefit from their low-cost technologies despite the fact that they have not changed the structure of their industry. Relatively low prices in these areas for the most part reflect the low costs of generation, not the benefits of the regulated system.

On the other hand, many high-cost jurisdictions saw costs rising, principally because of the need to build more generation, and moved to restructuring in part because of the desire to introduce competition in the generation investment and operation decisions.

In the last 10 years close to 4,500 megawatts of new generation capacity has been built in Alberta. This is one reason that there is less danger of the lights going out in Alberta than in Ontario - proportionally more capacity has been built here than in Ontario. Has more capacity been built than would have been the case without restructuring? This again is hard to say, because we simply don't have the crystal ball that answers the "what if" questions about the past.

More significantly than the amount of generation, though, is the fact that the new electricity generation plants in Alberta have been built without any price or profit guarantee from the government or the regulator as was the case in the "good old days." This is a comparison that we can make. Alberta ratepayers no longer carry the risk of construction-cost overruns, plant operation or fuel prices via a regulated system. This is a very real benefit to Albertans. Of course, Alberta electricity consumers do bear some risk with respect to fuel price increases. There is no way around this.

Was the government's plan perfect? Of course it wasn't, as I have often written. There were errors in planning and in implementation. The lessons of history cannot be ignored. But let's move on and make our electricity sector as productive, efficient and environmentally responsible as possible.

Is Alberta's electricity model today a panacea? Of course it isn't. I would like to see more competition in the retail sector, but fear that won't happen because of our small market size, and because electricity prices really are, relatively speaking, low. However, lack of competition on the retail side should not be mistaken for, or confused with, lack of competition in the wholesale and investment market.

It is also true that we have major challenges ahead in co-ordinating the development of regulated transmission in sync with our competitive generation market. This challenge is not unique to Alberta and will take a lot of effort and smart people to solve. It isn't an easy problem.
And clearly the newly created Alberta Utilities Commission has to regain public trust in its regulation of the electricity industry.

This exercise will take time, commitment and leadership.
So are there challenges ahead? Most definitely. But this is not a simple industry and the questions to be asked are complex. Suggesting otherwise does a disservice to the debate.
Joseph Doucet is professor of energy policy and director of the Centre for Applied Business Research in Energy and the Environment at the U of A's School of Business.
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