Power

Deregulation has been a boon to power industry, but critics question its merits

There’s a silent boom going on in Alberta’s electricity industry, one few Albertans are aware of when they turn on their lights.

It’s a boom Evan Bahry, executive director of the Independent Power Producers Society of Alberta (IPPSA), which has 100 members, is very aware of.

“Deregulation spawned a whole new knowledge-based industry,” he says. “The companies that have competed to build power plants in Alberta have been able to go to other parts of Canada and to the United States and build power assets there. Alberta is home to hundreds of head office power industry jobs as a result.”

Bahry points to companies like pipeline giant TransCanada as an example.

“A little over 10 years ago, TransCanada had zero power capacity, and now they produce over 10,000 megawatts throughout North America [slightly less than all of Alberta’s electricity] and it has become a core business.”

Calgary-based TransCanada, TransAlta, ENMAX and ATCO Power, as well as Edmonton’s Capital Power, are the leaders in the independent power producer sector in Alberta, each owning thousands of megawatts of electricity in and outside of the province.

In addition, the deregulated environment in Alberta has spawned smaller companies like Calgary-based Maxim Power, which owns more than 40 power plants in Canada, the United States and France, and Pristine Power (now owned by U.S.-based Veresen), which is developing a suite of natural gas and renewable energy projects in British Columbia and Ontario.

Bahry says the unique deregulated power market in Alberta—only Texas has a similar framework—is what created the conditions for the Alberta-made independent power producer (IPP) boom.

LEAN, MEAN AND EFFICIENT

Under the Alberta system, prospective power producers assume all the risks of investing in power plants (or buying existing ones), with the electricity they produce being sold into a power pool, which operates much like a stock market or commodities exchange.

As a result, they have had to become lean, mean and efficient, says Bahry.

“Our IPPs are well poised to expand throughout North America,” he notes. “In Alberta, they’ve had to either deal directly with customers who want the power or sell it into the spot market, so they’re used to competing. They are able to compete elsewhere because they’ve been doing it in Alberta.”

Coincident with this development, power markets throughout the United States and Canada have opened up, as governments seek alternatives to power sectors dominated by Crown-owned and regulated utility giants.

“The huge utilities know how to build large nuclear plants or coal plants, but they’re not very good at building smaller gas-fired plants or wind plants,” says Bahry. “That’s the kind of niche our IPPs are filling.”

Added to this is the environmental impetus, with governments wanting to see polluting and aging coal-fired plants replaced by renewables like wind and cleaner gas-fired plants.

In Ontario, for instance, where coal-fired plants once produced 25 per cent of that province’s electricity, the government has pledged to have all coal plants closed by 2014 and replaced with wind, solar, small hydro and gas-fired plants, all of which are being built by IPPs that receive long-term price guarantees.

The Conference Board of Canada recently forecast that the Canadian electricity sector will need to invest $15 billion a year through to 2030 to replace and upgrade aging facilities.

Bahry says Alberta-based IPPs are in a position to fill much of that void, along with similar opportunities worldwide.

The power purchase agreements Ontario, British Columbia, Quebec and other provinces make available, either directly by their Crown-owned utilities or through government agencies, provide a new opportunity beyond Alberta. Power contracts in most of the U.S. states are similar. Once won, these contracts ensure the recovery of all costs, plus ongoing revenue from power sales.

The province’s IPP sector emerged from deregulation, which started in 1996. Although the process has been anything but smooth, with much opposition from business and residential consumers in the initial stages and since, it has now evolved.

CLEARED FOR TAKEOFF

Bahry likens what exists now to the airline business. For instance, the transmission sector, now dominated by Calgary-based AltaLink and ATCO Electric, is akin to the runways and terminals of an airport—still regulated. The control tower is like the government entity called the Alberta Electric System Operator, which identifies the need for more transmission and arranges for power supply to be made available in response to market demand.

Finally, the generators are like airlines—a competitive industry operating within the power sector, with prices set by market competition.

Bahry argues that the former regulated utility industry may not have been able to keep up with growing demand in Alberta, Canada’s fastest growing province and its fastest growing power market. The province has experienced an annual increase in demand of 3.5 per cent for most of the last decade, compared to 1.7 per cent in the rest of Canada.

The open market enables investors to build when they believe demand warrants, rather than having to get regulatory approval for when to build, often a time-consuming process. It can also take years for a project to be built under a regulated approach.

Bahry believes that Alberta’s deregulated regime enabled the rapid construction of a host of generation facilities across the province starting in the late 1990s.

“Could planners and regulators have foreseen how quickly Alberta’s economy has grown?” he asks. “Clearly, those who plan our schools, hospitals, roads and housing sure didn’t see it coming.”

More than 6,000 megawatts of new electricity supply has been added since 1995, just before deregulation started to take hold. And with a federal government mandate to phase out the province’s older coal-fired plants, the need for new generation will continue. IPPSA believes the current generation of about 13,000 megawatts will grow to 20,000 megawatts by 2020. Currently, almost 6,000 megawatts of the existing power is provided by coal-fired plants.

COMPARING RATES

However, critics say power rates are higher than might be the case under a regulated system, pointing out that the province’s residential rates, for example, are the third highest in Canada.

For instance, IPPSA says residential rates in Alberta were about 13 cents a kilowatt hour in 2009 (they have remained at roughly that level since), just behind Prince Edward Island (more than 14 cents per kilowatt hour) and Ontario (almost 14 cents per kilowatt hour). Rates in provinces such as British Columbia, Manitoba and Quebec, all with abundant hydropower supplies, are just slightly above six cents per kilowatt hour.

Despite this, IPPSA argues that if costs are compared on a “level playing field,” Alberta rates are competitive with those in most other provinces. That’s because unlike regulated utilities, Alberta’s IPPs pay taxes and don’t have government-guaranteed debt.

In a recent report commissioned by IPPSA, it is calculated that rates in British Columbia and Quebec would be close to 10 cents per kilowatt hour if subsidies were included, while rates in Ontario would be close to 20 cents per kilowatt hour.

It also says that because so much new generating capacity has been built and is waiting to come online, power rates in Alberta will stay about where they are through to 2015, while they rise in all other provinces. Bahry is quick to note that the energy component of power costs has fallen due to low natural gas prices, but the “wire” component will increase due to a large amount of new transmission coming online to meet demands.

STAYING COMPETITIVE

Those opposed to deregulation say happenstance, with low natural gas keeping overall power costs down, played a part in keeping rates from skyrocketing. About 5,300 megawatts of the province’s power is now provided by natural gas-based power plants.

Mohyuddin Mirza, a consultant with the Edmonton-based Alberta Greenhouse Growers Association, which has 162 commercial greenhouse growers who employ 4,500 people full-time and part-time, says the group’s initial opposition to the move continues.

“I don’t think things are settled down, especially with concerns prices could be three or times higher [at times],” he says. “Growers need stability in power rates, and when smaller growers see their [fluctuating] power rates they’re concerned.”

Mirza says that larger growers have bought their power on the spot market to attempt to make their electricity costs more reliable, but this can be costly. He adds that vegetable growers, a large percentage of the group’s members, are concerned about competing with Mexican growers in a North American free trade market.

“Our power costs are high and our growers are competing with Mexico, where power is cheap [and subsidized].”

Brock Mulligan, communications director for the Alberta Forest Products Association, says the group, which represents 41 companies that employ 21,000 Albertans, remains concerned about fluctuating power rates.

“It’s certainly still of interest to us,” he says. “It’s one of the areas we’re trying to influence [through lobbying with the provincial government]. High power rates certainly impact our competitiveness.”

Mulligan says that most of the larger members have built their own cogeneration units, which produce both heat and power, tapping waste wood. That has allowed them to continue operating, but power costs remain a major area of concern. “Power is a significant cost of doing business for many of our members,” he says.

 

• < Prev
• Next >