Earlier this month the National Energy Board (NEB) issued a news release drawing attention to the fact that Alberta wholesale electricity prices have already set an annual record this year for the number of hours that generators received zero dollars for the power they generated. According to the Market Surveillance Administrator’s Q2/17 Quarterly Report (MSA Report) the pool price for electricity in Alberta settled at $0/MWh for 41 hours and at only $0.01/MWh for another 21 hours in Q2 of 2017. That means generators were paid nothing, or near nothing, for the electricity they generated and delivered to the grid in those hours. Why would a generator ever sell its electricity for nothing?
The answer to this question stems from the way generators are paid for their electricity in Alberta. All electricity that is bought and sold on the grid in Alberta is done through a competitive wholesale market (called the Power Pool) operated by the Alberta Electric System Operator (AESO). The AESO manages the grid to perfectly match supply (electricity generated/imported) with demand (electricity consumed/exported). Alberta generators and importers of electricity submit supply offers to the AESO a day ahead of each hour with the price ($/MWh) at which they are prepared to sell their power. The supply offers with the lowest price are used (dispatched) each minute of that hour by the AESO to meet demand until all of the demand has been satisfied. The last supply offer that is used to meet the demand in a particular minute is designated as the System Marginal Price (SMP) for that minute. The pool price for each MWh of electricity is then determined by the AESO for the hour by calculating the time-weighted average of all 60 SMPs (one for each minute) for that hour. Each generator that dispatched electricity into the grid in that hour is paid that pool price for its electricity regardless of the price specified in its supply offer – even those who offered electricity at $0/MWh get paid the pool price for the hour.
The $0/MWh pool price highlighted by the NEB means that for a particular hour generators and importers of power have offered enough electricity to the market at $0/MWh to meet all of the demand from consumers in that hour. Some generators offer at $0/MWh because either (i) the cost of shutting down and restarting their plants (e.g. large coal plant) is greater than the cost of operating the plants at a loss for a few hours, or (ii) their plants (wind farm) have minimal variable costs. These generators are price takers, who are willing to offer at $0/MWh to get dispatched and then be paid the pool price whatever it ends up being. Importers of electricity into Alberta on the other hand are actually required under ISO Rule 203.1 to be price takers and to offer their imported power at $0/MWh. This explains how a $0/MWh pool price occurs, and why generators and importers offer to sell electricity in Alberta’s market at $0/MWh. But why are so many $0/MWh pool price hours occurring in 2017?
According to the MSA Report, a significant increase in electricity imports in Q2 over the British Columbia and Montana interties during morning off peak hours is causing these $0/MWh pool price hours to occur this year in Alberta. The Pacific Northwest, including British Columbia, had a larger snowpack last winter than normal which enabled more hydro generation to occur. This increased generation has resulted in a morning off-peak arbitrage being available because the Mid-Columbia (Mid-C) off-peak power prices are lower than they are in Alberta. The following two graphs from the MSA Report illustrate the arbitrage and its impact on Alberta imports in Q2:
Q2 2017 Average Power Prices in Alberta and Mid-Columbia, by Hour Ending
Q2 Average Net Imports by Hour Ending, 2014-2017
The graphs illustrate the premium paid in the Alberta market versus Mid-C between midnight and 9 am (HE 1 to 9) in Q2 of this year. Yes the Alberta pool price was $0/MWh for 41 hours in this period, but the Alberta pool price averaged close to $15/MWh during these off peak hours over Q2 compared to less than $5/MWh in Mid-C in the same hours. This arbitrage opportunity resulted in increased imports into Alberta being offered at the mandated $0/MWh for imports. Combine these imports with the existing Alberta generation (e.g. coal and wind) that also offered electricity at $0/MWh during these hours, and Alberta had more hours where the aggregate electricity offered at $0/MWh was enough to meet consumer demand. 41 hours to be exact and all occurring in the midnight to 9 am period, compared to only for a few hours in all of 2016 and according to the NEB for only 108 hours in total since 2000 when Alberta’s competitive wholesale market was created.
These events illustrate how imports can exert downward pressure on pool prices in Alberta. Because, as noted above, all imports are required to be offered to the market at $0/MWh, the imports displace higher priced power and reduce the pool price. In this case the downward pressure actually resulted in $0/MWh pool prices for some of these morning off peak hours, although in the aggregate over all hours importers made money because of the arbitrage opportunity between Alberta and Mid-C.
One should not take away from this article that the Alberta market is somehow broken because there were 41 hours in Q2 of 2017 with a $0/MWh pool price. The reality is that this is only 1.9% of the total hours in Q2. Multiple zero hours often occurred in the same day when wind generation and imports were particularly high and consumer demand low. In fact, according to the MSA Report, average pool prices were $19.29 in Q2, which is 29% higher than in Q2 of 2016. The $0/MWh pool price hours only reduced the average pool price from what it would otherwise have been by 37 cents. Also, these zero dollar hours occurred in the off peak when less electricity is being sold. Plus, Q2 electricity demand was actually higher in Alberta – more than 7% above 2016. As a result, the market actually improved for generators and importers in Q2 of 2017 compared to Q2 of 2016.
This article does however explain why generators sometimes sell their electricity for nothing in Alberta. Fortunately, unlike other markets, Alberta does not have negative prices, but there are a few hours each year (more in 2017) when the pool price actually paid to generators is $0/MWh.
Kent Howie and Peter Bryan are partners who practice law in the Electricity Markets Group at the Calgary, Alberta office of the national law firm Borden Ladner Gervais LLP. They are regular contributors to the postings to AlbertaPowerMarket.com.