Not Another Rate Cap!
Dear Premier Smith and Opposition Leader Notley,
Be honest with consumers. Why not just tell them they can lower their utility bill without a subsidy by simply getting off the RRO? Alberta’s Utilities Consumer Advocate lists hundreds of rate options that are lower than the RRO.
As you enter the election's final weeks of campaigning, we implore you to consider the impacts of promises and the unintended consequences those promises carry. We hope you realize that dropping small pebbles like rate caps into a pond is more like throwing boulders into a puddle.
Late last year, the UCP government announced a series of measures under its Affordability Action Plan designed to help Albertans with the rising cost of utilities. These included:
- Rebates totalling $500 were paid out to consumers from July 2022 through April 2023.
- An RRO Rate Cap Deferral Program, wherein RRO rates would be “capped” at 13.5 cents/kWh, and the differential between the cap and the actual cost would be deferred and paid back by RRO customers from April 2023 to December 2024.
Then on May 14, 2023, the Alberta NDP party announced their plan to reduce utility costs for Albertans should they be elected. Their plan can be boiled down to three main points:
- They will pay off the remaining $180 million (of the original $201 million) Rate Cap Deferral loan. (The three big winners are ENMAX, EPCOR, and Direct Energy, who will be paid not to collect the deferral amounts from consumers who used the energy.)
- They will cap RRO prices for three months (July, August, and September) at 12 cents/kWh (which will be a subsidy paid to the big utilities). This will distort the market and gift a couple hundred million dollars to the big regulated utilities.
- They will launch a “special investigation” into why electricity prices have been high.
Although the UCP Affordability Action Plan most certainly helped Albertans over the past few months, it was a band-aid solution - it didn’t solve the problem of high power generation costs. Likewise, the NDP’s newly-announced measures don’t address the root cause of rising utility costs. Let’s dig into why.
Subsidized Caps
Back in 2017, the Alberta NDP introduced a rate cap of 6.8 cents/kWh. To be clear, when governments talk about rate caps, they are only talking about the Regulated Rate Option (RRO) - where RRO providers typically function as the default retailers. The number of customers on the RRO has been on a steady decline as more and more customers take advantage of the benefits of a deregulated market.
The 6.8 cents/kWh rate cap, which lasted from June 2017 to November 2019, meant that RRO providers could only charge 6.8 cents/kWh despite the real costs being higher for roughly half of that time period. It is estimated that the total cost of the rate cap was $100 million (source: Government of Alberta Annual Report on Energy 2019-2020, pages 54-55). Had the rate cap been allowed to continue until the legislated end date of May 2021, the cost could have ballooned to $303 million.
At the time, the rate cap only applied to RRO customers, meaning 60% of Albertans were protected, but 100% of Albertans paid the cost. Our question at the time was, why should Albertans who made the choice to get off the RRO have to pay for those who were subsidized by the rate cap?
This new cap at 12 cents/kWh will function no differently than the last one. Make no mistake: this is a subsidy, not a cap. Six years ago, 60% of Albertans were still on the RRO. Today, that number is less than 40%. A rate “cap” helps fewer than 40% of Albertans, but 100% of Albertans will pay for it; that doesn’t sound like “help” to us.
Clearing the “Dani Debt”
The NDP has called the outstanding $180 million Rate Cap Deferral Loan the “Dani Debt,” which they intend to pay off. The deferred amount was designed to be paid off by RRO customers, despite the fact that those who benefitted from the rate cap from January to March of this year could easily switch off the RRO in April and not have to pay back the deferred amounts.
We wonder, where will this $180 million come from? The NDP doesn’t have a magical bag of money to pay this debt. Those costs will need to be recovered somehow. Is it fair to have a rate rider added to all Albertan utility bills? Is it fair to those who’ve made the choice to switch to fixed rates offered through competitive retailers?
The NDP rate cap in 2017 (that lasted over 29 months) led to $100 million of subsidized debt. The UCP rate cap in 2023 (that lasted only three months) led to $201 million in deferred debt. Another NDP rate cap for another three months to cover another period of potential volatility? If the goal is to rack up debt, then mission accomplished.
Where did this money go? It was paid by the government to the big utilities (including ENMAX, EPCOR, and Direct Energy) to mask the real cost of energy by subsidizing their rates. By default, this creates an unlevel competitive playing field.
A “Special Investigation”
Kathleen Ganley, the NDP Energy Critic, has proposed a special investigation over the summer months to determine the cause of high electricity prices. She correctly points out that electricity prices are 140% higher than when the UCP took office. But what’s the cause? The NDP seems to have short or selective memories when it comes to the electricity market.
In June 2015, three months after the NDP Government previously took office as the party in power, they amended the Specified Gas Emitters Regulation to increase carbon taxes, including the carbon tax paid by coal-fired electricity generators. This set in motion several changes in the market, initially costing consumers $2 billion when Enmax Energy, TransCanada Energy, Capital Power, and ASTC Power Partnership terminated money-losing Power Purchase Agreements (PPAs). At the same time, Alberta’s power sector set in motion a plan to reduce GHGs and encouraged the industry to invest in renewables.
Decarbonization in Alberta’s grid is underway. The strategic choice to close down coal generation plants and accelerate investment in renewables began in 2015. By the end of 2023, coal plants will finally be phased out, and major solar and wind resources will have been added to the generation fleet. The investment in renewables to reduce emissions was necessary as was the investment in gas-fired generation in order to balance the supply/demand curve and ensure a stable baseload. However, the march toward net-zero carries a significant price tag ($42-44 billion), and wholesale prices have increased while we go through this transition period. Given the intermittent supply of renewables and without sufficient energy storage, Power Pool prices will continue to spike.
In the graph below, we chart wind generation (green) against Power Pool prices (blue). Notice a pattern? As renewables drop off, prices spike.
Another issue the government (NDP or UCP) should tackle is economic withholding. We covered economic withholding in a previous blog here. The short version is this: Economic withholding is the practice of offering energy generated at prices too high to be taken to meet demand, which lowers supply and increases the final price that gets paid to all generators in the merit order.
The Market Surveillance Administrator (a watchdog assigned to oversee market behaviour) condones economic withholding as a tool to boost investment into Alberta’s market. Although legitimate reasons exist for economic withholding, it must be balanced against the impacts on the wholesale market.
Real Action
The cost of electricity charged to consumers is not the real problem. We often hear from our customers that the Distribution and Transmission (D&T) charges are to blame, noting that they make up approximately 60% of most bills. A “cap” that will only lead to more charges is not a solution that benefits Albertans.
We recommend that the government (whichever that ends up being) look at line items like the Local Access Fee or LAF (we’ve written about that here). Or better yet, take our recommendations and create a new rate that would actually help vulnerable Albertans. We took the time to outline something we call the Transition Rate Option (TRO), a solution that, if implemented, would create meaningful change in the electricity market without the ramifications of government tampering in a deregulated market.
The private sector is investing in new generation. Competitive retailers are investing in long-term agreements and are able to offer retail prices lower than RRO providers. Consider the following chart, showing estimated forward RRO prices (June onwards), including the estimated 2.5 cents/kWh “adder” from the Rate Deferral Cap against Spot Power’s 3-year fixed rate:
Competitive retailers, like those under the UTILITYnet umbrella, offer fixed rates significantly lower than the RRO. Moreover, the NDP’s proposed “cap” comes off just as we head into winter when wind and solar generation are typically lower. If you recall our chart from earlier, when there are fewer renewables, prices tend to be higher. Both Smith and Notley should be urging consumers: “Get off the RRO and lock into a lower stable rate.”
From a consumer standpoint, the answer is easy. Switch to a competitive retailer and choose from the fixed rates currently available that are consistently lower than the RRO.