Alberta’s move last week to pause approvals for new renewable electricity investments sends a strong signal: The conservative, free-market fundamentals underpinning the province’s approach to electricity are no longer as strong as the past few decades might suggest.
Whatever happens between now and next February, when the moratorium expires, Alberta’s electricity industry is at a crossroads: Does the province continue to embrace its quarter-century as a free, open market, or will the government and regulator take more interventionist control over the type and location of generation investments?
In 1996, then-premier Ralph Klein’s Progressive Conservative government decided to let market forces govern electricity investment and generation decisions. The Electric Utilities Act established a competitive and open market with a goal of attracting private investment in generation capacity to deliver low-cost electricity to Alberta consumers.
In the 27 years since, it has worked. Private companies invested in coal and natural gas plants, cogeneration and biomass generators, hydroelectric facilities, and wind and solar generation. Mostly without any direct subsidies. (The largest solar farm in Alberta, the $700-million Travers project, was built with no public money and no government procurement contract, although it has contracted a private agreement with online retail giant Amazon.) Anyone who felt they could make a profit could apply to connect to the grid and sell power.
Alberta’s market structure is specifically designed to avoid bias for or against any specific technology. Generators that can commit to forward contracts are allowed to presell electricity to specific industrial buyers (“I will gladly pay you today, for a MWh on Tuesday”). Otherwise, everyone selling onto the grid at a given hour gets the same price. That price changes hour to hour based on supply and demand fluctuations, but any generator willing to take that hourly price can sell to the grid.
If you went looking for a poster child for a free-market approach to electricity generation, you would be hard pressed to find a better example. Most capacity (including renewables) represents private investments made on private land: decentralized decisions by individuals and companies.
That is why the renewable generation approval pause is so surprising.
Such an announcement – made with no prior notice or consultation with the renewables industry – is exactly what the free market does not like because it introduces a signal of regulatory risk and uncertainty. It creates a complete, if temporary, barrier to entry for a specific type of investment, and it will cost investors money (just as delays on the Northern Gateway, Keystone XL, Energy East and Trans Mountain pipeline proposals did over the past decade).
Proponents of the renewables pause have pointed to certain issues that need addressing. They note the correlation between renewable investments and rising prices in the province, the loss of agricultural land, and supply adequacy and impact on grid reliability of projects that depend on the elements. But to the extent they are problems at all, they could be addressed without such a drastic move – by the very free-market system the province has long embraced.
On the price front, correlation does not equal causation. Recent research by economists David Brown, Andrew Eckert and Blake Shaffer has shown that the large recent electricity price increases in 2020 and 2021 are the result of market power exercised by few large generators. Allowing additional competition, even in the form of renewables, would reduce this market power.
On the land-use issue, Rural Municipalities of Alberta members have expressed concerns about reclamation costs and displacement of agricultural operations.
The reclamation cost issue is critical and deserving of attention. But it seems inconsistent to announce a pause on renewables to resolve this while simultaneously continuing to approve new conventional oil and gas infrastructure, which carries the same reclamation issues, only more pronounced.
Moreover, when considering the displacement of agriculture, it is worth noting that renewables projects involve private ownership on private lands. As such, the government should contemplate the implications of policy changes that infringe on individual property rights. If a solar farm is more profitable for a landowner, the market is telling us that’s a better use for the land.
Finally, on supply adequacy: It’s a fact that wind farms only generate when the wind blows, and solar farms only generate when the sun shines. But how you react to this truth depends on how much trust you put in free markets. Consider the difference between the supply adequacy approaches taken under the previous two Alberta governments.
Before the 2019 election, then-premier Rachel Notley’s NDP government began planning a “capacity market,” to run in parallel to the current “energy-only market.” The capacity market would have facilitated payments to “dispatchable” generators (those not subject to the whims of the Earth’s air currents and celestial movements). Basically, the system would pay those generators to be on call to cover intermittent wind and solar.
After that election, premier Jason Kenney’s UCP government cancelled this plan in favour of maintaining the existing system. At the time, the expectation was that a free market could deal with renewable generation just fine: The energy-only approach would maintain incentives for a proper generation mix, as it has done since the days of Mr. Klein.
The structure of an electricity market is an ideological choice – that is inescapable. Will Alberta continue down the conservative path, restoring investor confidence and allowing for decentralized decisions, or will it move toward an interventionist approach? Between now and February, we will find out.
Kent Fellows is a professor at the University of Calgary, director of the master of public policy program at the university’s School of Public Policy and fellow-in-residence at the C.D. Howe Institute.
Op-ed from the Globe and Mail