Alberta’s Electricity Market Overhaul: A Costly Mistake?
This week our guest is Duane Reid-Carlson, President of EDC Associates Ltd., an independent electricity-focused consulting firm based in Calgary, Canada. The firm focuses closely on Alberta power markets.
EDC recently published its quarterly report and had some critical words about the government’s proposed changes for Alberta’s electricity market – called the Restructured Electricity Market (REM) – describing it as a “highly complex, expensive, inefficient experiment.” The same sentiment was reflected by almost all the 36 organizations that participated in the Alberta Electricity System Operator (AESO)’s feedback in early 2025. Stakeholders were nearly unanimous in their comments that the changes will make Alberta’s electricity markets more expensive and less reliable – the exact attributes the redesign promised to fix. The sharp criticism spans all industry segments – from natural gas generators and renewable energy developers to consumers and transmission companies.
Participants also raised the issue of the AESO skipping the regulatory review from the Alberta Utility Commission (AUC), which provides an independent review by a regulatory body as a safeguard to prevent any unintended negative consequences from the redesign.
Peter and Jackie examine the concerns and potential long-term negative implications for Alberta’s electricity grid, generators, and consumers with Duane Reid-Carlson.
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Episode 277 transcript
Disclosure:
The information and opinions presented in this ARC Energy Ideas podcast are provided for informational purposes only and are subject to the disclaimer link in the show notes.
Announcer:
This is the ARC Energy Ideas podcast, with Peter Tertzakian and Jackie Forrest, exploring trends that influence the energy business.
Jackie Forrest:
Welcome to the Arc Energy Ideas podcast. I’m Jackie Forrest.
Peter Tertzakian:
And I’m Peter Tertzakian. Welcome back. So Jackie at CERAWeek, which was now a couple of weeks ago in Houston, the big gathering of energy stakeholders I’ll call it, the International Energy Agency seemed to make some interesting statements amidst, of course, the whole very loud background narrative in the United States about energy dominance, fossil fuels are the future, “drill, baby, drill,” et cetera, et cetera. And the International Energy Agency has really sort of almost fed into that now. Is that-
Jackie Forrest:
Yeah. Well so Fatih Birol, the head of the IEA, said there is a need for oil and gas investment. Full stop. Well compare that to the 2021 message where companies should not invest in new oil, coal, or gas projects to meet net-zero 2050. So to me, now there’s some nuances in the words, but that’s a big change in message. And you and I have had many debates about these imaginary net-zero scenarios and how they’re really not great, because people are sort of viewing an imaginary future and not preparing for a realistic one.
Peter Tertzakian:
Right.
Jackie Forrest:
And so I’m hoping that the IEA is going to come out with a realistic outlook. So we’ll look for their world energy outlook this fall, but it’s rumored they might have a slower net-zero scenario, or maybe even we’ll go back to seeing a scenario that they used to have pre-2020 when they were a bit more reasonable, showing kind of what current policies would get us in terms of energy.
Peter Tertzakian:
When is their next big report coming out?
Jackie Forrest:
It’s the fall of 2025.
Peter Tertzakian:
Oh, the fall.
Jackie Forrest:
Well, not until October usually.
Peter Tertzakian:
Right. But they do have a monthly energy report that comes up. But this is the big fall-
Jackie Forrest:
Yeah. The big one that had the net-zero scenario, and in 2021 came out with messaging around no more investments in oil and gas, which really did affect, I think, how people viewed the oil and gas industry as a sunset industry.
Peter Tertzakian:
Right. Well there definitely is I’ll call it change of tunes going on everywhere. And we have-
Jackie Forrest:
Including here in Canada, by the way.
Peter Tertzakian:
Including here in Canada. Yeah. Another topic that’s front of mind is of course the federal election, which has just been called. We’re going to be following that, and we’ll have no shortage of things to talk about, particularly from an energy perspective. While speaking of energy at large, let’s talk a little bit about electricity. And let me ask you, the audience, if this morning when you woke up and flipped that light switch you wondered where the electricity came from, or when you put the coffee pot on? I certainly didn’t, I have to confess. Although every now and then I do think about these things given that Jackie and I live and breathe energy. But we need to have a conversation about electricity, electricity in particular in Alberta, because behind that light switch things are getting quite heated. And we have had guests on the podcast that have talked about our Albert electricity grid, we’ve talked about the clean electricity regulations, we’ve talked about the AESO, the Alberta Electricity System Operator, but there’s a review going on and we’ve talked about that, Jackie, right as well on the podcast?
Jackie Forrest:
Mm-hmm.
Peter Tertzakian:
So we’re delighted today to really get into some of the contentious things going on behind the scenes. And we’ve got a special guest, Duane Reid-Carlson, he’s president of EDC Associates Ltd. I’ve known Duane for a long time and I know that his consulting firm specializes in electricity. And I don’t know, you’ve been doing this for decades, so you are the voice of experience here. But Jackie, one of Duane’s reports sort of tweaked your interest, and that’s why we’re bringing Duane aboard.
Jackie Forrest:
Yeah, that’s right. So welcome Duane.
Duane Reid-Carlson:
Thank you.
Jackie Forrest:
You know Duane I’m really happy to have on because I’ve actually wanted to do this episode since the beginning of the year, but we’ve had tariffs and everything else going on. But earlier this year, the Alberta Electricity System Operator, AESO, as you just said Peter, asked for feedback on this redesign of the Alberta electricity market. Which is actually a really big thing, it’s not just the market, it’s how they do transmission. There’s just a whole range of changes being proposed. And I have to say there was 36 organizations that participated in this now public document, which we will put a link to in the show notes, but it’s scathing, it’s concerning, and I really want Albertans to know that almost every company that’s involved in the power markets, whether you’re a generator, a transmission company, a consumer, across the board, a distributor, is very angry about where we’re at and very concerned about the future of reliability and affordability of electricity in this province. And your firm put out an excellent report, you do that every quarter, and we will put a link to that in the show notes. Not the report, but to how people can find out about your firm and ask about getting the report. You also had some critical words. You called the Alberta electricity redesign, “highly complex, expensive, and inefficient experiment.” So with that Duane, we’re just happy to have you on and get more awareness to this issue.
Duane Reid-Carlson:
Great, thank you.
Peter Tertzakian:
Well Duane, I mean let’s just project ahead. Are the lights going to go off when the switch goes on?
Duane Reid-Carlson:
Likely not, but we might have trials and tribulations with respect to that if we get into trouble down the road.
Jackie Forrest:
All right, well let’s get into the details. But before we do that, I think it’s probably just good to give people a bit of background about Alberta power markets. Prices right now, consumers are enjoying fairly low prices, and the whole point of this redesign was to have affordable pricing. And we had very high pricing in the previous years. I think average power price in 2022 was $147 a megawatt hour, it’s about a third of that right now. So we don’t seem to have an affordability issue right now, so can you tell us why are prices soft and do we even need this redesign considering that?
Duane Reid-Carlson:
Well, that’s a good question. Just to be a little more accurate, prices averaged $133 a megawatt hour over ’21 to ’23. So that three year period. Which equates to the highest price that we experienced previously in the market in the year 2000, but that was for a three-year period. Prices have fallen to $63 a megawatt hour in 2024, and averaged, as you pointed out, $41 a megawatt hour year to date, 2025. So the cause of that, which was well-known for over the last four years to anybody watching in particular, was 13,500 megawatts of generation has been added. 7,500 megawatts of thermal, 6,000 megawatts of renewable, and 5,000 megawatts of that was developed in the last year alone in 2024. And 3000 megawatts of that was a conversion of coal to natural gas. So all of that has conspired and come along and is now operating and prices have miraculously fallen, as fully expected by us, our forecasting, our firm, and everybody that subscribes to our reports had insight to that, including the government of Alberta.
Jackie Forrest:
Right. So there’s no affordability issue now, but let’s start out then with why are we doing this redesign? It was about a year ago that the Alberta government announced these sweeping changes. In your view, what problem were they trying to solve and what’s the process?
Duane Reid-Carlson:
So basically the government’s stated objectives for their market intervention, as it is, were three things: high prices or affordability, or market power concerns or abuses thereof, and reliability. And as you know, there was two broad steps to the process. The first was the interim measures that took effect in mid-2024, and the subsequent restructured electricity market process that’s now underway, which is expected to be completed by 2027 when the interim regulations expire.
Jackie Forrest:
Well, so that was the stated goals that they wanted to, but this document which I will put on, and I think a lot of Albertans should read at least parts of this, a broad group of stakeholders are consistently saying that this new design has a big risk of increasing electricity costs, reducing new investment in the province, and reducing reliability. Just the things that this whole redesign was expected to solve, it seems to be making them worse. Described by one submitter, “a highly experimental, bespoke, and unconventional, untested design.” There’s other ones like, “It’s an exotic product. It could create harm in reliability and investment. It’s outrageous. Could lead to market failure.” These are things that very credible companies are saying about this redesign. And I know there’s so many details to get into, and we’ll get into kind of the concerns of different types of participants because I do have different lenses on this, but what went wrong here? Why are we at this point a year later with almost everyone in the industry saying that this is almost a disaster?
Duane Reid-Carlson:
Well again, another very good question, and there’s many reasons to dislike the initial design scope, and everyone has pointed out from their lens their own favorite element to dislike or hate. But I think the most common thread is just the sheer size and complexity of the scope and scale of the endeavor, which is quite unique, and as many people have called it, bespoke.
Jackie Forrest:
Yeah. I think there was one quote that in Texas and California, they tried to do something similar in terms of such a full wholesale change of everything at once, and it took something like seven to eight years. And what is the timeframe that we’re trying to get this done in?
Duane Reid-Carlson:
By 2027 is the target.
Jackie Forrest:
Right. So in two years. And then some of that is actually implementation time, but the actual design is a year and a half or something? Right?
Duane Reid-Carlson:
Exactly.
Jackie Forrest:
Like really, really, really tight.
Duane Reid-Carlson:
Really tight.
Peter Tertzakian:
Let’s just sort of back up here for a second. This word design, what does that mean? Electricity redesign? Does that mean… Like we’re trying to redesign, first of all, how electricity is traded. We’re trying to redesign who can get onto the electricity grid in terms of whether it’s natural gas-fired power versus renewables. Maybe just sort of talk to us, broadly speaking, help our audience understand what this nebulous word redesign means.
Duane Reid-Carlson:
So market redesign is taking the current structure that we have in place, which is an energy only market design, which is very simple in its nature. It has its various degrees of complexities like any market does, but very straightforward. Generators put their power into the market, it’s assembled by the AESO, and the dispatch occurs and prices settled against load. Very simple structure. So now they’re looking at taking that and putting in more complex systems and procedures with respect to many things, I won’t get into all the details, but just the redesign of how generators interact with the market, how price formation takes place, and how revenue is generated.
Peter Tertzakian:
Right. I mean if I could sort of characterize it, we all, as I said in my opening comments, turn the lights on in the morning, put the coffee pot on, then there’s sort of a surge in demand as everybody wakes up. And then as they come home again, maybe fire up the electric stove, turn on all the appliances and the television sets and maybe even plug in your electric vehicle. So the dynamics on the demand side, we sort of understand and they’re growing. And then there’s a supply side, which includes used to be coal, now dominantly natural gas fire generation in this province. Now we’ve got a lot of renewables coming in. And so the suppliers are coming into the market and selling through the system operator, and the consumers have prices that they pay, mostly which are regulated by some mechanism. And so what you’re talking about is changing the whole structure about how the goods of electrons are supplied in this market, and how we as consumers consume them. And that’s everything behind the light switch that I talked about this morning. We have no idea what’s going on, but the redesign is going to change the way the flows of electricity are going to occur, how the prices are settled, who makes money and who doesn’t. Is that it?
Duane Reid-Carlson:
That’s essentially correct. And a lot of the change has been driven, as I said, from cost concerns. But more importantly, reliability and operational considerations that the AESO is having to struggle with maintaining the system operations. And the ramp rates of thermal, which aren’t that quick versus the ramp rates of renewable, which in the scale that we now have are creating problems in terms of how quickly some of the renewables can come and go, and how hard it is to manage against the thermal generation to backstop that and managing the two. So that’s kind of the inner workings of the complexities that are causing problems for the AESO.
Peter Tertzakian:
Let’s explore that a little bit more. I always like to use a simple analogy of a farmer’s market, a supplier of peaches, and I can see that there’s too many stalls with peaches so I’m not going to build a plant. Right? So if we equate peaches to natural gas fire generation for example, and I can see that there’s too much oversupply, I’m not going to build a plant. Again, I’m trying to get back to this thing of understanding system redesign. It’s like reorganizing the farmer’s market and where the stalls go.
Jackie Forrest:
Well it’s kind of organizing who pays.
Peter Tertzakian:
Who can come in, who can buy, who can come in and sell, and how the prices are settled.
Duane Reid-Carlson:
How the prices created and settled. Basically, if you think about what EDC does for a living, we model the electric system, and we’ve done so for about 33 years. And the energy only system is fairly simple and transparent, and it’s taken decades for us and others who do economic and financial analytics for the power sector, for generators, but more importantly for their debt and equity providers and their lenders. And so those lenders have gotten very comfortable with the energy market design that we have, because they can see a straight line path through our analytics to how price is formatted and how generation is derived. And so from that they become comfortable. Contracts no longer for capacity are for the full life of an asset, nor for the full capacity at any point in time. So we’re seeing merchant tails on contracts, but that’s suggestive of the lending industry is very comfortable with the market. What we’re moving towards is looking more like a black box. We have not yet been able to figure out how to model the REM in its current sort of design proposal, and so it’s become a bit of a black box. So lenders have put down their pens, they can’t see the path to price formation and revenue determination as simply as it was before. So this is going to create a very difficult-
Peter Tertzakian:
So if I could extend this metaphor, the province is coming in and basically saying, “Okay, we’re going to rearrange the stalls in the market, the way prices are set. And by the way, we’re going to turn the lights out so you can’t see where the stalls are.” Is that-
Duane Reid-Carlson:
Well, one of the fears that I have is that the government has said affordability is its objective. And what worries me about that is when price formation is not determined transparently through a fair and openly competitive process as it is today, it opens for the AESO in this particular case that may be asked or being asked to manage prices through reliability concerns.
Peter Tertzakian:
So what is the catalyst? Like why are we doing this?
Duane Reid-Carlson:
Well, the government says affordability, and market power concerns and reliability. And so I worry that affordability or managing price is the primary concern, and it will be done through reliability means.
Peter Tertzakian:
So market power is when one supplier of electrical power has too much control over the market?
Duane Reid-Carlson:
[inaudible 00:15:20].
Jackie Forrest:
Mm-hmm.
Duane Reid-Carlson:
And the MSA is in the market. That’s its mandate is to look out for those kinds of things and look into it. And over the high price period of 2021 to ’23, the MSA was silent. There was no accusation, that I’m aware of, of anybody doing wrongdoings. There was no collusion, there was no price fixing. There was some hints of maybe prices were higher than they should be, but the MSA didn’t do or say anything. So market power is a concern, it’s always a concern, but it has tools at its disposal to manage those and sort of take care of things. And if they thought someone had too much capacity in the market and could use their position to maximize their price, they could change those rules very easily. The concentration is currently 30%. There’s only one participant that’s anywhere near that. But that number could be managed to sort of mitigate those fears and concerns.
Jackie Forrest:
MSA, just tell us what that means.
Duane Reid-Carlson:
Oh, the Market Surveillance Administrator. My apologies.
Jackie Forrest:
Right. And you could argue that the market worked, because we had high prices and all this capacity came on, and now we have low prices. And honestly, the people that come here and risk their capital are hoping there’ll be some periods of high prices, but having to risk periods like this where they make very little money. So we’re going to get to what the solutions are. But Peter, we had the head of the CAISO, the California-
Peter Tertzakian:
Elliot, yeah. Mm-hmm.
Jackie Forrest:
They had the same issue where there was renewables coming on and lower utilization for the natural gas generators, and they solved it through much more simple means, which is just providing some payments to those base load generators. We’ve created something very complicated.
Peter Tertzakian:
So what’s the biggest issue?
Jackie Forrest:
Well, I think one of the most concerning issues that’s throughout this document is the Alberta government has decided to not have the Alberta Utilities Commission, which is also called the AUC hearing, to ensure the proposed design is in the public interest, and will keep the lights on at an affordable price. There are comments in this feedback form saying this is a regulatory proceeding that is legally required. There are comments that to do a market redesign with the government just doing it via legislation, which is what’s they’re proposing. We’re not going to go through a regulator who’s going to model this, make sure it works, hear everyone’s feedback, adjust it for unintended negative consequences. We’re not going through that process because we are so concerned about doing this quickly that we’re just going to put this in effect without that, and it could lead to significant costs for Alberta consumers. Other comments from the document, “Deeply concerned by bypassing established regulatory review process.” Another comment, they’re concerned about the bypassing of regulatory oversight on this, “and especially considering you’re using an ill-defined, expedited process.” So first of all, it’s in the public interest that the lights come on, especially in a place like Alberta. If the lights don’t come on, remember that January two years ago? Remember what happened in Texas? People die.
Peter Tertzakian:
Mm-hmm. Yeah, no I completely agree.
Jackie Forrest:
And so the fact that we’re just slamming this thing at an accelerated speed through the system, and ignoring the requirement to have a regulatory proceeding, to have independent experts who are experts at electricity markets opine and model. You talked about the word modeling Duane, that’s another thing that comes up in here. There’s been no modeling to the typical process that you would use to show that this will actually deliver on prices that are affordable and that you will get investment in this province. And even though we are doing those steps, we’re skipping the most important part at the end of the process. So enough of my ranting, Duane, I’m very concerned by this. Am I wrong to be concerned?
Duane Reid-Carlson:
No, everybody should be very concerned. And I’m not a lawyer, but there’s some question whether the government can legally skip these steps. Maybe it can by the action of a pen, I’m not sure. But they say they want to skip these steps in the essence of time, recognizing that mistakes will be made anyway and we’ll just fix them on the fly. So with a bespoke design such as it is, they’re sure to be lots of unintended consequences with the design and the IT implementation, notwithstanding a significant cost.
Jackie Forrest:
Right. Yeah, that’s another thing, Peter, that came in through these documents. This is very complex and will require a huge investment in IT infrastructure to manage the prices and things the way that they’re proposing. That’s not even being talked about really.
Peter Tertzakian:
So based on what you know Duane, what is the rush that Jackie’s talking about? What’s the rush to ramrod this through without any oversight?
Duane Reid-Carlson:
Well, other markets representatives like CAISO and ERCOT and others have been to town and have all said that, “Don’t take on too much complexity at once, at any one time. And don’t arbitrarily rush it, sort of work through it. By not taking too much on your plate, you’re not going to take up too much time.” So taking too long actually causes the market to sort of stand down and wait and see, and all of that creates the fears that we’re now seeing.
Peter Tertzakian:
In terms of investment to build the electrical incremental capacity that we need to support economic growth, population growth, and AI and data centers and what have you.
Jackie Forrest:
Mm-hmm. We’re going to get to that.
Duane Reid-Carlson:
Just to go back to during the NDP government’s period, they looked at redesigning the market to implement a capacity market, which is more of a bolt on to the energy-only market rather than a full redesign. That process took several years and got to the point of the AUC decision, which had a lot of input from the experts on that particular instance whereas this one is not expected to, and that caused a four-year hiatus from generation being developed. Very few megawatts were put in place for a four-year period as a result of that process. It’s just a natural response by the market to stand back and wait and see how the market design’s going to turn out, and how price formation again and revenue determination comes out of it. So they need to understand those things in order to make a financial investment decision.
Jackie Forrest:
But it’s kind of damned if you do and damned if you don’t. Because if you don’t do that process, I think investment stays away too. Because based on reading all these people’s feedback, none of them are investing in this province. And so taking longer or making this shorter isn’t going to bring a bunch of capital into this province any faster by the looks of it. It makes people feel even less confident about the durability of this new program.
Duane Reid-Carlson:
No, and the process, as I mentioned before, is far too broad in its scope and scale and just far too many things can go wrong.
Peter Tertzakian:
So there seems to be a mismatch as well in terms of the amount of new electrical supply that’s coming on in terms of including renewables and this notion of congestion plugging into the grid. And historically it’s been, I guess the term was zero congestion. In other words, anybody could build and plug in and it goes through those big high tension wires and ultimately to homes and factories and everything else in the economy. So can you talk about what’s going on with this whole transmission side and congestion that’s now starting to occur?
Duane Reid-Carlson:
Yep, that’s all correct. We’ve seen since about 2020 there’s been a substantial increase to about 3000 hours in 2024 where congestion has occurred. The AESO estimates that the congestion for the top 10 renewable projects is anywhere from 6-12% of production.
Peter Tertzakian:
Mm-hmm.
Duane Reid-Carlson:
That equates to about 16,000 megawatt hours to up to 50,000 megawatt hours.
Peter Tertzakian:
So what you’re saying it’s like 6-12% of the electricity they produce can’t get flowing through the wires.
Duane Reid-Carlson:
Yep, that’s right. So that aggregates to 16,000 to 50,000 megawatt hours, so not an insignificant amount of energy. But more importantly, this translates to about 7-10% of their revenues, and that’s not insignificant either.
Peter Tertzakian:
So what is the issue? Not enough transmission lines? Or does it go beyond that?
Duane Reid-Carlson:
Well it goes beyond that. Not enough transmission in certain locations where generation has rushed to connect and sort of over connected, if you will, with the transmission that’s available in those areas. So they rushed to where the resource is, the wind resources and the solar resources-
Peter Tertzakian:
Like down in Vulcan and places like that?
Duane Reid-Carlson:
Yes, in southern Alberta majorly. And so there’s been a rush on Alberta. When Alberta opened for renewables quite some time ago, the world took notice.
Peter Tertzakian:
So the rush comes from the renewables, we need more transmission lines. However, with the redesign and all the uncertainties that we’ve talked about, nobody wants to invest because they don’t know what the rules are. So this is the kind of situation that’s being created is that we’ve got mismatches between the electricity generation, the transmission, the loads going up, and there is not a lot of incentive to invest because of the tremendous amount of uncertainty in what this whole black box market is going to look like.
Duane Reid-Carlson:
Yeah. And low prices and volatility. We’re having more zero priced hours than we ever had, and more 999-priced hours than we ever had. So the pricing has become bifurcated. We’re either in a $0 hour or we’re in a very high-priced hour.
Peter Tertzakian:
Is that the max? 999?
Duane Reid-Carlson:
999, today.
Peter Tertzakian:
Today. Yeah.
Jackie Forrest:
Yeah, right now. They’re bringing it down potentially, which no one’s happy about. I want to talk about this congestion, because I think this is another big issue in terms of scaring capital throughout this document. We always had a zero congestion grid. So if you built a generation project in Alberta, you were guaranteed the transmission or the road to the market. And a lot of people came here with that expectation and built projects, and that has been a longstanding rule. Now whether that was smart economically or not is another question. So they want to change that, and they have this… I forget. It’s CAM they’re calling it, but some sort of congestion management thing where generators are going to pay a fee, then that fee will be going towards building more transmission. But there’s no guarantee that it will result in you getting more transmission or solving your problem or taking that risk away. And this is one that almost throughout all of the feedback of generators, every type, people see this as a huge barrier to investing. Because if you don’t know you can get the road to get your product to market, you’re not going to build your product. You’re not going to build that plant.
So it’s a big problem. And I also think it’s a problem because it’s going to apply retroactively to people that build projects thinking that that was part of the deal. And I think that’s another thing, Duane, that scares capital away from this province when the rules change so significantly.
Duane Reid-Carlson:
And through all sectors. The wholesale market as well as the transmission, as you’ve pointed out. Yeah. There’s so many balls in the air.
Peter Tertzakian:
Mm-hmm. So the renewable generators are quite upset because, A, they’re not getting on to the grid. And B, the revenue goes down, which Jack already talked about, therefore the returns go down. Talk a little bit more about the whole renewable surge and that whole constituency. What are they saying?
Jackie Forrest:
Yeah, I’ll just add to that, Peter. I’m on the CanREA board, so I’m hearing a lot of this firsthand. But there’s a broad set of problems, they call it death by a thousand cuts, really. But the way that the market redesign is shaping up, it looks like they’re going to get less money for their product, their electrons. It also looks like they’re going to face curtailment a lot. They may have extra costs. They’re saying that their renewables are going to potentially have to pay ancillary fees to account for the fact that they create maybe more cost to the system. All in all, most of the modeling is showing that some of these renewables, if not most of them, are going to be cashflow negative under the new system. And some are even saying they’re going to just disconnect from the grid, because you can’t afford to lose money every day. I don’t know, Duane, your thoughts on the renewables? And if they were to just disconnect from the grid, that’s a big problem I think. There’s something like six gigawatts of total capacity, and they are required now.
Duane Reid-Carlson:
Yeah, you’re correct. Financial harm can manifest itself in many ways to these projects, from increasing the cost to curtailed production, which reduces their revenues, and this would negatively affect their existing and future renewable merchant capacity and PPA valuations. So for existing contracted assets, these effects would be felt by PPA contract counterparties through lost value in their PPA.
Peter Tertzakian:
So that PPA is a power purchase agreement where a guaranteed price is [inaudible 00:27:00]. It’s a contract.
Duane Reid-Carlson:
Yep. Between generator and buyer. So no project gets built without a PPA. As I said earlier, because of the comfort in the market and our current market design they’ve gotten shorter, less for the length of the asset or for the full 100% of the asset. Which has made them easier to contract for buyers, because buyers don’t necessarily want to take full capacity for the full life of the assets. So there’s variability there that’s been very good to the market. So what could happen based on all of these rules changing in the market is that PPA buyer is going to be financially harmed through losses with respect to the value of that project or that contract. So you could have contracts that would fail in the hands of a purchaser, which would then roll up onto the project so the project could become insolvent because it no longer has a contract, now is exposed to merchant prices. And so that insolvency could occur. I don’t think these assets will disconnect from the grid, however, because it’s just going to take a financial write-down and some other party will buy it at a lower price that will presumably… The more times it’s bought and sold, there’ll be a price where it’s profitable under somebody’s purchase.
Jackie Forrest:
Even if it’s generating negative cashflow each year?
Duane Reid-Carlson:
Well, I don’t think it would be negative in aggregate necessarily. It could be during certain periods. But yeah.
Peter Tertzakian:
So I mean the renewables aren’t happy, and neither are the natural gas fire generators. Right, Jackie?
Jackie Forrest:
Yeah. I mean the natural gas generators, I mean many of them are concerned about limiting the upside, and the fact that, you alluded to it Duane, that the price is not as transparent. It’s being set by the AESO now, and they’re also limiting the market, the highest price and some of these market power interventions. But I mean, the whole point of this redesign, I thought, was to incent more natural gas base load to come on. And I do not think by reading this that it’s accomplishing that.
Duane Reid-Carlson:
No, not at all. Because part of the REM design, you have an element called an administrative scarcity pricing curve, which gets from the potential lower offer cap for generators, $800 a megawatt versus the current 999. And the only way to get to the price cap, the new price cap that’s proposed, $3,500 a megawatt hour, is through this administrative curve. That is administered by who? And that’s the AESO. And it’s only administered in the event of a scarcity emergency alert on the system that would create it to move up that curve. But if you think high prices and affordability is the problem, any movement up that curve is obviously going to get front headlines and perhaps maybe a tap on the shoulder from the parties, the powers to be, “Hey, let’s not go to prices at such that level for very often.” So it could arbitrarily be managed through reliability concerns by the AESO.
Jackie Forrest:
Okay. Well, let’s talk a little bit about these interconnects. That’s another contentious thing that the province is proposing. Now interconnects are good in some ways in that they should increase our reliability, because if we have more interconnects then we have more optionality if we are short power. However, there’s a lot of concerns that you come to this province to build a generator, and now they could just flood the market with low cost power and you never get a high price. And by the way, this is on top of the redesign. So this is an example, Duane, of you’re not only changing the market, but now you’re adding all these other things on the side, all changing at once. But what are your thoughts on this plan for I think there’s four interconnects?
Duane Reid-Carlson:
We actually have three interconnects, 1200 megawatts with BC, 300 megawatts with Montana, and 150 megawatts it’s a DC interconnect to Saskatchewan. So these ties are limited by operational concerns to levels lower than their rated capacity, and their commercial utilization is even lower than that. Having said that, the government wants to get the limits on the transfer capability of the various ties to a higher level so that we could implement or utilize the ties to a much higher level, either commercially or through contract.
Peter Tertzakian:
When you say utilize, is that for import?
Duane Reid-Carlson:
Import or export.
Peter Tertzakian:
Import or export.
Duane Reid-Carlson:
So Alberta is a net importer. It traditionally has been out of the last 25 years, it’s been a net exporter only three years. Last year, 2024, was one. 2025 and potentially 2026 could also be, given where prices are. So the government wants to increase all the transfer capacity limits with respect to the three ties to create a greater opportunity for utilization under various circumstances. The downside to this is that we have differences in the regulatory models that are used in adjacent markets, BC and Saskatchewan for instance, and even the US. Particularly where government owned utilities exist, which leads to an unfair competitive advantage of parties that could compete against domestic supply, particularly thermals, during peaking situations in Alberta.
Peter Tertzakian:
Mm-hmm.
Duane Reid-Carlson:
One of the key concerns.
Jackie Forrest:
Okay. So you’ve got to have a way to manage it so that you can still make money. Okay Duane, well we’re going to wrap up here pretty soon, but a couple more questions. I think one that’s on a lot of people’s minds is while we’re changing the whole supply side here, and maybe making it very fragile and no one investing in it, at the same time we’re talking about bringing more demand to this province with all of this talk of AI data centers. So I looked at the AESO Q, and currently there’s about nine gigawatts of potential new load from AI data centers that have applied to be grid connected. And of course we know that there’s also a bunch of other projects that are saying they don’t want to be grid connected, but they would come build here in the province as well. Just looking at the grid connected, our average consumption of electricity in this province is about 10 gigawatts. So that’s like talking about doubling demand at a time when the supply side seems rather shaky. So how concerned are you by that? Do you think this demand will materialize, and is that going to just add to our problems?
Duane Reid-Carlson:
Yes, if it materialized in the way that it’s being announced it would cause significant problems. Because a data center, from my understanding, can be built from anywhere from 24 to 36 months and bring some significant load with it. Our generation to cover that size would take six to eight years to build. But I think just to update your estimate, I looked at the AESO Q last week and it’s closer to 12,000 megawatts. But that said, the more I learn about data centers, the more I think there’s some significant hype here. And it reminds me of the air barrels during the oil pipeline nominations of the 1980s and 1990s, which you probably remember very well.
Jackie Forrest:
Mm-hmm. Those still happen when my line gets full.
Duane Reid-Carlson:
Yeah. So what I’ve come to learn is that all data center developers plan for future scaling to be able to match the project for the demand, which is exponential by the way. But that said, they will deploy in a very modular fashion, if they proceed, where a proposed 400 megawatt site will actually build out in four 100 megawatt phases. That could be as far as a year or more between each module as they gain customer contracts to fulfill the data centers. Also, some of the hype is towards the next generation data centers of the 1000 megawatt size, which the GPUs for that data center are not even existing yet, but they’re under development. So data centers expect to get there, so this is some of the future expectations.
Jackie Forrest:
So it’s not all happening right away when they put these big numbers out? Right?
Duane Reid-Carlson:
No, no, no. And just to give some context, there’s an estimated 40,000 megawatt of data center load worldwide, which is expected to grow somewhere between 90,000 to 130,000 by 2028. So very aggressive expectations from the industry. But by comparison for Alberta, Ireland which is a significant data center hub in Europe, took 15 years to build its current 2,500 megawatts of data center load. So based on these numbers in Alberta, should we expect to see some? Yes, we will. Will we see 12,000 megawatts or more? If we do, it’ll be in some distant future and we’ll see it coming and be able to prepare for it. But as you pointed out, the generation, the REM process and what’s going on in transmission and other things are the biggest inhibitor to a data center building because it potentially may not have supply.
Jackie Forrest:
Well, that’s interesting, because one of the feedbacks in the document of the 38 participants was from a data center developer. Okay, well to wrap up… I have actually one follow-up question, but if you were sitting there and giving advice to the Minister of Affordability and Utilities Nathan Neudorf, and Premier Smith, what would you suggest they do at this point?
Duane Reid-Carlson:
Well, it’s funny you ask this question, because I appointed myself minister for the day during a speech I gave to an IPSA luncheon last spring. And as minister for this podcast, here’s what I recommended then. First, if price of power was truly the concern, then I would’ve implemented a consumer rebate at a reasonable strike price for a reasonably defined short period of time. Just like many other that have been put in place by the Alberta government with respect to natural gas, gasoline, and power in the past. We’ve done that many times. The government is well aware of where prices were going, and they were expected to decline once all the new capacity that was under construction hit the market. So this was a relatively low, low cost fix.
Second, if market power and its abuse was a concern, then I would’ve asked the Market Surveillance Administrator, the MSA to look into that if they had not already seen existence of those issues. And they were silent during the period of high prices, so we know that potentially was not a problem.
Thirdly and lastly, if long-term reliability was a concern, then I would’ve tasked the AESO, which is its mandate, to work closely with industry to come up with new market products and procedures and rules to eliminate the perceived risks. So prices are down. Check mark. Now they should scale things back.
This is what I would recommend now, after the fact, because they didn’t listen to those recommendations when I was minister of the day a year ago. So now they should scale things back to a manageable scope and scale and work with industry to get it right, and then utilize off-the-shelf software that exists that other markets have used and implemented to minimize the errors and to maximize the speed to implementation. That’s what I would recommend.
Jackie Forrest:
So small tweaks, and back to the drawing board to just go after those issues that are around.
Duane Reid-Carlson:
They could probably take advantage of some of the design elements they have today, because not everybody hates everything. There’s pieces that could work, could fit into the market. But again, don’t do bespoke IT design projects that will take much longer and cost much more to complete.
Jackie Forrest:
Yeah. Highly experimental, as it has been described. Well I think going back to the drawing board, and how about slowing down and doing this at a reasonable pace with all of the checks and balances like the regulator reviewing it at the end too? So one last question before you go, and we really appreciated your time here Duane, is are you buying a backup generator for your home right now?
Duane Reid-Carlson:
Well, Albertans should be very concerned about future electricity supply, reliability, and affordability. But as you so eloquently pointed out at the top of this podcast, I think the current government actions are more likely to cause the very things that they say they’re trying to avoid. However, in saying that I believe the government’s intentions were sincere, I want to make that point. I just think we are not on the right path now, as I just outlined. So to answer your question, I’m not buying a generator, I’m not installing a Tesla battery or solar panels just yet. But to be honest, all residential and commercial customers don’t have the correct bidirectional digital meter to benefit from any of those investments. But when we do, I expect much more innovation would occur.
Jackie Forrest:
Yeah. And actually that was a feedback too. Why aren’t we talking about demand side management around things like giving people incentives to use electricity at different times of the day? Because although sending emergency messages to our phone worked on that cold January night, there’s got to be better ways of doing it.
Duane Reid-Carlson:
However, that crude method did work. We did get a demand response that helped those situations. So until we have an AI-driven app on our phones and tablets, we’ll have to use the crude methods that we have.
Peter Tertzakian:
Well, thanks Duane Reid-Carlson for shedding light, if you pardon the pun, on this redesign issue. Thanks for the work you do in highlighting the issue to the public and those practitioners who are in the business. It’s great to talk to you. So we’ll see how it all plays out, but in the meantime, again, thanks for coming.
Duane Reid-Carlson:
Thank you very much for having me.
Jackie Forrest:
And thanks to our listeners. If you enjoyed this podcast, please rate us on the app that you listen to and tell someone else about us.
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