ELECTRICITY 101

How are electricity prices set in Alberta?

Electricity prices are set when companies that make electricity offer to sell their energy to buyers, called Energy Retailers, such as Northern Lights Energy & Power. Energy Retailers buy enough electricity to meet their customer supply requirements. The wholesale prices are affected by many factors that relate to the supply and demand for electricity.

These factors include:

  • Generation outages (coal plants & maintenance down times)
  • Weather & temperature influencing demand
  • New generation producing power for sale
  • Water levels in dams or wind strength
  • Price of fuel (coal & natural gas)
  • Time of day & time of year electricity is used

Because Coal is the least expensive method of producing energy, when more than one Coal Plant shuts down for either a planned or unplanned outage, this greatly affects the cost of energy.

What does Deregulation mean?

How is electricity brought to my home or business?

What is Generation?

What is Transmission?

What is a Retail Energy Provider?

WHAT DOES DEREGULATION MEAN?
Deregulation in the Alberta energy market provides residents a choice when it comes to purchasing electricity for their homes & businesses. The Alberta electricity market became deregulated in 2000 giving customers in Alberta the option of shopping multiple energy suppliers for competitive electricity rates.

Prior to energy deregulation, Alberta customers were obligated to purchase electricity from a designated utility company. While the transmission and distribution of energy is still managed by the Alberta Utilities Commission (AUC), competitive electricity providers can now supply their own energy.

HOW IS ELECTRICITY BROUGHT TO MY HOME OR BUSINESS?
When you switch on the power in your home or business you see the result of four major steps in Alberta’s electricity market, some of which is deregulated.

GENERATION:
(Source)
Privatized and controlled by the Alberta Electric System Operator (AESO)
TRANSMISSION: Regulated by the Alberta Utilities Commission (AUC) and the AESO
DISTRIBUTION: Regulated by the AUC
RETAILER: A blend of regulated and competitive services

 

WHAT IS GENERATION?
With deregulation of the electric industry in Alberta, the price paid for electric generation is no longer regulated. Generators sell their power to the Alberta Electric System Operator (AESO). The AESO, in turn, provides independent, fair, efficient and open-market-access for all Market Participants (Retailers), who buy electricity from the wholesale market at the hourly posted price.

There are over 200 participants and about $9 billion in annual energy transactions handled by the team at the AESO.

In Alberta, almost half of our energy is produced from coal, with an increasing amount being generated by natural gas including cogeneration. Renewable plants generate the remainder of the supply (hydro, wind and biomass).

Over the last decade 5600megawatts (MW) of new capacitywas brought online and there are1,219 MW of projects currentlyunder construction.


WHAT IS TRANSMISSION?
New wind powered generation being added to the grid over the next decade is forecasted to add an additional 2,700 MW. Interties between Saskatchewan and BC are also an essential component. In Alberta about 1% of the power generated in the province is exported and 2% of the provincial demand requirements are imported. Currently work is underway on the first merchant intertie line running from southern Alberta into Montana. When this is completed it will enable generation developments in both regions.

Electricity is sent from the generating plants over high-voltage transmission lines to substations that use transformers to reduce the voltage level before distribution to the end consumer.

Regulated rates for transmission are set by the Alberta Utilities Commission (AUC) and are managed by the Alberta Electric System Operator (AESO).

The AUC approves the construction and operation of all transmission facilities in Alberta. They also establish Regulated Transmission Rates. The AESO administers the rates and oversees the transmission system so there is equal access for all Market Participants. Distribution companies then flow through these transmission charges to Retailers in their service area. Distribution companies’ transmission charges are based on rates approved by the AUC, and on each consumer’s individual energy usage. Retailers in turn pass these transmission charges on to the consumer as part of their monthly retail bill.

The need for new transmission lines is normally analyzed by Alberta’s Electric System Operator (the AESO), and reviewed in public hearings before the AUC. The Government of Alberta has recently changed the electric industry legislation, allowing cabinet to mandate the construction of critical transmission infrastructure. This change has proven to be highly controversial.

Alberta has built very little transmission in the past 20 years, and the need for substantial system reinforcement is widely recognized. However the size, timing and technology of these transmission additions is unprecedented.

The removal of the public need assessment process, and its replacement by a closed-door cabinet decision making process, is of concern to many parties, particularly since all costs of the bulk transmission system are paid by customers and no bulk transmission system costs are paid by generators.

Others observe that expanding transmission capacity will facilitate green power development, increase generator competition, and open up new internal and external supply options for customers within and outside of Alberta.

WHAT IS A RETAIL ENERGY PROVIDER?
In Alberta, customers can choose to buy electricity from a Regulated Retailer whose rates are set based on a government formula or a Competitive Retailer. Competitive Retailers are licensed by Alberta Government Services (AGS).

For consumers who have not chosen to sign a contract with the competitive supplier, the Regulated Rate Option (RRO) is available as a default supply option. Over the last 5 years, the formula used in calculating the RRO has gradually changed. On July 1 2010 the calculation was based on 100% month-ahead projected pricing instead of a blend of short term and long term hedges.

Competitive electricity retailers will often purchase electricity for their customers through a combination of long-term or short-term contracts with the generation companies. They can also buy electricity directly from the wholesale spot market based on the published hourly price.

This allows consumers to get as close as possible to wholesale prices, which are often well below other competitive retail or RRO prices.

For more information on Competitive Retailers in Alberta visit the Utilities Consumer Advocate’s website.

NOTE: While the market is a blend of both regulated and unregulated entities, the Government of Alberta is responsible for the orderly and fair proper operation of the province’s electric system, including generation, transmission, distribution and retailing.

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