Alberta consumers could be on the hook for $600-million if the province's power companies walk away from a number of fixed-rate electrical contracts, according to a report from the University of Calgary, far less than the $2-billion claimed by Rachel Notley's NDP.
The typical Alberta household would pay an additional $2.25 every month on their electrical bills if the money-losing contracts were cancelled. However, that would happen only if power prices remained at near-record lows, economists Trevor Tombe and Andrew Leach cautioned in the report, released on Tuesday morning.
Alberta's New Democrats are going to court to stop a number of the province's electrical companies from cancelling 16-year-old power contracts known as power-purchase arrangements ( PPAs).
"Falling prices and rising costs have made many of the PPAs unprofitable, in particular those which apply to legacy coal power plants in the province," the report says.
The contracts were at the centre of then-premier Ralph Klein's move to deregulate the province's electrical market, allowing power generators to sell to buyers at a stable price for two decades. However, many of the contracts are now unprofitable as electrical prices in Alberta have tumbled to a small fraction of what they were only three years ago.
The NDP will be arguing in court that the language in the contracts allowing buyers to back out of the deals was entered illegally, only days before the contracts were auctioned off. In e-mails obtained by The Globe and Mail, the chief Canadian lobbyist for discredited energy giant Enron claimed responsibility for the last-minute insertion of the clause the government is now looking to have revoked.
Power companies pocketed nearly $10-billion from the coal-fired PPAs over the past 16 years as the Alberta economy soared and power prices rose. In the summer of 2015, the five years remaining on the power contracts were estimated to be worth about $1.5-billion. According to the University of Calgary report, they are now worth negative $900-million.
While Alberta government officials have said that most of the drop in value has occurred because of the plunge in the province's power prices, the report says two new policies introduced by the NDP are responsible for about half of the nearly $2.5-billion fall in value: a doubling of the carbon levy on industrial emitters and the introduction of a provincewide carbon tax. Prof. Leach chaired the panel that helped to design the province's new carbon tax.
The report explains how the value of Alberta's power deals declined. Worth nearly $1.5-billion last year, the contracts will lose about $500-million in value when the industrial carbon levy doubles in 2017. The new economy-wide carbon tax shaves an additional $850-million off the contracts at the same time. The power deals would still be profitable after the government's new carbon taxes, worth only $150-million.
However, plummeting power prices will reduce the value of the contracts by $1.1-billion by 2020. The end result is that they're now worth negative $900-million, according to the report authors – because one of the contracts is already owned by the government, Albertans would be required to pay for $600-million in money-losing contracts. Spread out over each power bill, that equals about $2.25 monthly a household.
Echoing the fall in the value of the contracts has been the rapid increase in carbon costs faced by Alberta's coal producers. Since the Notley government took over last summer, the new carbon taxes announced by her New Democrats will push the carbon cost of electricity from about $2 aMWh in 2015 to $21 next year.
With a number of efficient natural-gas plants opening in recent years, which pay fewer carbon taxes and sell electricity more cheaply, "coal-fired power plants would become significantly more expensive to operate but would not be able to pass this cost onto consumers through higher prices," the report says.
As taxes have climbed, prices have collapsed. While a coal-fired plant could sell its electricity for $49 aMWh in 2014, in 2016 the price has averaged $16 aMWh. The price of electricity isn't expected to recover fully until the end of the decade.
The electrical price drop has been a welcomed relief for Albertans in the midst of the province's most protracted recession since the Second World War. Electrical prices have been $10 lower a month for the average consumer in 2016 compared with 2015, and $24.50 below 2014 levels, according to the report.
In the event that the PPAs were cancelled, an entity known as the Balancing Pool would take them over. The arm's-length agency would then charge consumers $2.25 every month to pay for the money-losing electricity, but that would happen only while Albertans continued to save money on their bills because of depressed prices.