Record cheap electricity is transforming world energy markets as Canada struggles to keep up: Don Pittis

A new world record price forelectricity set earlier this month signalsa radical disruption inglobal energy marketsand Canada, whose economy was once powered by some of the world's cheapest electricity, will not escape the effects.

The new price,described by the news site Electrek as the cheapest electricity on the planet, was less than 2 cents per kilowatt hour, "part of a pattern marching to 1 cent per kWh bids that are coming in 2019 (or sooner)," the site declared.

The record was not set in a place where energy is traditionally cheap. Nor isit from a traditional electricity source.

Low bids

The new low price of 1.7cents per kilowatt hour was part of a contract between the Italian multinational ENELGreen Power and the Mexican government agency that administers the country's electricity wholesale market.

It was just one of a series of low bids, including from Canadian Solar the company founded by former Ontario Hydro engineer Shawn Qu to make electricity.The low bid was for power from wind that is hitting records around world.

But the fact the power willcome from an alternative source is only one part of a series of profound changes,including mass battery storage,that is in the process of shaking up the world energy market.

As has so often been the case in the past, Alberta is on theleadingedge of an energyexperiment that is turningglobal and Canadian markets upside down.

Withinweeks, the Alberta Electric System Operator (AESO), which manages and operates the province's power grid,is expected to announce the results of a bidding process to create "5,000 MW of renewable electricity generation capacity connected to the Alberta grid between now and 2030."

Pushing prices down

The power will also come from wind, althoughprices will be more than doublethe record pricesset in Mexico. But for the first time in Canada, the Alberta agency will use the same market auction system for creating green power that has helped push electricity prices down in Mexico and other places around the world.

Some experts say the prices setin the Alberta bidding process could be as low as 5cents per kilowatt hour. That'sin the same rangeas the gold standard combined cycle natural gas power plant andjust thebeginning of a process that will use market forces to stimulate new efficiencies in Canada's electricitymarket as technology improves.

Cost overruns at two Canadian hydroelectric stations now under construction, B.C'scontroversial Site C and Newfoundland's expensive Muskrat Falls, have drawn attentionto an electricitysystem in transition.

Electricity pricing in most of the world remains complicated, but (allowing for myinevitable mistakes of over-simplification) the principlesare not.

No end user, even in Mexico or Chilewhere prices have hit record lows, gets to buy electricityfor less than2 cents perkilowatt hour.Nor will Albertans pay the lowest prices resulting from the new bidding process.

Instead, each new tranche of low-cost power is mixed into the basket of previously contracted electricity to make a composite price. Then,you at home pay that price, plus transmission fees and various other things tacked on to your bill.

Disruptive pricing

As market bidding structures expand beyond Alberta, the low bid prices will be crucialanddisruptivefor companies making the electricity.

"What you're starting to see is a willingness or at least desire in Ontario to switch to a more market-based system," says Sarah Petrevan, Ontario electricityspecialist with Vancouver based Clean Energy Canada.

Under the provincially owned and operated Ontario Hydro, low cost was often set aside in favour of other goals. For example, Petrevansays, when one includes start-up and decommissioning costs,nuclear power would be impossible to justify on a market-competitive basis.

A recent report declared that B.C.'s Site C would not be cheaper than greener alternatives except for the $2 billion kill fee required to stop the project.

Even Ontario's recent push toward green energy was not based on the lowest cost. Rather, it was an attempt to create a wind and solar industry during an industrial recession by offering high-priced long-term contracts.

In its first contracts, Ontario was offering 80 cents per kWh, a price high enough to make the University of Calgary's Blake Shaffer briefly consider coming to the province to get a piece of the action.

Shaffer cut his teeth in electricitytrading when BC Hydro started doing it in 1999, just before the California energy crisis. After seven years in B.C., Shaffer left to help setup the electricity trading desk at Lehman Brothers, and then Barclays in New York.

Now finishing a doctorate, he has a ringside seat to Alberta's new green power bidding system.

"I'm very curious to see what the price is in that auction," he says.

Out-competing coal and gas

Shaffer says that in order to be effectivein an integrated power network with backup systems like gas and hydro,intermittent power sources like wind only have to fall below the price of the cheapest alternative. Carbon pricing gives wind an even greater advantage over gas.

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But withMexico's under-two-cent power, even without the effects of carbon pricing,the argumentfrom the fossil fuel industry that green power cannot stand alone no longer holds water.

"It seems like at these prices, and that's what's really amazing about how low we're getting...is that, yeah, it can compete, eventhough battery technology is expensive these days," says Shaffer. "You can out-compete coal and natural gas at these levels."

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