Trader’s Insight

In the third quarter, the Alberta power and natural gas market had remained quite volatile. We expect this ongoing volatility to continue to increase in the years ahead until economically viable battery storage emerges to help bring some stability to the market to offset the wind and solar impact on the electricity grid. For natural gas, the market also has seen prices rise and be increasingly volatile. We expect price increases to continue as well as demand in the next decades to come.

Alberta Power Market Update

The Alberta Electric System Operator (AESO) pool price has averaged ~$100/MWh YTD, which is a tremendous increase compared to recent years. The main drivers for this wholesale price environment are:

• Increased consumption as the Alberta economy stabilizes in a COVID world
• Significant ramp down in traditional coal-fired electricity generation facilities
• Retrofitting coal into gas fired generation facilities that have yet to come online
• Increase in solar and wind facilities that are much greener but not able to ramp up and down to match consumption the way a fuel-driven generators can
• No economically viable battery storage available to help buffer swings in solar and wind production

As a result, the AESO broker marks (forward strips of power that we use to hedge price volatility) continue to climb higher at a steady pace in the last six months (see chart below)

Forward prices show that the longer the term the lower the prices as the 1-5 year spread continues to widen from $10.66/MWh in March 2021 to $24.07/MWh in September 2021. The main driver for these spreads continuing to widen is that until there is an economically viable way to store electricity at scale (even for an hour or two) with longer duration storage even further away from becoming a reality (figure 2.11 below). Each additional solar or wind generation facility that comes online will only further increase the volatility in the AESO spot price. The market continues to expect battery storage to start emerging in the next few years but as the chart below (figure. 2.13) shows the lithium ion battery storage is still quite far away from being economically viable and stable.

We are still at least 5-10 years away from economically viable electricity storage at scale which leads me to believe that securing as long dated an electricity contract as possible is generally in consumers best interest as with each passing day that we don't see a technological breakthrough, we will continue to see the market push the stabilizing impact of economically efficient battery storage further into the future, raising prices across the board in the interim.

Alberta Natural Gas Market Update

The Alberta gas market (and the gas market generally) has seen some pretty dramatic price increases in the last six months that have flown a little under the radar. While the AESO power broker marks have risen 13-28% in the last six months depending on the term, the AECO gas marks have risen 26-42% depending on the term during the same period. The chart below shows that even six months ago the 1-5 year prices were concentrated in a fairly tight range, but since then a fairly pronounced contango pattern has emerged with 1 and 2 year prices exploding higher and 3-5 year prices rising but by a lesser degree.

If the chart below of NYMEX natural gas is looked at from a technical analysis perspective it shows a a very pronounced inverted head and shoulders pattern which broke higher in the last few days which is possibly a harbinger for a test of the 2014 polar vortex highs ($6.13/MMBTU) in the months ahead.

Overall, it’s expected that natural gas prices to continue to rise across the board as it's the only fossil fuel expected to see increased demand over the next 5-,10-, 20- and 30-year time horizon with coal demand dropping precipitously and oil dropping at a slightly lower rate. Natural gas has a much smaller carbon footprint than either of those two other commodities but maintains the same predictability that you don't get with solar and wind. At some point in the decades ahead a combination of solar/wind plus economically efficient battery storage will cause natural gas demand to drop off but that isn't currently expected until 2040-2050. In the meantime, gas is here to stay for not only electricity generation but also increasingly in other applications globally like transportation, manufacturing, buildings, cooking, etc.

In summary, barring a technological breakthrough or a repealing of assorted carbon tax measures, it’s expected that the increasing share of solar and wind to push AESO power prices higher in the months and years ahead. This will have an upward impact on natural gas prices which should continue to see increased demand, pushing prices higher as it continues to slowly replace all other more carbon intensive products like coal and oil across the industrial landscape.