Trader's Insight - Link Energy

Trader’s Insight

Second Quarter 2021

The Alberta Electric System Operator (AESO) power pool pricing has changed materially in 2021. These changes are driven by:

  • Carbon pricing
  • Increased renewable generation without efficient battery storage
  • Demand returning towards normal

The Alberta Electric System Operator (AESO) just celebrated its 20 year anniversary but is now going through an evolutionary phase unlike anything seen in its history. We expect higher and more volatile electricity prices in Alberta over the next several years. Market price spikes were historically driven by either extreme weather events (very hot or very cold) or a simultaneous combination of all of these three factors; 1. warmer/colder than usual, 2. planned/unplanned outages, and
3. renewable intermittence. As of 2021, that has changed to simply needing extreme weather or two of those three factors previously listed. The main drivers of this change are carbon pricing, increased renewable generation without efficient battery storage, and demand returning towards normal.

Carbon Pricing

Carbon pricing has caused two market distortions. First, it has effectively raised the AESO pool price floor as cheap, baseload coal facilities are no longer as cheap as they used to be due to the high cost of their carbon footprint. Second, baseload coal facilities are being aggressively taken offline either permanently or being retrofit to be able to use natural gas as a fuel source, which is equally predictable but is less carbon-intensive. These retrofits will only re-enter the market in the years ahead. In the meantime, we have removed a low-cost and highly predictable source of energy.


Increased Renewable Generation Without Efficient Battery Storage

Wind and solar energy continue to come online at a rapid pace as they make up more of the generation stack. Wind and solar have virtually no carbon footprint themselves, but they are prone to renewable intermittence. This means that it is a lot harder to predict their output as the sun and the wind are subject to rapid changes in their condition (clouds, wind changing direction, etc.), which adds increased volatility to the generation stack. It is also impossible to schedule their production, so they are produced regardless if they are needed at that time or not (lots of wind in the middle of the night for example). Efficient battery storage would help to solve this intermittence problem but the current cost is prohibitive. Therefore, in the short term renewable intermittence will continue to contribute to wholesale market volatility.

Demand Normalcy

COVID decreased demand and it is now returning to normal. With demand low, the effects of carbon pricing and renewable generation were not felt as much as they would have been in normal conditions. As of 2021, we have seen Alberta’s demand return towards normal and expect that disruptions on the supply side will have a greater impact on price as a result.


Looking Forward

In conclusion, risk-averse end-users currently on or contemplating going on a variable rate power product should be reticent in doing so as the market has fundamentally changed recently. They may be better placed by locking in a fixed-price product to avoid experiencing volatile invoices. The old days of riding a few small spikes during the summer heatwave and a cold week or two in winter made sense if you could stomach the ride and the vast majority of the balance of the year was a low price and low volatility period. However, due to a combination of a carbon tax, coal baseload retirement, more wind and solar coming online without cost-effective batteries, and consumption returning to normal high and volatile prices appear to be here to stay.


In 2020 (chart 1 below in orange), material price spikes were almost exclusively extreme weather-driven. Compare that with the reality in 2021 (chart 1 below in blue) where we see normal weather and yet prices are spiking more often due to outages and renewable intermittence.

2020 vs. 2021 Pricing Spike (Jan-Apr)

Looking even further back from 2017 to 2020, we see similar trends with most price spikes caused by extreme weather. Those simpler and lower cost times (chart 2 below) are now in the past as there can be pool price spikes with completely average weather as long as there are enough planned/unplanned outages and a sudden drop in renewable generation.

2017-2021 Pool Prices YTD

Moving forward, expect the higher priced floor (carbon tax) to combine with more frequent price spikes to create higher overall sustained pool prices for at least the next year or two if not much longer (chart 3 below).

2021-2025 Pricing Forecast

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