Energy economist challenges fluctuating energy prices

“They’ve created the most volatile market than anywhere in the planet.” David Gray, energy economist

Wholesale buyers of electricity, generally commercial and light industries, have to deal with hourly price changes and one energy economist wants that to change.

David Gray, president of Gray Energy Economics questioned why six coal-fired generating stations, owned by TransCanada, reduced their output one third July 28. Gray stated that prices spiked to 90 cents per kilowatt hour (kWh); this would cost an average person approximately seven dollars to wash and dry one load of laundry.

Changes in the wholesale prices are readily available on the Alberta Electric System Operator’s (AESO) website at but in an effort to educate buyers, Gray has designed a smartphone app called The Alberta Power Price App that provides this data in an easy to read format.

When it comes to supply and demand, users generally pay more for a product.

“One hour at one dollar per kWh is $10.5 million,” states Gray.

John Esaiw, director of market analytics and forecasting with AESO says consumers need to look at the average prices over the course of a year rather than one hour of a day to see what the prices look like. He suggests if wholesale customers don’t hedge electricity costs, they will be exposed to fluctuations in the market.

“It’s absolutely a function of supply and demand,” said Esaiw.

AESO looks at the long-term impacts rather than daily changes, he added.

He suggests a deregulated market puts the responsibility of power generation in the hands of generators rather than taxpayers. “Ultimately we’re just paying for what we use.”

Gray says for his part that generators take advantage of economic withholding rules defined by the Market Surveillance Administrator (MSA), which monitors the market to ensure that prices are fair and balanced.

What is economic withholding?

Generators are allowed to increase prices during hourly periods when there is a tight supply or increased demand for power. The MSA defined some of these practices in 2011 and gives the generators an opportunity to raise prices to ensure profitability.

Matt Ayres, deputy administrator and chief economist with the MSA says economic withholding allows a company to be profitable during peak times but consumers are still in a competitive market.

“A competitive market is allowing private investors to come in…Because they can make a profit,” he explained.

He says it is difficult to store energy so when customers use very little such as at 2 a.m., then companies sometimes offer power at rates that barely pay for the its distribution.

Gray disagrees with economic withholding rules. “This is absolutely legal and completely disgusting.”

He suggests one way to tackle the high costs is by conserving as much energy as possible during these peak times. With economic withholding, the wholesale market has become volatile and fluctuates on an hourly basis, which makes it difficult for customers to plan their future contracts.

Gray used the analogy of filling up a car at a gas station; at one time fuel may be a low rate and at another the price may be 10 times what was paid on a previous day. Gray says this is what commercial and light industrial businesses face on a daily basis.

“They’ve created the most volatile market than anywhere in the planet,” he stated.

However, with electricity costs customers won’t get their bill until the end of the month. He feels the principles of supply and demand are not a part of the equation.

“The market is designed for competition between suppliers but demand just isn’t invited for the party,” stated Gray.

Demand response – which provides customers with the opportunity to reduce or shift their use on time-based rates – must be part of how Alberta’s energy market operates to benefit consumers, he added.

Some information on economic withholding was garnered from electricity consultant Sheldon Fulton from a document called Alberta Electricity Market Structure Assessment.