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In Like a Lamb Out Like a Lion – 2017 YTD Electricity Market Update

Electricity Pylon power line transmission tower at sunset

Two weeks ago, my colleague Natalie Manzarpour and I presented our Q1 Market Update Webinar. We discussed how electricity markets have been impacted by new factors affecting supply, and in turn have resulted in price spikes, volatility and increases year over year.

A warm winter this year led to a decrease in overall electricity demand for the first quarter of 2017 compared to the same time period in 2016. Prices, however, did not follow the trend. Hourly Ontario Electricity Prices (HOEPs) for winter 2017 were more than double the benchmark from 2016, despite the lower overall demand.

So, what has been impacting pricing in Ontario? Why, with decreasing demand, did we see increasing prices and amplified volatility?

Let’s take a look at the key factors rocking the electricity price boat so far in 2017.

1. Focus On Supply-Side Changes

Electricity prices, like any commodity, are impacted by factors affecting supply and demand. So, with demand down in 2017, we need to take a closer look at supply.

First, a quick primer. Our generation stack is divided into three tranches: baseload, peak and intermittent generation. The first source of generation to be called on is baseload. Baseload generation provides the basic level of generation needed in Ontario to keep the lights on. It’s inexpensive, reliable, and runs 24/7. Baseload generation in Ontario is primarily provided by nuclear and hydroelectric sources.

The second is peak generation, which is called on to meet electricity needs during higher demand times. Winter and summer days, when heating and cooling drive electricity demand, are prime examples of this increased need for generation. In Ontario, our primary source of peak generation is provided by natural gas generators.

Finally, intermittent generation is provided by generators that cannot be relied on to produce energy on an as-needed basis, but will provide electricity to the grid when they are able. Wind and solar are two forms of intermittent generation we have seen increase in Ontario over the years, however they only generate electricity when the wind is blowing or the sun is shining.

This year, we have seen a decrease in baseload generation due to the Darlington refurbishment project which began in late 2016. We have also seen a decrease in natural gas generation resulting from the cap and trade carbon tax which came into effect in January 2017. There was a net increase in wind generation, but not enough to meet the overall reduction by the more stable, reliable forms of generation.

2. More Variable Generation = More Price Volatility

The decrease in baseload generation and increased reliance on intermittent, unreliable wind generation equals increased variability in the HOEP, with price spikes reaching the market ceiling of 200 cents/kWh several times through the first quarter of 2017.

The trouble with variable generation is that, while wind generation will be strong when the wind blows, it is highly unpredictable and impossible to forecast. From day to day, and even from hour to hour, wind output can change dramatically.

The overall impact of increased intermittent generation on HOEP year over year has been dramatic – we experienced more price spikes, and more intense price spikes in 2017 than we did in 2016.

Price volatility has also been more pronounced than would be expected in the shoulder months, March and April, which tend to be low-demand, low-priced months. However, an increase in variable, unpredictable wind generation has resulted in an atypical pattern of price spikes and dips.

Overall, these patterns have contributed to higher prices on the Ontario market.

3. Higher Natural Gas Prices = Higher HOEP

A generator’s fuel cost is going to have a direct impact on the cost for that supplier to generate electricity, leading to a higher price of electricity. Demand for natural gas as a fuel has been increasing, and this higher demand has pushed fuel prices up year over year.

Another factor to consider in Ontario is the impact of the Cap and Trade carbon tax on electricity generators. Cap and Trade has further increased fuel prices as of January 2017.

Overall, supply side changes have increased prices and volatility in the Ontario market.  These are factors we see continuing to impact electricity prices through summer 2017.

Want to learn more?

For the whole story, as well as a view of additional drivers impacting pricing in the future, watch our recorded webinar, or download our Spring 2017 Market Insights Report.

Natalie and I will be continuing our updates with monthly podcasts beginning the first week in May.  Sign up for our newsletter today to get the podcast and more!