Varcoe: Cold snap welcomed by power and gas producers as Albertans await relief

Sun sets in Calgary as the city’s under an extreme cold warning on Monday, January 13, 2020. Azin Ghaffari/Postmedia

A nasty cold snap will leave many Albertans marooned indoors for the week, but it has already provided a spark to two key provincial commodities: electricity and natural gas.

Prices for both commodities have risen as the temperature has fallen, giving the power and natural gas markets a quick jolt early in the year.

On Monday evening, wholesale spot prices for electricity on the Alberta Power Pool soared to $999 per megawatt-hour (MWh) as demand climbed and furnaces kicked into high gear.

“If you are in Alberta, every year or two you are going to hit this streak of really cold weather for a week or two,” said Brian Vaasjo, CEO of Capital Power Corp., one of the province’s largest generators.

“Part of our expectations, from a power company perspective, is that we will hit those periods of high prices. And during the other parts of the year, you end up with significantly lower prices.”

For hard-hit natural gas markets, AECO spot prices in Alberta rose 14 cents Monday to close at $2.66 per gigajoule, and have increased from around $2 last week.

“The prices now in the cold period are quite good,” said Phil Hodge, CEO of Calgary-based producer Pine Cliff Energy.

“No one is allowed to complain about the cold weather in our house.”

The mercury fell below -25 C in Calgary on Sunday — and sank to a bone-chilling -41 in the northern town of Manning — as a brutal weather system settled over the province.

With temperatures in Calgary and the province expected to stay below -30 for part of the week, power consumption, including natural gas-fired generation, will be in higher demand.

Due to the frigid weather and rising consumption, the Alberta Electric System Operator issued a Level 2 energy emergency alert on Monday evening, which occurs when the province experiences tighter supply conditions.

The alert means the AESO is “able to meet all power demands across the province, but our system controllers are moving through processes and protocols to balance supply and demand,” says agency spokeswoman Tara de Weerd. 


Steam rises from the Bow River and downtown Calgary buildings on a -25C morning, Monday, January 13, 2020. Gavin Young/Postmedia

Duane Reid-Carlson, chief executive of electricity consultancy EDC Associates, expects Alberta will set peak demand records during the week, eclipsing the all-time high of 11,697 MW used in January 2018. (The province came close to the mark early Monday evening.)

Rising demand means wholesale power prices will likely remain high during the brutally cold weather.

“It should be short term and transitory in nature, these price spikes,” he added.

On Monday, Alberta Power Pool prices surged above $900 per MWh for several hours during the day before hitting the maximum wholesale price cap of $999 in the evening.

“As for the rest of the week, we expect there to continue to be some volatility experienced in the wholesale power market as the province moves through the cold snap,” de Weerd said in a statement earlier on Monday.

Last year, the average pool price was $55 per MWh, and even with the cold weather this month, it has averaged $51 this year, according to AESO.

For Alberta’s energy-only electricity market, short-term hikes in wholesale prices aren’t unusual when the temperature dips below -25.

But industry experts say these high-priced events are critical periods when generators can recover not only their variable costs but other expenses.

“In these periods of scarcity is when firms recover their fixed costs,” said University of Calgary economist Blake Shaffer.

“High prices are what we need in an energy-only market to drive investment.”

Shaffer said the sudden price spikes shouldn’t be a concern for consumers as they aren’t directly paying the hourly wholesale prices — particularly for those Albertans on fixed-rate contracts — although “if it were to continue and continue, those floating rates rise” for consumers.

Reid-Carlson expects the wholesale prices to average around $56 per MWh in 2020. He anticipates some demand growth because of improved economic activity and notes a few coal-fired generating units have been mothballed, partially offset by new renewable energy projects coming online this year.

On the natural gas front, prices have been faring better in Alberta since the fall.


Giant steam generators at the Cenovus SAGD oilsands facility near Conklin.

Ryan Jackson / Postmedia

Stifel FirstEnergy put out a new report that says “AECO prices are poised to be materially stronger than the last couple of years” at $2 per thousand cubic feet in 2020.

While U.S. gas prices have weakened this winter from a year ago, Alberta prices have seen a recovery, aided by an agreement last fall between gas producers, TC Energy and the province to temporarily reverse changes blamed for making AECO prices more volatile during periods of summer maintenance work.

Stifel FirstEnergy noted domestic supply is flat to down in Western Canada, and it expects the “overall supply picture to be largely stagnant over last year.”

“AECO has kind of recovered, (a) phoenix rising from the ashes. (It) will be stronger, more so when it’s very cold,” said analyst Robert Fitzmartyn of Stifel FirstEnergy.

“The question will be, how fast will producers respond … CEOs running the companies are probably conditioned by investors that they do not want to see more supply, (or) just growth for growth’s sake.”

Hodge agrees most gas producers will need to see higher prices for a longer period of time in 2020 before spending additional money on increased drilling programs.

Demand for natural gas is also expected to rise in Alberta with more consumption in the petrochemical sector and more coal-to-gas switching for electricity generation.

“We are cautiously optimistic that things are getting better and clearly in the short term, they are,” Hodge added.

“I am very much welcoming this temperature. This is a good thing for the natural gas industry.”

Chris Varcoe is a Calgary Herald columnist.

cvarcoe@postmedia.com