September 2022 Ontario Electricity Market Update: The Wholesale Market Guns of August

September 30, 2022
Brady Yauch

It’s been a wild ride for electricity markets in the past two months, particularly in August. Electricity prices in jurisdictions across North America hit some of their highest levels in more than a decade. Meanwhile, natural gas markets continue to experience significant price and volume volatility in the wake of the Russian invasion of Ukraine in February 2022. While natural gas and other commodity markets are expected to stabilize in the next few years, electricity grids will continue to face large-scale upheaval due to a combination of decarbonization policies, electrification, and technological changes, among other factors.

In Ontario, the average wholesale electricity price (the Hourly Ontario Energy Price, or HOEP) was more than $80/MWh. The biggest driver for the increase was the spike in natural gas prices, which settled at more than $10/MMBtu – their highest level since 2006. Both figures are in nominal dollars and do not account for inflation-adjusted figures from the past. Given Ontario’s unique hybrid market design – and even more unique cost allocation policy between Class A and Class B customers – the high HOEP resulted in one of the lowest Global Adjustment (GA) charges since the Industrial Conservation Initiative (ICI) was introduced in 2011. In August, the Class B GA rate came in at just $4.99/MWh. The last time the GA was that low was in early 2014 when the polar vortex pushed gas prices higher across the northeast and resulted in high electricity prices across the winter months. In Ontario, higher prices in the wholesale market result in lower fixed costs recovered through the GA.

Alberta also experienced its highest August electricity price since it launched its wholesale market in 2000. But the reason for higher electricity prices in Alberta was very different than in Ontario. While in Ontario the driver was largely higher natural gas prices across the Northeast(and the globe), in Alberta gas prices were moderate and offer behaviour (and outages) by market participants was largely responsible for the price increase. Unlike most other wholesale markets, Alberta allows for what is known as economic withholding. This allows market participants to offer energy far above their marginal cost – in stark contrast to most markets which actively implement market power mitigation schemes that will reduce energy offers to marginal cost when the system operator (or its surveillance arm) deems a market participant to have market power. One easy measure to analyze high prices in Alberta is to look at the market-based “heat rate”, which is a measure of the efficiency of burning fuel to create power. A typical Combined Cycle Gas Turbine (CCGT) will have a heat rate of around 7 GJ/MWh. The current market heat rate in Alberta is more than 36 GJ/MWh – well above what it has been over the last six years. The high rate means most market participants are generating high levels of profits, given the spread between their marginal cost and market revenues.

Other wholesale markets are experiencing similarly high prices, largely as a result of high gas prices. Across the NYISO, ISO-NE, PJM and MISO wholesale markets – which covers essentially the eastern half of the United States – were greater than $100/MWh, marking their highest levels in more than a decade. With natural gas prices expected to remain elevated throughout the winter, wholesale prices are expected to remain elevated for at least the next six months.