Canada Energy Market Report - August 2018

Electricity: There’s nothing like a little summertime heat to bring out the character in an electricity market - both Alberta and Ontario have experienced increases in the market price due to hot temperatures. Ontario is somewhat of a unique market due to the above-market price guarantees that virtually all producers have. Most of the big, baseload generators (nuclear and hydro) have their regulated rate locked in for their production, so the hourly market has less interest for them than a gas-fired generator.

The hourly market for power is operated as a ranked-bid system, with the bids ranked from the most economic to least. The last bid accepted becomes the hourly prices for the entire stack - nuclear, gas, hydro et al. The least economic bids come from the peaking types of generation where their willingness to run depends on their fuel prices, which is typically natural gas. When a lot of power is needed, such as during a heat wave or intense cold snap, the more expensive gas bids are acceptable and therefore inflate the hourly market. With that said, gas is dispatched slightly less than 10% of the time, so we advise clients not to worry about hourly market volatility. Electricity hedges in this market are almost never worth the risk premium.

Natural Gas: AECO market is down significantly over the last month on the prompt contract, which has also weighed heavily on the 2019 curve. Summer 2019 has pulled back quite a bit from one month ago - down almost 10%. Backwardation continues to be a prominent feature of the market with 2020 and 2021 trading at discounts relative to 2019. No news yet on the Final Investment Decision for the BC LNG project in Kitimat but the sentiment seems optimistic.

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