Why is the city considering alternatives to owning/operating our electric generation assets?
As a municipality, the City of Medicine Hat has a commitment to stakeholders, including residents and taxpayers, to be prudent stewards of the public purse. It is imperative that we continually evaluate our risk tolerance and consider options around disposing of or acquiring assets for the benefit of our residents.
The power generation unit (GENCO) operates within a volatile commodity market, which is a high-risk endeavor, where more stable investments would protect against the uncertain market and environmental impacts facing the energy industry.
Are the electric generation assets profitable?
The assets remain profitable, averaging over $25 million in profit per year over the last decade, and the power plant workers have kept the assets in excellent shape. We expect that the business will remain profitable for years to come and our customer base is steady. We are currently in preliminary stages of building our next generation unit (Unit 17).
However, in a commodity-based market, profits and losses happen quickly, and the city must evaluate our risk tolerance on a consistent basis and be ready to act when economic advantages are evident.
What are the main challenges in operating the electricity generating assets?
Fluctuating revenues is the first challenge. Predicting future revenue, and thus budgeting accordingly, is difficult when commodity prices vary dramatically year over year. This is further complicated by the depletion of City-owned natural gas reserves. In decades past, Medicine Hat was insulated from some of the pricing swings by owning our own natural gas to fuel the plants. We have not produced enough gas for our plants for a long time. Currently, all of the fuel for the plants comes from other producers. Thus, we are exposed not only to pricing swings in the electricity market but also to fluctuations in the price of the natural gas that we must purchase.
What could we do with the proceeds of a sale or partnership?
The sale of any city assets holds potential of building a significant endowment for future generations, continuing the legacy of the Medicine Hat advantage. If the city were to sell the generation assets, we could put the proceeds in financial investments that will return money each year. Essentially, we would be converting our investment in electricity-generating assets into an investment in financial assets which will provide the City with more diversification and control of our overall securities. The economic return on these investments should be reasonably predictable, helping to make our budgeting more accurate and minimize economic instability to our City balance sheet.
How does the evolving industry impact this decision?
We also need to be aware of how quickly the energy landscape is transforming. We believe that natural gas-based generation will be crucial for decades to come, either as a primary source for electricity or as backup for renewable energy sources. Currently, in Canada, there is significant pressure to reduce carbon emissions and to move away from non-renewable energy sources. Technological advances with these renewable energy sources make the future of energy supply uncertain.
Larger companies that are solely focused on electrical generation can adapt their energy supply to meet these changes, but this is difficult for a small, geographically focused, generator like ourselves with limited financial resources. The City truly is a small player in this industry and is not well-positioned to advance with looming environmental and technological requirements.
We have gas - doesn't that matter?
Technological change has impacted our natural gas business significantly. For over 100 years, we have profited from our gas fields, but as a non-renewable resource, the gas fields are depleting, making the remaining natural gas more expensive to produce. For most of our fields, it costs the city more to produce the natural gas than what we can sell it for. The price of natural gas has fallen significantly, due, in large part, to the discovery of massive new natural gas fields in northwestern Alberta and northeastern British Columbia. These fields utilize new techniques for producing vast quantities of natural gas which can be produced at a much lower cost than our legacy gas. As a result, the value of our legacy gas has dropped significantly. The City has diligently and successfully mitigated much of the potential loss but the economic damage was significant. It is hard to sell assets when profits are good but it is even more difficult to sell when they are not so profitable.
Is it possible to purchase our natural gas from a cheaper source and still run our own power plant?
The city currently does buy natural gas from others and pays the daily market rate for that gas. Long-term secure contracts would generally be more expensive and result in higher electricity prices. One option is to own the upstream gas versus purchase. The city explored southern Alberta for over three years for new fields with limited success. No new significant gas fields were found to be viable.
Where will my electricity bill come from?
As we are not considering selling our distribution system all customer billing and questions would still be administered by the City of Medicine Hat.
How much will electricity cost?
The electricity market is completely de-regulated in Alberta and, as such, is highly competitive. Any future supplier of electricity to our City would have to participate ardently in that market and we would only enter into a long-term arrangement that would deliver competitive rates to our customers. The city currently charges our customers the average blended rate across Alberta, so in fact, customers are already paying competitive pricing. Additionally, customers in Medicine Hat do not have to pay some of the electricity charges that other Albertans on the provincial-wide grid must. We believe that our Medicine Hat exemption to those charges can be maintained through this process.
What will happen to the jobs/workers at the Power Plant?
The market for electrical workers is strong and our workers know our plant well. It would be highly unlikely that a new buyer would look to replace the current workforce. It would be expected that the workforce would go to work for the new owners and perhaps benefit from incentives that private companies can offer that municipalities cannot.
Who will we sell to?
As you might expect, due to confidentiality reasons, we cannot identify who we might be considering as new owners. We can assure our residents that we value our strong reputation in this business and we would only sell to those who share our principles as it pertains to people, safety and the environment.
Why don’t we build renewable energy facilities in Medicine Hat?
Solar fields require large surface areas and wind turbines require significant setbacks, which make them difficult to place within the City limits. In addition, although costs are coming down, renewables are still expensive. Under our exemption, we must have sufficient power available at all times for our residents, so we would require natural gas powered generation to back up the renewables which would add to our electricity costs.
Is hydroelectric power an option?
Hydroelectric energy is an important source of renewable energy. Material energy supply for the City of Medicine Hat, however, would have to come from outside the city due to our lack of geographic space for a dam and associated reservoir.
What about Hydrothermal (hot water for steam, and heating from the ground)?
Unfortunately, the water that lies deep below our City is not hot enough for steam-based electrical generation. Small scale residential geothermal heating may be possible but currently it has limited application.
Has nuclear power generation been considered?
Nuclear power is currently not being considered by the City of Medicine Hat given its very long lead time development and high cost.
Will the City retain the part 8 exemption in the Utilities Act?
Yes, it is our understanding that the exemption can be preserved in alternative ownership outcomes. The City of Medicine Hat now has the ability to import power from the regional grid which provides amalgamated sources of electricity, ensuring emergency backup.