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If there is one word to describe the mood in Alberta’s energy investment sector these days, it’s this: uncertain. With the turmoil in global oil markets and the recent election of a green regime in Ottawa led by Prime Minister Justin Trudeau, Canada is preparing to turn sharply away from the fossil fuel-intensive economy that has long sustained Calgary, the powerhouse of the country’s oil industry. As a result, many investors are nervously scratching their heads, weighing the risks of traditional energy investment at a time when renewables are readying to take off. A sense of panic, from boardrooms to oil fields, is everywhere. But that panic is misplaced.

In my previous article, Extracting Value From Volatility, I made the case that volatile energy prices, contrary to popular wisdom, are in fact a tremendous investment opportunity that are already reaping financial rewards. These days, and looking further to the future, volatility will be the name of the game in Alberta. And as more renewable power generation enters the market, flexible capacity will become that much more crucial for energy utilities to increase profit. So how are investors to react in Calgary, and why the case for optimism?

For one, Canada’s political about-face—namely, Trudeau’s promise to lead Canada away from heavy carbon-emitting industries and more toward a clean energy future—should provide a new sense of financial certainty, because it signals that cleaner, renewable power is here to stay. As we’ve already seen, from Texas to California, the more renewable energy gets added to the power supply, the more volatile energy prices become. This may threaten the bottom line for power utilities still operating with inflexible capacity. But for investors who get out in front of the trend, profits are already rising because utilities with flexible power are able to catch the increasing price spikes that come with an increase in volatility.

It’s understandable why investors in Alberta are holding on to their cash, uncertain about where to commit it in an energy sector that is undergoing such sweeping transition. But in the same way that more renewables have already translated into lower electricity prices benefiting consumers, price volatility in the energy sector has also led to greater real-time profit for utilities—a fact that should lessen the sense of risk now being felt by investors. According to conventional wisdom, constructing traditional combined cycle gas turbine power plants can still compensate for the phase-out of old, coal-powered plants. But this is outdated thinking: what seemed like a smart investment in inflexible capacity six months is anything but smart today. Traditional gas plants simply aren’t a good investment, period.

On the other hand, as study after study shows, investments in flexible capacity are seizing on the momentum generated by renewable energy, and are paying off in big ways. For this reason, the sooner that investors in Alberta embrace the more volatile energy future, rather than fear it, the quicker they’ll be able to not only adapt—but to take the lead in shaping Canada’s energy future. Instead of fearing change, they must realize this is a unique moment of opportunity for them to profit from flexible capacity investment.

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   Matti Rautkivi

   Sales & Marketing Director,
   Wärtsilä Energy Solutions
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It’s going to be a volatile, bumpy ride for those invested in conventional gas-fired plants.

Case in point: EDC Associates, an independent energy-consulting firm based in Calgary, has expressed support for the Trudeau government’s position on reducing fossil fuel production while dramatically boosting renewables. Taking the long view of future market prices, EDC estimates that CO2 emissions in Canada will be reduced by 80% as renewables replace coal and oil. In the process, it’s going to be a volatile, bumpy ride for those invested in conventional gas-fired plants.

The EDC market price forecast has seen as industry standard in Alberta. It is reliable forecast which e.g. financing institutions use while making their lending decisions to the power sector. The graph below shows EDC’s long term price forecast for electricity and natural gas. There is a step-change in early 2020, when some of the existing coal plants will be closed. The step-change is an important element, but more interesting is the blue line – monthly price- , and not even the line but its shape. After 2020, the electricity price volatility increases, and the higher volatility levels will remain due to increasing amount of renewable generation. The investors with a plan to invest in traditional combined cycle gas turbine are not happy with this market outcome. An investor with a flexible capacity plan is more than happy with this outcome. With flexible plant more volatility means better return on investment.

In Wärtsilä, we wanted to analyze it: will more flexible plant bring better return on investment than highly efficient plant? We used the price EDC price forecast and dispatched both plants against the price curve. As there is multiple different hourly price patterns, we run our models for 100,000 times to get ‘probabilistic’ return on investment- distributions. The results are shown below. Surprisingly, the more flexible unit is able to provide better return on investment than the most efficient combine cycle. Or actually, this should not be a surprise, it is reality in the future power mix: Flexible generation will be rewarded.

In the not-so-distant past, investors knew what the price of electricity would be in the future, so they could rest assured that their profit margin would hold steady. In other words, a gas-fired plant could run as base load 24/7, and still be ‘guaranteed’ to make money. But that isn’t the case anymore, and flexibility is now required. In response, investors must shed their fears about whether or not flexibility will bring them financial rewards—because the numbers already prove that it does. Thus, what we’re talking about more than anything is a change of perspective: to understand that the climate-imperiled world we now live in offers different investment opportunities from the one we previously inhabited. And the key is not to panic.


Three things we know are true: coal is on its way out, renewables are on their way in, and gas will continue to be an essential part of the energy mix. But it’s the way that utilities choose to replace coal—with traditional, inflexible gas-fired plants that waste rather than conserve, or with efficient, flexible gas-fired plants that catch price spikes and enable investors to profit while the sun is shining and the wind is blowing. That future is already here, and so is the new era of energy volatility. But the solutions to that volatility have arrived as well. Investors in Alberta are perfectly poised to profit, if they can only see the market that is in front and not behind them. Those who seize on flexible capacity, and those who don’t, will determine who succeeds in the volatile years moving forward.




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