Short-term Avoided Costs (Quebec)

Quebec’s regulatory system for electricity is unique and surprisingly complicated. The basic structure is easy to grasp:  A vertically integrated government-owned utility (Hydro-Québec) is organized through “functional separation” into distinct operating units, for Distribution, Transmission and Generation.  Distribution and Transmission are subject to regulation by the Régie de l’énergie, and Generation is not regulated.

When this regime was created in 2000, a legislated contract was established to ensure that Quebec consumers would continue to benefit from existing low-cost generation.  Under this “patrimonial contract”, HQ Distribution (HQD) is entitled to a large block of power and energy from HQ Generation (usually known as HQ Production, or HQP), at a fixed price of about 3¢/kWh.  Its additional needs must be purchased through competitive tenders, in which HQP can participate as well.

The patrimonial contract fixes not only the amount of energy made available to HQD (165 TWh/yr, after losses), but also the amount of power available at any one time.  Thus, for example, HQD is entitled during the year to take more than 34,000 MW for just two hours, to take between 33,000 and 34,000 MW for 8 hours, and so on, as seen in this  HQD Patrimonial Power graph.

There is no limitation on when during the year HQD can make use of each of these hourly allotments (referred to as “bâtonnets”, or sticks).  Because Quebec’s loads are very weather-dependent (and because the weather in December vary wildly from one year to another), the precise bâtonnet that will be applied to each hour can only be known with certainty when the year is over.

HQD goes to great lengths to ensure that it does not exceed its patrimonial allotments, and its main tools for doing this are a) by maintaining an ongoing estimate of which bâtonnets are likely to be applied to which hours, and b) by purchasing energy in short-term markets to reduce the amount of energy it takes from HQP in hours when there is a risk of exceeding its patrimonial allotment.

Prices in the short-term market vary widely — anywhere from 2¢/kWh or less during the night when the weather is mild, to 50¢/kWh or more during peak periods.