Energy and environmental policy trends: The regulated rate option trap

With soaring electricity prices this winter, the Government of Alberta capped what customers on the regulated rate option (RRO) would pay. However, the policy design for the cap has some serious consequences.

Albertans have two main options when it comes to their electricity bills. Option 1: do nothing and you get the regulated rate option (RRO) from your default provider. The RRO price changes from month to month based on a regulated formula that moves with wholesale market prices. Option 2: sign up with a competitive retailer. These retailers can also offer floating rates but the more popular offering tends to be a fixed rate, where your price for every kilowatt-hour is set for the next 1 to 5 years.

Recently, fixed rates have been the clear winner. In 2022, a typical household choosing a fixed rate saved roughly $600 on their annual electricity bill. The figure below illustrates how consumers responded to fixed-rate savings, showing the share of households on the RRO falling to a record low 35%. Why would anyone remain, and what’s in store for them when it comes to repaying the cost of the recent price cap?