Mistral Energy: A Tale of Two Power Markets

Mistral Energy is looking to build a $40 million power plant in close proximity to both the Alberta and Saskatchewan power markets. The Alberta market is deregulated and the price fluctuates hourly with supply and demand. The Saskatchewan market, on the other hand, is a regulated monopoly. Mistral Energy needs to understand into which market they should sell their power. Because the prices available in Saskatchewan are unknown, Mistral is particularly interested in what power price would make the company indifferent between markets. Additionally, because the power plant is roughly equidistant between Alberta and Saskatchewan transmission lines, it might be possible to choose between markets on an hourly basis. Mistral is interested in investigating the value of this inter-market connection. Unfortunately, for technical reasons, this switch is not instantaneous, and the plant must be shut down for 30 minutes before supplying power into the other market. Another challenge is predicting when the power price in Alberta will be greater than the contract price available in Saskatchewan. Because the future Alberta price is unknown and highly variable, the risk exists that high prices might not be sustained long enough for Mistral to realize any value.