Grids with gas power are vulnerable to fuel price swings, but market design and clean power can insulate consumers from volatile electricity prices.
Key insights
- Gas shocks affect electricity price through system design and market structure. Electricity prices are shaped by three forces:
- Generation mix determines whether customers are exposed to (more volatile) fossil fuel prices;
- Spiking natural gas prices can create price shocks; and
- Market structure determines whether fuel shocks reach consumers immediately or over time.
- Electrification amplifies exposure and volatility where gas sets the price. As electricity demand rises, systems rely more on the most expensive power source needed to meet demand, which is often natural gas. When gas prices spike, electricity prices in systems that rely on gas become more volatile as well.
- Price stability depends on relying less on gas setting electricity prices. Electricity systems that rely on gas to set prices at the margin can increase battery storage, demand management, and clean firm supply to reduce exposure to price volatility.
Electricity demand is set to increase across the country. According to the Canada Energy Regulator (CER), electricity demand could grow by between roughly 30 per cent and double today’s levels by 2050 depending on the scenario. Increases would be driven by new demand from electric vehicles (EVs), building electrification, industry growth, and new data centre load. Much of that electrification will be critical for meeting Canada’s decarbonization goals. But growth in power demand also risks exposing the volatility built into some of Canada’s electricity systems.
Today, the level and stability of electricity prices can vary widely across Canada.
We conducted a difference-in-difference regression analysis looking at three Canadian provinces for the period of 2012 to 2025 to understand what shapes the level and stability of electricity prices. We found three factors driving these outcomes. First, a province’s electricity generation mix determines its exposure to fossil fuel prices. Second, gas prices can create price volatility in electricity systems that are exposed to these fluctuations. And finally, electricity market structures help determine how those prices reach households paying for power.
This week’s Insight explores these three compounding forces and focuses on how systems in Quebec, Alberta, and Nova Scotia behave differently.
The mix of electricity sources determines exposure to fossil fuel prices
Electricity systems with higher fossil fuel shares are exposed to swings in prices like the one spurred by the closing of the Strait of Hormuz. Instead, provinces with cleaner generation mixes pay less in fuel costs. For example, Quebec produces more than 95 per cent of its electricity from hydroelectric dams built over decades. Since the dams have no fuel costs to cover, rate increases move slowly and predictably to pay off capital costs over time. Between 2012 to 2025, Quebec’s residential rate moved just roughly 1 per cent per year. With minimal fossil generation, these systems are largely insulated from fuel commodity price swings.
Gas prices are vulnerable to energy shocks
By contrast, Alberta generated between 60 per cent and 90 per cent of its electricity from fossil fuels between 2012 and 2025. As shown in Figure 1, Alberta’s electricity rates behaved very similarly to the price of gas. When gas prices surged in 2022 following Russia’s invasion of Ukraine, Alberta’s pool price responded within weeks. By 2023, residential rates had hit nearly 30 cents per kWh, then declined from 2024 onwards.
Policy responses, such as Alberta’s arrangement of the ‘Rate of Last Resort’, aim to protect consumers from volatile electricity pricing. But they do not change the underlying exposure.
Figure 1
Electricity market structure can smooth out fossil fuel price shocks
While more than half of Nova Scotia’s electricity comes from fossil fuel generation, the impact of gas price volatility on residential electricity prices were dampened by market structure. As a result, Nova Scotia Power did not immediately pass on 2022 fuel costs to customers. Instead, the utility absorbed those costs over time and was still recovering elevated fuel costs from the 2019–2023 period through approved rate increases in 2025.
Market structure in this case dampened the spike in electricity prices from gas price volatility, but it can’t protect households from eventually paying back elevated fuel costs.
Relying on gas power presents risks for electrification
As demand rises in the future—from EVs, heat pumps, and industry—systems rely more often on their marginal source of supply to set the price of electricity. In many provinces, that source remains natural gas. In systems where gas sets the price and costs are passed through quickly, higher demand will mean higher spikes in both average prices and volatility. In systems where costs are regulated and recovered over time, the same pressures will show up as gradual, lagged increases.
Clean Electricity Regulations + investment incentives can protect households
Investing in clean electricity lessens the rate of exposure to fuel price shocks, and increases electricity predictability. If systems invest in measures that help shave off peaks and their dependence on gas generation and back-up through further building out their non-emitting electricity generation, storage, and implementing demand management measures. The Clean Electricity Regulations, coupled with investment incentives, can help align Canada to a cleaner grid while shielding household electricity bills from future fuel price shocks.
For replication and transparency, the econometric code and panel data are provided here.
Arthur Zhang is a Senior Research Associate at the Canadian Climate Institute.