Earlier this spring, TransCanada Corp. announced that it would cancel its power purchase arrangements (“PPAs”) with certain coal-fired plants in Alberta. The company’s stated reason for the termination was increased costs associated with CO2 emissions over the life of the PPAs as a result of recent amendments to the Specified Gas Emitter Regulation (“SGER”). TransCanada was the third company in Alberta to make the move to cancel PPAs with coal-fired power plants in recent months after Enmax and AltaGas Ltd. The PPAs allow a party to terminate the arrangement where a change in provincial law makes the arrangement unprofitable. In this case, the parties cited the amendments to the SGER as the triggering change in provincial law.
Amendments to Specified Gas Emitter Regulation
In 2015, the Alberta government announced amendments to the SGER which included stricter emission reduction limits and higher carbon pricing. Under the SGER, any facility that annually emits more than 100,000 tonnes of CO2, including carbon-fired power generators, must reduce their emissions intensity by a prescribed amount. There are four ways for companies to comply:
- Make improvements to their operations to cut emissions;
- Purchase emissions performance credits from other regulated facilities that have reduced emissions below their prescribed reduction amount;
- Purchase an Alberta-based carbon offset credit; or
- Contribute to the Climate Change and Emissions Management Fund (the “Fund”).
Companies electing the fourth option pay a charge for emissions over their CO2 target on a per tonne basis. In 2015, the Alberta government introduced increased emission intensity reductions and carbon pricing to be implemented over a two-year period. The emission intensity reduction level would increase from 12% in 2014 of a facility’s baseline emissions to 15% by 2015 to 20% by 2017. Similarly, the carbon pricing for contributions to the Fund would increase from $15/tonne of CO2 emissions over a facility’s reduction target in 2015 to $20/tonne in 2017 and $30/tonne in 2018.
Power Purchase Arrangements and the Balancing Pool
Professor Nigel Bankes, Chair of Natural Resources Law at the University of Calgary Faculty of Law, recently published an analysis of the legal issues raised by the decision of these companies to terminate their interests under the PPAs in an ABlawg.com post titled The Termination of Power Purchase Arrangements in Alberta: What is the Legal Position and What are the Implications of Termination? In his post, Professor Bankes provides a helpful summary of the role of PPAs in Alberta’s electricity system and their relationship to the province’s Balancing Pool:
PPAs were developed as part of the Province’s strategy to introduce competition into the generation sector of the electricity industry. Prior to 1995 the electricity sector in Alberta was subject to cost-based utility regulation. Coal generation was the dominant form of generation. Facilities were owned by one of the three main utilities – Edmonton Power (subsequently EPCOR and then publicly traded as Capital Power), Alberta Power (subsequently ATCO) or TransAlta (TAU). The generating facilities were part of the rate base and the cost of coal was recovered as an operating cost. Cost-based rates were approved by the Public Utilities Board (now the Alberta Utilities Commission (AUC)): see for example, Alberta Power Limited et al v Alberta Public Utilities Board (1990), 72 Alta LR (2d) 269 (CA).
A market dominated by three incumbent generators is not a competitive market (and will not attract new entrants because new entrants will worry about the market power that the incumbents may exercise). Hence, the province needed to come up with a strategy for limiting the market power of the incumbents…[T]he province opted for “virtual divestiture” through the mechanism of the PPAs…
A PPA separates two things: (1) ownership and operation of the plant, and (2) the right to bid generation from the plant into the power pool (the market for generation). The incumbents continue to own and operate the facility but the buyer under the PPA decides at what price to bid generation into the pool…
PPAs were auctioned in what turned out to be a series of rounds. The theory was that the auction price should serve to capture at least some of the upside potential that the buyers might anticipate earning on the difference between payments to the owner and the pool price. As it happened the first sale was far from successful. Of the 12 PPAs offered for sale in that auction only 8 were sold and only $1.1 billion received (for 4,249 MW of approximately 6,400 MW). The unsold PPAs were assigned to the Balancing Pool.
The Balancing Pool was established in 1999 to manage the transition to competition in Alberta’s electricity industry. Professor Bankes describes the Balancing Pool as being “…responsible for exercising the buyer’s rights under a PPA where those rights have come into the hands of the power Pool either because nobody bid to acquire the PPA at auction, or because the buyer has terminated the PPA”.
Under section 96(3) of the Electric Utilities Act, a PPA that is terminated is deemed to have been sold to the Balancing Pool and the Balancing Pool becomes responsible for offering the capacity into the market and in making payments under the PPA to the generator. The Balancing Pool has the option of either continuing to hold the PPA, reselling it or terminating it by paying the generator an amount equal to the net book value of the generating unit.
Termination of the PPAs
Given the foregoing, the PPAs cancelled by TransCanada, Enmax and AltaGas would normally revert to the Balancing Pool. Initially, it appeared that the Balancing Pool would accept the transfer of a cancelled PPA on these terms. On February 24, 2016, having received the first notice of termination from Enmax, the Balancing Pool issued a press release stating that it confirmed Enmax’s right to terminate its PPA and that the Balancing Pool would now step into Enmax’s shoes as a buyer under the PPA. However, one month later on March 21, 2016, the Balancing Pool issued a press releasestating that having also received the notices of termination from TransCanada and AltaGas, the Balancing Pool would conduct an investigation to verify the reason for termination of the PPAs and assess and analyze the potential impacts.
In the meantime, on March 14, 2016, Premier Notley announced the government was reviewing Enmax’s termination of its PPA and whether or not it met the criteria necessary to revoke the PPA. Premier Notley’s recent comments to the press suggest the government intends to challenge any move by Enmax, TransCanada and AltaGas to terminate the PPAs. Premier Notley stated that the companies should not be able to terminate the PPAs on the basis that there was a change in law that made them unprofitable because the law hasn’t changed yet. The Premier noted that the largerClimate Leadership Plan had not yet come into effect. Furthermore, Premier Notley questioned whether or not the SGER amendments constituted a change in provincial law sufficient to trigger the termination provision. Premier Notley stated that the initial SGER legislation was enacted in 2009 and put a $15 per tonne levy on excess CO2 emissions. All that her government has done, Premier Notley stated, was to raise the levy to $20 as of January 1, 2016.
While the government initially stated that the transfer of the cancelled PPAs to the Balancing Pool would have minimal impact to consumers, other commentators suggest that these PPAs will erode the Balancing Pool’s overall assets by approximately $1 billion and that consumers may see their electricity bills increase as a result.
Professor Bankes notes that third parties may also enter into the fray. Professor Bankes states that if the parties to the PPA (including the Balancing Pool) do not contest the validity of these companies’ decision to terminate the PPAs, the decision of the Balancing Pool to accept the validity of a buyer’s decision to terminate is a statutory decision which may be subject to a judicial review application by an interested third party such as a consumer group or the Utilities Consumer Advocate.
The Balancing Pool has not announced when it expects to conclude its investigation. Given the comments of the Premier and positions of the companies, it seems that whatever the decision of the Balancing Pool, this matter may well find its way to the courts.