Last year’s election ushered in Alberta’s first regime change since 1971, resulting in a wave of policy changes involving renewable generation development, the phase-out of coal-fired generation, and emissions and carbon tax policy. This update captures certain key aspects to these changes and takes stock of things to come.
Alberta’s provincial government released its Climate Leadership Plan (Climate Plan) in November of 2015, as discussed in a previous post. This post focuses on the following key Climate Plan policy announcements affecting the power industry:
- incentives for renewable generation,
- phase-out of coal fired generation emissions by 2030,
- implementing an economy-wide carbon price, and
- implementing an energy efficiency program.
Renewable Electricity Program
The Alberta Electric System Operator (AESO) was mandated by the government to spearhead initiatives for development and implementation of the province’s Renewable Electricity Program (REP). The AESO undertook stakeholder consultation and developed draft recommendations for the REP in the form of a report delivered to the government on May 31, 2016. To date, the report is not public and it is unclear whether the report will be released in its entirety, but aspects of its contents appear to have been included in a recent press release.
In September, the province announced a firm target that 30% of electricity used in Alberta will come from renewable sources such as wind, hydro and solar by 2030. As discussed in a recent post, the province intends to support 5,000 MW of additional renewable capacity in order to achieve this target.
Currently, the expected timeline for the REP remains as follows:
Phase 1 of stakeholder engagement process closed on March 24, 2016.
Provincial government requested AESO’s draft recommendations on program design.
First competition for new REP projects.
Expected in-service date of first REP projects.
For developers, project eligibility for the REP will be critical. The AESO has indicated that projects must:
- be based in Alberta,
- be new or expanded,
- be five megawatts or greater in size, and
Issues and Developments to Monitor
In its early release of details respecting the REP, the AESO noted that “[i]t is anticipated that the existing transmission system will be leveraged”. While use of existing infrastructure is a logical path forward, certain renewable projects face significant congestion on inadequate lines. For instance, substantial wind power development opportunities in highly desirable locations are shackled by insufficient transmission capacity in the southern Alberta region and face delays in planned reinforcements for the area. It will be interesting to see how the province plans to accommodate 5,000 MW of additional renewable capacity given the locational constraints for generation sources such as wind and solar and the significant controversy characterizing transmission system reinforcement efforts in southern Alberta.
The province has stated that the REP will be based on recommendations provided to government by the AESO, and that the government and AESO are now working on detailed program design. As always, the devil is in the details, and such release of details is anticipated in Q4 of 2016.
Alberta Coal Phase Out
Many market participants in Alberta are aware of the controversy currently surrounding Alberta’s Power Purchase Agreements (“PPAs”), originally a mechanism to transition the Alberta electricity market from a cost-of-service model to a deregulated model. The PPAs allow their holders to buy output from the facility owners and bid it into the power pool. PPAs have recently declined in profitability for their holders as a result of increased costs attributed to Alberta’s regulation of greenhouse gas (GHG) emissions and lower revenues resulting from falling power pool prices.
In March of 2016, Alberta named Terry Boston to act as the province’s independent coal phase-out facilitator. The full scope of work for the coal-facilitation can be found here. Generally, Boston was tasked with presenting options to government that will strive to maintain the reliability of Alberta’s electricity grid, maintain stability of prices for consumers, and avoid unnecessarily stranding capital while meeting the government’s objective to phase out coal generation by 2030.
One key aspect of Boston’s work is to engage with the three owners of coal-fired generation facilities that are currently expected to operate beyond 2030. Boston is supported by the Alberta Energy’s Coal Secretariat and the Alberta Electric System Operator. Alberta’s Economic Development Minister had initial hopes that a deal with the owners would be in place by September when Boston’s contract expires.
Regulation of Emissions
Changes to the Specified Gas Emitters Regulation (SGER) in 2015 significantly increased the cost of emissions for large industrial emitters, being those which emit 100,000 tonnes or more of GHG. As noted in a previous post, such facilities are subject to the following costs of compliance under SGER:
|Site-specific emissions intensity reduction targets:
· 12% in 2015
· 15% in 2016
· 20% in 2017
|Emissions payments for each tonne over the facilities’ reduction targets:
· $15 in 2015
· $20 in 2016
· $30 in 2017
Further, the government adopted the Climate Leadership Panel’s recommendation to introduce a Carbon Competitiveness Regulation basing emissions intensity credits on a comparison with the most efficient natural gas generator. This means that coal-fired generation, which falls near the bottom of the pack in terms of emissions intensity, now receives far fewer credits.
As a study co-authored by Andrew Leach (chair of the Climate Leadership Panel) notes, this change in emissions credits increases the cost to the PPA holders by approximately $15 per MWh over and above the new government’s June 2015 changes to the SGER.
The “Change in Law”
The Climate Leadership Implementation Act ((Climate Act), as discussed in an earlier post) will come into force on January 1, 2017. Before the Climate Act officially became law, PPA holders, namely ENMAX, TransCanada and Capital Power, gave notice of their intention to terminate their PPAs under their respective contractual “Change in Law” provisions. Such provisions, dubbed the “Enron Clause” by the provincial government, allow the PPA holder to terminate the PPA without penalty if a “Change in Law” renders the PPA “unprofitable or more unprofitable”.
The province has disputed the effectiveness of the Change of Law provisions essentially on a procedural basis. The province contends that in 2000, during the process of finalizing the PPAs but before their “auction”, a request was made on behalf of Enron to add the phrasing “or more unprofitable” to the Change in Law provision. The reason that the addition of this language is so important is that it broadly increased the discretion of the PPA holders to terminate their respective PPAs. The form of PPAs that had been approved by previously held public hearings were granted such amended phrasing by the Energy Utilities Board of Alberta without public notice or hearing.
The provincial government has commenced a lawsuit seeking, among other things, a declaration from the courts as to the validity of the Enron Clause. The government argues that the last-minute amendment to the PPA was void from the outset as it was done without proper consultation or review, and thus there was no authority to amend the PPAs in the first place. While frequently portrayed in the media as the province suing itself, the legal skirmish is more nuanced. The government is banking, using the guise of protecting Alberta ratepayers, that it can erase a critical piece of a commercial agreement entered into and accepted by the parties nearly 20 years ago. Seen another way, the government’s strategy appears to be that if the words “or more unprofitable” are found by the court to not be valid, the PPA holders will not have met the condition necessary to allow the Balancing Pool to accept the termination of the PPAs and will, therefore, need to keep performing their contractual obligations.
With emissions regulations driving up the costs of producing coal-generated electricity, and power prices much lower than expected, PPA profitability has been impacted. To illustrate, the Leach-Tombe paper states:
In 2014, Enmax’s Battle River 5 PPA generated just over 2.5 million MWh of electricity. Assuming spot-market sales, with prices down over $18 per MWh in 2016 from what was previously expected, revenue would be roughly $45 million lower in 2016 alone. Add to this the revenue losses expected between now and 2020 and the Battle River 5 PPA alone may lose roughly $100 million.
If the Balancing Pool accepts the termination of a PPA, the Balancing Pool can either terminate the PPA (which requires payment of a termination amount to the PPA holder) or it may assume the role of “buyer” under the PPA and manage the bidding of the generation assets into the power pool. Under the Balancing Pool’s governing legislation, any surplus or deficiency is allocated to consumers through either a customer allocation payment or a surcharge. With the significant impact of low power prices on the profitability of the PPAs, the province’s argument hangs on the phrase “or more unprofitable” and whether the PPA holders may have the benefit of this contractual “out”. It remains to be seen whether the court will be persuaded that the amendment process was so flawed that the result should be to void this term of the PPAs.
Impact of the Case on Albertans and Developments to Monitor
The Government of Alberta estimates that terminating all of the PPAs will cost ratepayers up to $2 billion between now and 2020. In comparison, the study by Andrew Leach and Trevor Tombe, referenced above, estimates the cost of terminating the PPAs is closer to $600 million (the drop in value being approximately $900 million, and taking into account that one of the PPAs was already owned by the Balancing Pool). The $900 million amounts to about $2.25/month on the typical consumer’s electricity bill.
The province’s originating application was filed on July 25, 2016, and the action has been assigned a case management judge. We will continue to monitor its progress through the courts.
Climate Leadership Implementation Act: Carbon Levy and Energy Efficiency Alberta
Alberta’s Bill 20 was tabled in the legislature in May of this year, containing both the Climate Act and the Energy Efficiency Alberta Act. The former establishes a carbon levy for the province and the latter establishes a Crown corporation called Energy Efficiency Alberta, tasked with raising awareness and delivering programs related to energy conservation.
A detailed overview of the carbon levy and its estimated impacts on Albertans can be found in in a previous post. Broadly, carbon levies will be implemented on various enumerated transactions across the fuel value chain. There are some exemptions to the levy, but these are limited in number and scope.
Proceeds from the levy are estimated at around $9.6 billion over the next five years. The government has indicated that the proceeds will be reinvested in the provincial economy and it has earmarked approximately $6.2 billion on diversifying the energy economy. The remaining $3.4 billion will be used to provide provincial support (i.e. rebates) for households, businesses and communities adjusting to the carbon price.
Energy Efficiency Alberta: Advisory Panel
Given that the province’s April 2016 budget allocated $645 million to this new Crown corporation, it is well worth keeping track of Energy Efficiency Alberta’s progress. In June of 2016, the province established the Energy Efficiency Advisory Panel and tasked it with conducting public, indigenous and technical engagement activities from June to September, 2016 and providing a report to the government in the fall of 2016.
The report will contain the panel’s recommendations on “the types of energy savings programs that Energy Efficiency Alberta can start to deliver in the short and medium-term, as well as help set out a long-term vision”. Energy Efficiency Alberta’s programs are scheduled to launch in early 2017.
Recent Developments: Climate Change Technology Task Force
On September 19, 2016, Alberta announced that it had appointed a Climate Technology Task Force (Task Force) to “provide recommendations on targeting investments in climate technology to help transition to a lower-carbon economy”.
The Task Force comprises a chair and four members with experience in research, development and deployment of climate change-related technology, and plans to bring together a cross-section of academic, business, government and not-for-profit representatives in a series of sessions this October. Albertans may also provide their views via email.
The Task Force will provide a written report to the government at the end of November 2016 containing recommendations for a provincial Climate Change Innovation and Technology Framework.