As expected, the Alberta Government moved this week to phase out coal-fired power generation and replace it with lower-carbon natural gas and zero-carbon renewable generation.
There will be no pollution from coal-fired power generation in Alberta by 2030. Alberta will replace the current 6300 MWs of coal-generating capacity with renewables (2/3) and natural gas (1/3). Beginning in 2018, all coal generators will pay $30 per tonne of CO2 on emissions above what Alberta’s cleanest gas plant would emit to generate the same electricity. Renewable generation will account for up to 30% of Alberta’s total operating generating capacity by 2030. The Province agreed that it would not unnecessarily strand capital and would consider compensating the coal generators. All of these mandated changes are supposed to occur within the confines of Alberta’s merchant power market.
To encourage the mandated renewable power development, the Alberta Climate Change Advisory Panel (“Panel”) recommended that the Province implement a clean power call procurement process. This power call would see the Province purchase renewable energy credits (“RECs”) on long term contracts using money from Alberta’s new carbon pricing regime. It is suggested that the process would be technology-neutral (i.e. solar, wind, etc. would be treated the same), such that RECs would be purchased from those needing the least government support. The Panel rejected the use of a feed-in tariff or Alberta signing long-term power purchase agreements with renewable developers. Thus, renewable power project developers who are successful in the power call will still be exposed to the uncertainty of Alberta pool prices for much of their revenues, with only a portion coming from the sale of RECs to the Province.
Some thoughts on who won and lost:
- The coal producers were clear losers, but the market for natural gas producers has expanded. Those who have seen the economics of their “gas to LNG” strategy weaken lately should examine a “gas to power” strategy.
- Coal generators appear to be losers, but a 2030 phase-out is much longer than Ontario took to phase out its coal. Also, the promise to not unnecessarily strand assets and consider compensation is an indication that the Province will work with the coal generators to help soften the blow.
- Experienced renewable project developers with strong balance sheets and a low cost of capital are big winners. They will be successful in a power call focused on price. It is unclear if small developers will be able to finance their renewable projects with only the REC component of their revenues having the certainty that lenders will require. That said, there will be a market for any projects that the small developers have in the pipeline as national and international developers arrive in the Province.
- Wind is a winner if the “technology-neutral” Panel recommendation is implemented. While per MW solar development costs are falling rapidly, wind projects are likely to be the winners in a power call designed to ferret out renewable projects that need the least government support.
- Rural, First Nations and Métis communities are also likely to be winners as the Panel recommended that a premium be given in the power call to proponents who partner with these communities. Municipalities are also likely to be active in community-scale generation, and will look to bring new power projects to their communities.
No matter what your take is on the winners and losers, one thing is very clear. Big changes are coming to Alberta’s electricity market.