Revised RESA Term Sheet

On November 14, 2016, we issued a bulletin entitled Alberta Releases Details of First Renewable Electricity Program Competition (available here). That bulletin summarized the original term sheet for the Renewable Electricity Support Agreement (RESA) released by the Alberta Electric System Operator (AESO) on November 10, 2016. Earlier this spring, on March 31, 2017, the AESO released a revised term sheet for the RESA containing several amendments in response to comments received during a period of stakeholder engagement.

The purpose of this update is to provide a summary of the recently revised term sheet and highlight changes from the draft term sheet released by the AESO last fall.

The revised provisions were released at the same time as the AESO issued a Request for Expressions of Interest (REOI) to initiate the first competitive procurement process under the Renewable Electricity Program (REP).

Interested parties must submit an Expression of Interest form to the AESO by April 21, 2017 to be able to participate in the first round of the REP. For further details on REP participation and the anticipated timeline for Round 1, please see here. The RESAwill ultimately be awarded to successful participants (Generators) at the end of the REP competition. A full form RESA will be provided when the RFQ stage opens on April 28, 2017.

The RESA, which is effectively a contract for differences, will govern the development and operation of the Generator’s renewable energy project and will establish the terms and conditions upon which the Generator will be entitled to receive support payments from the AESO representing the value of the renewable attributes associated with the project.

Key Provisions

The March 31, 2017 revised key provisions of the RESA (PDF) include the following:

·Section 3: Target and Longstop Dates.The Target Commercial Operation Date (“Target COD”) is now specified as December 1, 2019. If the Generator fails to achieve commercial operation by Target COD, the Support Period (defined as a period that begins on commercial operation and ends 20 years after the earlier of commercial operation and the Target COD), during which the Generator is entitled to receive support payments, will be shortened for each day of delay on a day-for-day basis.

·A Project must achieve commercial operation within 18 months after Target COD (the “COD Longstop Date”). If a Generator fails to meet the COD Longstop Date, the AESO has the option to terminate the RESA in which case Generator will pay liquidated damages equal to the amount of the completion and performance security and AESO’s remedies will also be limited to such amount.

Earliest Support Payment.The term of the Support Period (and payment of support payments) has been clarified in the revised term sheet. This period may not begin until April 1, 2018 (the “Earliest Support Payment Date”). Although support payments cannot be made before this date, this does not restrict the Generator from delivering and selling electricity into the power pool beforehand.

Generation prior to COD. If electricity is generated and delivered to the power pool prior to the facility COD, the Generator:

  • is entitled to all power pool revenues (prior to the Earliest Support Payment Date); and

  • must remit any pool revenues in excess of the strike price to the AESO.

The above features concerning electricity generation prior to the COD are new within the revised term sheet.

·Section 4. Commencement of Construction.Construction of the project must commence by the specified longstop date (the “CC Longstop Date”). The CC Longstop Date for the first procurement is now specified as December 1, 2019. If the Generator fails to commence construction by the CC Longstop Date, the AESO has the option to terminate the RESA and have the Generator pay liquidated damages equal to the amount of the completion and performance security and AESO’s remedies will also be limited to such amount.

Essentially, this change, together with the COD Longstop Date and related changed described above, mean that interested parties must have enough confidence that their project can be commenced by December 1, 2019 and then developed in time to achieve the COD Longstop date of June 1, 2021, at the latest in order to avoid significant liability.

·Key Development Milestones. The revised term sheet now specifies that the Generator will be required to use commercially reasonable efforts to achieve Key Development Milestones so the facility can achieve commercial operation by the Target COD. Commencement of construction will now be deemed to be have been achieved when the AESO confirms such in writing acting reasonably and in a timely manner (new qualifiers in the revised term sheet).

·One of the new Key Development Milestones included in the revised term sheet is that the AESO now requires an executed copy of any security documents pursuant to security provisions set out in section 6 (see next section).

·Section 6. Security.As mentioned above, the revised RESA term sheet includes additional items concerning completion and performance security that Generators will be required to provide to the AESO. Among these items, are the inclusion of Pre-COD ‘development obligations’ and post-COD ‘payment obligations’ which are discussed below.

    • Pre-COD Development Obligations, Generators must maintain completion and performance security (in the form of an LOC) in the amount of $50,000 per MW of project nameplate capacity declared at RFQ.
    • Post-COD Payment Obligations, Generators are not required to obtain and maintain any liquid security following commercial operation of the facility with respect to payment obligations to the AESO when pool price exceeds strike price (“Generator Payment Obligations"). Payment obligations will instead be secured via security interests taken by the AESO (described below). There will also be a contractual right for the AESO to set off any Generator Payment Obligations against settlement funds otherwise due and owing to the Generator.

·The Generator is required to provide the AESO with security interests over the facility (including the recent revised term sheet addition of any associated land rights), the proceeds from any sale of the facility, and the Generator Payment Obligations to protect against various events of Generator default, including Generator bankruptcy, non-permitted facility transfers, and other listed events.

·Also new this March and important to note: senior lenders’ security will have priority over AESO security except that the AESO has priority over all Generator Payment Obligations which accrue prior to any termination of the RESA.

·Section 13. Renewable Attributes and Funding from Other Governmental Authorities.The Generator must transfer title to all renewable attributes associated with the Generator’s facility to the AESO in exchange for support payments under the RESA. Government funding received by the Generator must also be shared with the AESO. When such funding is provided based on facility capacity (i.e. MWs, etc) and is not provided in exchange for title to Renewable Attributes, the Generator must pay 50% of any such payment to the AESO within 30 days of receipt. Further, the Generator may not seek other sources of funding or incentives provided by the Government of Alberta with respect to renewable generation projects. There have been no changes in this section since November.

·Section 16. Settlement Provisions.The RESA provides a settlement process for amounts owed by each contract party. It indicates that for each hour in any month (a new qualifier), if the strike price exceeds the pool price (positive difference), the AESO will pay the difference to the Generator in the form of support payments. However, if the difference is negative (the pool price exceeds the strike price), the Generator will pay the absolute value of such amount to the AESO. New from the March revised term sheet is that settlement for each month will occur on the same date that power pool settlement occurs under ISO rules.

·Section 16.1. Change to Pool Price. The RESA will eventually provide a mechanism for adopting a replacement reference price in place of the pool price to determine support payments if the current Pool Price is replaced, the calculation method is materially altered or ceases to be published. This is an entirely new provision under the March revised term sheet.

·Section 17. Indexation and Payment Adjustments.The RESA provides a process for partial adjustments (20%) to the strike price (the approximate percentage allocated to operation and maintenance costs) to reflect any change to the Alberta Consumer Price Index. The provision is silent on whether such calculations are made annually or otherwise.

·Section 18. Curtailment. In November 2016,this provision stated that a Generator will not be compensated for electricity it could have produced during any curtailment. This provision has since been re-drafted and now contains significant details regarding compensation for Foregone Energy.

·Forgone Energyis defined as the estimated amount of renewable electricity that would have been generated and delivered by the facility (when synchronized to the Alberta grid), but for actions or directives from the AESO that curtailed or limited generation due to transmission constraints.

·Specifically, section 18 provides Generator rights when project production is curtailed by the actions or directives of the AESO. Compensation from the AESO will now be provided where the cumulative amount of Foregone Energy in a year exceeds 200 hours multiplied by the nameplate capacity of the project due to specific curtailments.

·The revised term sheet provides specific situations where the Generator will not

be compensated for lost generation pursuant to section 18. These scenarios include:

  • facility outages or de-rates;

  • transmission or connection outages resulting in the facility not being synchronized with the Alberta grid; or

  • the application of the supply surplus rules when the supply of electricity available at zero dollar ($0) exceeds the system load.

·The revised term sheet further notes that Forgone Energy calculations also consider any over-generation on the part of the Generator due to a failure to comply with the AESOs dispatch instructions or directives.

·Section 19. Change in Law. There have been some new additions within this section from the revised term sheet and these changes are highlighted below (in italics).

·This provision provides schedule and financial relief for the Generator in regards to changes in laws, regulations, rules (including ISO rules), orders by any Alberta government or regulatory authority (or any court in respect of these items) which are directed at the:

  • REP, any Generator; the rules, regulations, terms or conditions governing generators; or any RESA; or

  • are otherwise related to occupational health and safety, the environment, or a sales tax; or

  • any interpretation, reinterpretation or administrative position relating to such laws, regulations, rules or orders,

provided that such changes either:

  • materially delay development and construction of the facility;

  • increase the costs for the Generator; or

  • affect the volume of electricity the Generator can produce.

Also new in the revised term sheet, is a list of specific changes in law that will not result in schedule and financial relief. These include changes to any laws, regulations, rules or orders (including regulatory approval for Generators) in relation to: greenhouse gas emissions, emission performance credits, emission offsets, carbon offsets, carbon-pricing, or carbon-related taxes, levies or fees, or other carbon-related charges or payments, including the following Alberta laws and regulations: the Climate Change and Emissions Management Act, the Climate Leadership Implementation Act, the Oil Sands Emissions Limit Act, and the Environment and Sustainable Resource Development Grant Regulation.

·Such relief will also not be provided where the Generator has prior notice of the change, where the change is in response to any Generator action contrary to law, or where the change is permitted under the RESA (this is unchanged from the November 2016 term sheet).

·In terms of consequences to designated changes that result in a net increase or decrease in the Generator’s costs or the volume of electricity which the Generator is able to produce, RESA payments will be adjusted accordingly to maintain the Generator’s financial position under the RESA. Generator net capital cost changes will be addressed via lump sum payments, while net operating costs changes will be dealt with through strike price adjustments.

·Section 20. Force Majeure. The revised term sheet provides relief from required milestone dates, including Target and Longstop CODs due to events of force majeure. The section also provides a termination right for each party when a Generator-invoked event of force majeure continues for either 18 continuous months or an aggregate of 24 months.

·For greater clarity, the revised term sheet indicates force majeure will include: general industry strikes, delays or disruptions in the construction of certain transmission or distribution facilities, government orders/judgements, and the inability to obtain/renew any required permit/licence/approval (unless caused the inaction of the party seeking to invoke FM).

·The revised term sheet also indicates that Force majeure will not include: the inability to procure feed stock/fuel, an appeal of the project Permit/Licence – unless the supplier is ordered to cease construction, and the inability to obtain consent/ approval of the AESO pursuant to the terms of the RESA. There have been no changes in this section since November.

·Section 23. Termination – Events of Generator Default.Such events include: standard events (such as insolvency, bankruptcy, RESA breaches, etc), failing to commence construction by the CC Longstop Date, failing to achieve commercial operation of the facility by the COD Longstop Date, failing to hold the required project permits, and facility breaches.

·Remedies for the above breaches prior to commercial operation include termination (as mentioned above in section 3 and 4), in which case the Generator will pay, as liquidated damages, a sum equal to the completion and performance security (with AESO’s remedies limited to this amount).

·If termination occurs after commercial operation of the facility, the AESO may exercise all remedies it has at law or equity, including claims for damages. New within the revised term sheet is that the RESA will now include a specified methodology for calculating “mark-to-market” damages suffered by the AESO. Further, as more fully described in section 6, if the appropriate legislative changes are made, the AESO will also hold security as protection against the Generator in events of default.

·Section 24. Termination – Events of AESO Default.Such events will include the standard events of default (e.g. failure to make payments, failure to perform a material covenant, or bankruptcy). A Generator may terminate the agreement for an AESO event of default.

·Termination which occurs prior to commercial operation will result in termination payments from the AESO which are the same as in the case of termination for AESO convenience.

·Termination occurring after commercial operation results in the Generator retaining any other remedies available to it at law or equity, including pursuing damage claims (new this spring). Similar to the change in section 23 above, the revised term sheet has added that the RESA will now include a specified methodology for calculating the “mark-to-market” damages in the case of an AESO event of default.

·Section 27. Financing and Consequences of Default. The RESA will allow for security to be granted to the Generator’s lenders contemplating a direct lender agreement between the AESO, Generator and secured lenders. This type of direct agreement between parties will have the practical effect of streamlining communication, providing transparency and clarity of details affecting all three parties, which may allow for a more efficient financing for these projects. There have been no changes in this section since November.

·Section 33. Dispute Resolution. The revised term sheet expands the binding arbitration process for disputes relating to commercial or technical issues within the RESA. Previously, in the event of a dispute, the parties’ representatives were instructed to attempt to resolve the dispute within 10 days after a request by either party, failing which either party had the right to commence litigation.

·In the revised term sheet, the parties’ representatives will still attempt to resolve the dispute within 10 days after a request by either party, failing which either party may pursue (i) binding arbitration to be conducted in accordance with the RESA, whose rules must specify that the reasons for decision will not be kept private; or (ii) commence litigation. The first option is meant for disputes of a technical or commercial nature (as opposed to judicial remedy) and the second option is meant for all other scenarios.

The most significant changes made to the RESA key provisions from November 10, 2016 are found within section 18- Curtailment. In November’s draft term sheet, there was no compensation available for lost electricity during any curtailment. After considering stakeholder comments, there has been significant revisions allowing for Generator rights in the event that electricity generation is reduced by AESO dispatch instructions or other directives. The speculative reason for this new addition of Generator compensation is perhaps a greater awareness and recognition of the effects of transmission constraints on Generators. The risk of curtailment for renewable energy projects is a concern for both Generators and lenders and allocating the risk between parties appears to be a reasonable compromise.