Consistent with the Alberta Electric System Operator’s (AESO) earlier indications and as discussed in previous posts, renewable electricity will include wind, solar, hydro, geothermal, and sustainable biomass projects. The REP is available to large scale renewable electricity generation (5 MW or greater total nominal capacity). Under the Act, the AESO will administer “a fair and competitive process” for REP proposals to incentivize renewable generation in the Alberta in order to meet the Province’s “30 by ‘30” target. Following the competitive process, successful bidders will enter into a Renewable Electricity Support Agreement (RESA) with the AESO.
The RESA will be a twenty-year, index-adjusted fixed price contract, also known as a contract for differences (CFD). The fixed (or “strike”) price of a RESA will be the price that the AESO accepts from a successful bidder and is expected to be the lowest price at which such bidder can build and operate its renewable energy project while obtaining an acceptable rate of return.
Commercial Terms: Consultation is Open
On November 10, 2016, the AESO released a draft Term Sheet for the purposes of stakeholder comments on the proposed commercial terms of the RESA. Stakeholder comments on the Term Sheet must be submitted by December 9, 2016.
As noted, the RESA’s payment terms will take the form of a CFD, which the AESO refers to as an “indexed REC”. When the generator’s strike price exceeds the Alberta pool price of electricity, the generator will be paid a dollars per megawatt hour ($/MWh) payment based on the difference between such prices. However, when the pool price exceeds the strike price, the generator will pay the amount of such difference to the AESO. In this way, the price of the RESA to the generator is “fixed”, and the AESO gets the benefit of market price upside but also the risk of market price downside. Twenty percent (20%) of the strike price (i.e. the percentage that the AESO is proposing to be allocated to operation and maintenance costs, seemingly without distinction between generation technologies) will be indexed to the consumer price index (Alberta, all items).
McCarthy Tétrault’s Power Group prepared a legal update which was intended to illuminate some of the key issues that government and potential stakeholders should consider in connection with the REP and any proposed form of CFD. We are pleased to see that the Term Sheet covers most of the issues that we highlighted. While the Term Sheet treats some of these commercial terms differently than we had suggested in some cases, we have not attempted to analyze or comment on such terms in this blog posting. Suffice it to say that some of these key issues reflected in the draft Term Sheet are:
- Term: The operational term of the RESA will be twenty years but such term will be shortened if a generator is late in achieving its target commercial operation date, subject to the availability of force majeure relief.
- Change in Law: Change in law provisions will be included in the RESA dealing with changes to:
- ISO rules (i.e. if a change to an ISO rule materially affects a project’s economics);
- Market structure (i.e. if the market structure changes and a replacement reference price is necessary); and
- “Designated Changes”, defined to include any changes by the Government of Alberta directed specifically at generators in relation to projects, or rules and regulations governing generation facility owners, or the RESA, and which materially delay the development and construction of the facility or which increase costs generators would reasonably be expected to incur.
- Force Majeure: Force majeure will include delays or disruptions in construction of certain transmission or distribution facilities, as well as inability to obtain or renew licenses or permits required for performance.
- Curtailment: Generators will not be compensated for electricity they could have produced during any curtailment.
- Additionally, some of the other important Term Sheet provisions include:
- Termination – AESO Convenience: Prior to commercial operation of the facility, the AESO may terminate the RESA for convenience by providing up to 30 days’ notice (with specific remedy provisions for pre- and post- commencement of construction).
- Security: Prior to commercial operation of the facility, generators must maintain completion and performance security of $50,000/MW (nameplate capacity). While liquid performance security will not be required following commercial operation of the facility, it appears that the Government is contemplating introducing legislation that will permit the AESO to take security in the facility itself and any proceeds from electricity sales by the facility.
- Ancillary Services: Generators are not permitted to sell ancillary services to the AESO.
- Events of Default: Both parties will be subject to “standard” events of default, but additional events of default will apply to generators and will include failure to commence construction of the facility by a date certain.
- Renewable Attributes: Generators must transfer title to all “Renewable Attributes” to the provincial government (i.e. any other incentives received from governmental agencies will be transferred to the AESO).First, there are no terms related to performance security to be delivered by the AESO. While the AESO has stated that the Government of Alberta will enter into renewable energy finance agreements (REFAs), whereby the Government intends to fund RESA payments using funds received from the province-wide carbon levy imposed under the Climate Leadership Act (not yet in force), there is currently no visibility as to whether such amounts will be sufficient or what assurances generators will have that they or the AESO will be able to enforce the REFAs. Competitive Bid Process: Expected Q1 of 2017The REP process will consist of three stages:
- The first competitive bid process is expected to commence in Q1 of 2017 for up to 400 MW of renewable energy generation. In this competition, the winning bidder will be the lowest cost qualified project. Minister Shannon Phillips has left it open for future competitions to allow indigenous participation or projects to be built in specific regions to outweigh cost considerations.
- Second, and related to the first, the Term Sheet does not reveal how generators will be assured that the proposed terms of the RESA, in particular the aforementioned change in law clause, will be enforceable in the future. The recent refusal by the Government to disavow rumours that it will pass legislation to void the change in law clauses in the heritage power purchase agreements, as discussed in a previous post, are expected to cause these provisions in the Term Sheet to be subject to particular scrutiny, if not apprehension.
- While the Term Sheet, by its nature, does not include all the terms that are expected to be found in the RESA, we note that there are some important terms that we raised in our legal update that are not currently addressed.
- Request for Expressions of Interest (REOI): 4-6 weeks
- Interested parties determine whether to participate in the competition. There is no obligation on interested parties to participate at this stage.
- Request for Qualifications (REQ): 4-6 months
- Bidders meeting certain eligibility requirements submit their qualifications and pay a qualification fee to participate in the bid.
- Request for Proposal (RFP): 2-3 months
- Qualified RFQ bidders submit their final binding offer for support (i.e. bid price).
Following the closing of the competition, the bid process must be approved by the Minister. After this, the successful bid participants will enter into a RESA with the AESO.