The Alberta Government is expected to announce policy changes in the next two weeks that should encourage new renewable power projects in the Province.
Alberta Power Market
Alberta's electricity market is unique in Canada in many ways. Unlike most other Provinces, the Province of Alberta has never owned or operated a power utility. It has also never created a Crown corporation or agency to procure and sell power into its power market. To date, the Province has no legislated renewable power program. Instead, Alberta relies on the Alberta Electric System Operator ("AESO") to operate the Province's power pool in an open and competitive fashion to dispatch energy at a single hourly price determined using a minute-by-minute merit order system. Pool prices are set in real time at the intersection of supply and demand, without government price intervention except for a mandated $999.99 MW/h offer cap. Accordingly, it is generally said that Alberta operates Canada's only real "merchant power market" where investment decisions for new generation in the Province are made for the most part based on the price signals sent by its power market.
Existing Power Composition
Not surprisingly, given the merchant power market and Alberta's large coal reserves, Alberta has relied on coal as its primary low-cost reliable source of electricity. With an installed capacity of over 16,000 MWs, coal-fired generation supplied 55% of the Province's power in 2014, which was followed by natural gas at 35%, wind at 4%, hydro at 2% and other renewables at 4%.
The difficulty that the Alberta electricity market poses for new renewable power projects is evident by the fact that Alberta has less than 10 MWs of installed solar capacity (less than .01% of its total capacity) compared to over 1500 MWs of solar generation in the Province of Ontario (approximately 4% of its total capacity). All of Alberta's solar power is micro-generation installed under Alberta's micro-generation rules applicable to customers who are self-generating environmentally friendly power with a capacity of less than 1 MW. With little government support, the costs involved in building large scale renewable power projects have simply been too high a barrier for renewable power project developers wanting to finance, construct and operate a project in Alberta's merchant power market.
Alberta governments have historically been satisfied that this market-driven approach to the wholesale electricity sector has worked well to meet the power needs of Alberta. However, on May 5th of this year, Albertans elected Premier Rachel Notley and her left of centre New Democratic Party government — replacing the Progressive Conservative Party that had governed Canada's traditionally conservative Province for over 40 years. A key area that this new Alberta government promised to tackle was climate change and Alberta's role in dealing with this challenge. The "greening" of Alberta, a Province that has been built on a carbon/oil & gas economy, will be no easy task. However, Premier Notley and Shannon Phillips, her new Minister of Environment, have shown no signs of being deterred.
Increase of Carbon Levy
For example, immediately after being elected Alberta announced changes to its Climate Change and Emissions Management Act, and regulations, which are applicable to large industrial emitters (like Alberta's eight coal power facilities). These changes increased the required carbon intensity reduction levels from 12% (of an established historic baseline) to 15% in 2016, and also increased the Province's carbon levy from $15 to $20 per tonne (going to $30 in 2017). These changes will indirectly help Alberta's struggling renewable power industry by increasing the costs of the large emitting power generators, and also by increasing the monetary value of the emission offsets that renewable power projects generate and market to the large emitters as an alternative means for those emitters to meet their targets.
Climate Change Advisory Panel
More importantly, as a strong signal that change is coming to the Alberta electricity market, this past summer Alberta appointed the Climate Change Advisory Panel, chaired by Dr. Andrew Leach, to advise the Alberta Government on the measures required to reduce greenhouse gas emissions. Though all of Alberta's industries are being examined, including oil and gas and transportation, the "Climate Leadership Discussion Document" issued when the Advisory Panel was struck makes a number of observations to suggest that changes are on the horizon for the Alberta electricity market, including that:
- electricity generation is the second largest source of emissions in Alberta and is responsible for 17% of the Province's 2013 emissions;
- coal-fired generation is 85% of the total emissions from the electricity sector; and
- Alberta accounted for 65% of all coal power production in Canada making it unique in Canada because of its heavy reliance on coal.
Besides strongly signalling a need for Alberta to move away from coal-fired power generation, the document also canvasses a variety of possible policy approaches that Alberta could pursue, all of which we have seen in other jurisdictions, like a feed-in-tariff program, green power call, subsidies and tax-credits, government-backed loans and power purchase agreements, renewable portfolio standards and/or renewable energy certificates.
Province Ready to Announce Changes
The Climate Change Advisory Panel has completed its consultation, which included input from the public as well as industry, labour and aboriginal stakeholders. The Alberta Government recently indicated that it is now working in conjunction with the Climate Change Advisory Panel and has promised to disclose Alberta's new climate change policy initiatives before heading to the 2015 United Nations Climate Change Conference (COP 21) in Paris from November 30 to December 11. This week Premier Notley hinted that she might increase the carbon levy again and promised that she would address the coal issue, stating that in its place "we must encourage lower-carbon natural gas and zero-carbon renewables". We should know before the end of this month the form that this encouragement will take and if the new Alberta government will propose what is expected — policy changes to Alberta's electricity market that will create renewable power opportunities in Alberta for project developers.
Borden Ladner Gervais LLP (BLG) is working with power developers and other market participants who are taking positive steps now to position themselves to take advantage of the expected changes to Alberta's electricity market. We understand the renewable energy business and Alberta's electricity policy framework. We have in-depth experience in the development, financing, construction and operation of renewables and alternative energy projects including solar, wind, waterpower, geothermal, biomass and biofuels. We bring a range of experience — project and transactional expertise, senior provincial and federal government experience and an understanding of varying regulatory regimes — to our electricity clients in operating their businesses in the fluid environment of what remains one of the most heavily regulated industries in Canada.
The Climate Change Advisory Panel's recommendations and COP 21 are only the first step. Over the next few months it is expected that the Province will enact climate change legislation and embark on a further examination of renewables as part of Alberta's electricity mix. This may include a task force on renewable energy, further public consultation and electricity market redesign.
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