Canada: Alberta's New Climate Change Strategy: What Does It Mean For Renewable Power Project Development In The Province?

Last Updated: November 30 2015
Article by Kent D. Howie and Alan Ross

Most Read Contributor in Canada, September 2016

As BLG advised in our November 23rd Bulletin All Change — Alberta Overhauls Climate Policy, Ushers In Sweeping New Requirements, the Alberta Government recently announced its new climate change strategy and policies in advance of heading to Paris for the 2015 United Nations Climate Change Conference. These policies will touch all aspects of Alberta's economy. However, it is the electricity sector, and Alberta's merchant power market in particular, that is likely to be most affected because these new policies mandate a change in Alberta's future power generation mix. As we predicted in our November 16th Bulletin Alberta's Power Play: Potential Changes Should Bring New Renewable Power Project Opportunities, coal is on its way out, and is to be replaced with lower-carbon natural gas and zero-carbon renewables.

The Big Electricity Changes

The substantive electricity policy changes announced this week by the Alberta Government are:

  1. There will be no pollution from coal-fired power generation in Alberta by 2030. The Alberta Government determined that too rapid a retirement of coal, as was done in Ontario, would bring too much reliability risk for the Alberta market and so the year 2030 was chosen.
  2. All coal-fired plants will be phased out and replaced by natural gas and renewable power generation, or by using technology to produce zero pollution (e.g. a coal plant adopts carbon capture and storage). Alberta's current coal-fired capacity is approximately 6300MW, or about 39% of the total installed capacity. All of it, including Alberta's newest coal plants (Keephills 3 and Genesee 3) with the best clean coal technology, is likely to be gone by 2030.
  3. Two-thirds of the coal-generating capacity (4200 MW) will be replaced by renewable energy, and one-third (2100 MW) by natural gas. Note that the focus appears to be on "generating capacity" and not actual energy generated by coal.
  4. Beginning in 2018, all coal generators will pay $30 per tonne of CO 2 on emissions above what Alberta's cleanest gas plant would emit to generate the same electricity. This will provide a clear advantage to lower emitting and more efficient generation and encourage its dispatch. It is also expected to have a lower impact on the Alberta pool price during most hours of the day than continuing with the current Specified Gas Emitters Regulation that applies to all large emitters (including gas-fired generation) in Alberta.
  5. Renewable resources will account for up to 30% of Alberta's total operating generating capacity by 2030.
  6. All of the electricity policies will fit within Alberta's energy only merchant power market (the only one in Canada) to ensure the electricity system continues to be reliable.

The following electricity related quotes from Premier Notley's speech announcing her climate change plan also provide us with some insight into what we might expect for Alberta's electricity market:

"This is the day we start to mobilize capital and resources to create green jobs, green energy, green infrastructure."

"We are going to put capital to work investing in new technologies, better efficiency, and new job-creating investments in green infrastructure."

"We will keep the costs of renewables as low as possible by using market mechanisms, such as auctioning."

"The Government will appoint a facilitator and negotiator to help us develop and implement this plan."

"We will pursue this policy without endangering the reliability of our electricity system. We will maintain a reasonable stability in prices to consumers and business. And we will not unnecessarily strand capital."

Climate Change Advisory Panel's Report Recommends a Clean Power Call

The new Alberta climate change strategy followed the recommendations made by the Alberta Climate Change Advisory Panel ("Panel"), which the provincial government appointed this past summer. This Panel, chaired by Dr. Andrew Leach, issued its final report ("Panel Report") to the Alberta Government at the same time that Premier Notley was announcing her new climate change strategy.

The Panel Report includes the electricity policy changes described above, but provides more background and insight into how these changes might be implemented. Of importance to renewable power project proponents and consistent with the Premier's reference to "market mechanisms, such as auctioning", the Panel Report recommends the use of an "auction-based clean power call". Regarding the clean power call, the Panel recommended that:

  1. Alberta should adopt a clean power call mechanism to enable increased renewable generation based on an annual schedule, e.g. 350 MW to be available by 2018.
  2. Participants should be pre-qualified to ensure that they can deliver on projects and should provide performance security to protect the Province if they do not deliver on their projects.
  3. Alberta Government support should be in the form of the purchase of renewable energy credits ("RECs") on long term contracts using money from Alberta's new carbon pricing regime. The Panel indicated that this incremental revenue (along with the Alberta Pool price) should be enough to encourage the new renewable power project development mandated for Alberta (i.e. 2/3 of coal-fired generation being phased out and 30% of total operating generation capacity by 2030).
  4. Contracts should be awarded to those requiring the lowest level of support using evaluation criteria and awards should be technology-neutral (solar, wind and geothermal to compete on level playing field).
  5. Alberta Government support should have a collar to limit the government exposure; the Panel recommended a cap of $35/MWh with a further suggestion that $25-35/MWh would initially be required to support renewable power generation.
  6. A premium should be paid to those that partner with rural, First Nations and Métis communities.
  7. Projects built with Alberta Government support would still offer their power into the Alberta Pool at the pool price such that the Alberta energy only merchant market would continue to operate.
  8. Alberta should not adopt a feed-in-tariff or a long-term government power purchase agreement to support project financing by small producers. Instead, Alberta's merchant market will remain with support for renewables in the form of government-purchased RECs.

It should be noted that the Alberta Government did not unequivocally endorse the Panel Report, so it is not yet known whether all of the above recommendations from the Panel will be implemented in a power call to encourage renewables.

Questions Remain to be Answered

This week's announcement was the first step in what is sure to bring interesting opportunities for electricity market participants in Alberta. However, the announcement raises a number of questions that will be answered in the coming months, including:

  1. Will the Alberta merchant power market really send the necessary price signals for the new natural-gas fired power required to replace one-third of the coal-fired generation, especially given the current historic low Alberta pool prices, existing 30% capacity reserve margin and little load growth? Except for the recently announced changes, there is absolutely no price signal today in Alberta to build any new generation.
  2. Is government support through a REC auction sufficient to encourage renewable power project development on the scale required, or will the Province be required to provide more revenue certainty (long term power purchase arrangements) to permit the long-term financing of these projects? Will the REC auction provide support until 2030 or for a longer term? Will $35/MWh really be enough? Will developers proposing to build 30-year projects trust that a future Alberta government will not unwind or dial back these long-term renewable commitments?
  3. Who will design and run the clean power call? Will it be done directly by a Ministry (Environment and Parks or Energy) or by one of the existing Alberta electricity agencies, either the AESO or the Balancing Pool, or a brand new agency?
  4. Will the Alberta Government encourage Alberta institutions, like ATB and AIMCO, to finance the new natural gas and renewable projects that will be needed to replace coal?
  5. Will the Province reject the Panel's "technology-neutral" recommendation and, instead, conclude that a mix of different renewables is best for the Province? If not, can new solar, hydro or geothermal compete with wind in a power call based on price?
  6. Will the power call provide any locational criteria to deal with things like the geographic wind variations, location of load, and transmission or distribution constraints, or will market forces be left to site the renewable projects?
  7. How will the coal-fired generators be compensated, and will compensation include any preferential rights to renewable power opportunities or support for coal to gas conversion? Will they really be the losers, or will the Province's commitment not to strand assets, consider compensation, and protect jobs and communities result in a means for them to maintain market share but with a different and less-carbon mix of generation?
  8. How does distributed generation fit within this new regime? Will the microgeneration rules be expanded to permit larger distributed generation renewable projects (e.g. solar) to occur outside of the clean power call?
  9. Will there be a premium in the power call process for rural, First Nations and Métis communities, as the Panel suggested, and, if so, what form will the premium take, e.g. price, share of power call? Will municipalities be encouraged and financially supported in the development of small-scale community renewable or natural gas generation projects?

BLG is fully engaged in the proposed changes to Alberta's electricity market and the questions raised by this week's announcement. We are meeting with government officials, and working with power developers and other market participants who are taking positive steps now to position themselves to take advantage of the changes to Alberta's electricity market. BLG understands the electricity industry 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.

If the Alberta electricity business opportunity is something of interest to you then members of our national electricity team would be pleased to meet with you and to answer any questions you may have about Alberta's electricity market and the recently announced changes to that market.

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