Changing the rules of engagement for Alberta power plants

Accelerating the shutdown of Alberta's coal-fired generators could penalize consumers

CALGARY, Alta. — The Alberta government is intent on reducing emissions, but the goal could penalize power consumers while hastening the dismantling of an industry.

Implementing the ambitious Climate Leadership Plan is a priority for the government. And as a way to improve how Alberta is perceived in the world, it is certainly justified.

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But electricity and energy systems in Alberta are complex. And as government layers new carbon levies and policies onto existing systems, it's essential that the intended outcomes are achieved and unintended consequences are managed.

The early terminations of power purchase agreements (PPAs) with coal-fired generators appears to be an unintended consequence of the government's emissions reduction strategy.

Recently in Alberta, there has been a spate of agreement terminations between power buyers (ENMAX, TransCanada, AltaGas and Capital Power) and coal-fired electricity generators (TransAlta and ATCO). The agreements give the power buyer the right to terminate under certain conditions, including a change in environmental laws that make the deal "unprofitable or more unprofitable."

These cancellations were ostensibly the result of recent changes in Alberta's climate change policies: the increase in levies under the Specified Gas Emitters Regulation (SGER). These changes, the power buyers have argued, effectively make the purchase agreements more unprofitable.

These agreements are a legacy of Alberta's transition from a regulated to a deregulated energy market in the late 1990s. At that time, government needed to artificially create a power market and reduce the market power of the incumbent generators. Government preferred to reduce market power without forcing the operators to sell their assets, so the PPA was introduced. At deregulation, the agreements were sold at auction. However, not all of the PPAs received an acceptable bid and the obligations for the unsold agreements were taken over by the Balancing Pool, an entity created by legislation.

Early termination of the agreements appears to be founded on some general assumptions. First, that in the context of power pool prices, coal-fired generation PPAs are not generally considered economic. Second, that the new SGER rules or any similar form of carbon levy will increase costs for power producers. And, third, that if the PPAs are terminated, the Balancing Pool is obligated to assume responsibilities of the buyer to the operator.

If the Balancing Pool assumes responsibility for the agreements, it can:

continue to offer electricity into the power pool (with consumers on the hook for price shortfalls);

attempt to sell the PPA (highly unlikely now);

or terminate the deal and pay the net book value of what is left to run under the contract.

These options are unlikely to benefit consumers. And the longer-term impact of terminations is uncertain. For example, the Balancing Pool issues a credit to consumers on their electricity bills in the range of $3 per month. If all of the electricity under the recently terminated PPAs was sent to the power pool, this credit could flip to a charge on bills in the range of $5 to $10 per month. While the pool may offset some costs, to the extent the PPA terminations trigger increases, the political space available to government to advance its Climate Leadership Plan is likely to be reduced. This is especially true in an economic recession.

Do recent changes to SGER allow the buyers to legally terminate their agreements? The Alberta government seems to be suggesting that this is still open for discussion. Ultimately, the courts will likely have to weigh in.

But there are other options that could reduce uncertainty and avoid litigation.

Government introduced the SGER changes and may be able to mitigate or reverse the impacts by removing the trigger for PPA terminations.

Government could exempt coal-fired power plants from the new SGER requirements entirely. The rationale would be that, unlike other industries, coal-fired power plants are already being treated separately and, in fact, more aggressively since they are subject to complete shutdown within a fixed timeline.
To require already approved coal-fired power plants to now meet both sets of regulatory requirements may be unfair, especially as original investments were made in a regulated environment and there are few near-term opportunities to manage these incremental costs.

Donna Kennedy-Glans, QC, lawyer and businesswoman, is former energy executive and associate minister of Electricity and Renewable Energy (Alberta).

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