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Alberta emission policies shake up power industry

Author(s): Martin Ignasiak, Jessica Kennedy

Mar 10, 2016

On March 7, 2016, TransCanada Corporation announced its plan to exit three Power Purchase Arrangements (PPAs) as a result of changing emissions laws in Alberta, which TransCanada claims have rendered the PPAs unprofitable. The decision will leave the Balancing Pool – a statutory entity created during deregulation in 1999 – in charge of the PPAs associated with the Sundance A, Sundance B and Sheerness coal plants. The announcement follows ENMAX Energy Corporation’s decision earlier this year to exit the Battle River PPA, also claiming that the plant had become unprofitable as a result of changing emissions laws. The Effective Terms of the Sundance B, Sheerness and Battle River PPAs are set to expire at the end of 2020 and the Sundance A PPA expires at the end of 2017. The collective generation capacity of these plants is 2,407 MW (about 15% of Alberta’s total installed generation capacity).

These decisions follow the Alberta Government’s announcement in June 2015 that it will increase the carbon emission reduction (or offset) requirements for industrial emitters from 12% in 2015 to 20% in 2017, in conjunction with an increase to the carbon emissions levy from $15 per tonne in 2015 to $30 in 2017.  The interim increases (15% reduction and $20 levy) took effect at the beginning of this year, at a time when Alberta was (and is) experiencing consistently low electricity prices. The Alberta Government also released an aggressive climate change leadership plan in November 2015, which includes an accelerated phase-out of coal by 2030, with much of the excess capacity to be filled by renewable power (see our prior Osler Update here).

PPA exit rights

TransCanada and ENMAX – like all other PPA buyers – are entitled under the terms of the PPAs to relieve themselves of all further obligations thereunder (referred to in the PPAs as “termination”) if they determine that a “change in law” has rendered the arrangement unprofitable:

4.3 Change in Law: … to the extent a Change in Law, after giving effect thereto and to this Section 4.3, could reasonably be expected to render continued performance by the Parties to this Arrangement for the balance of the Effective Term unprofitable to the Buyer in respect of a Unit … then the Buyer may terminate this Arrangement and shall not be liable for, nor entitled to any Termination Payment.

The phrase “Change in Law” is broadly defined in the PPAs, and includes any regulatory amendments that affect the PPA counterparties and relate to, for example, “taxes, including any charge or tax related to the use or consumption of fossil fuels or the production of any related by-products from any such use or consumption.” When a PPA buyer exits a PPA under this provision, it is not required to make any payments to the Balancing Pool, although it is not entitled to recoup any losses either. In the case of TransCanada’s recent decision, the company states that it will incur a $175 million write-down (after tax), which represents the remaining book value of its initial investment.

The effect of PPA “termination” by the buyer

Where the buyer elects to terminate a PPA, the Electric Utilities Act (EUA) provides that the PPA is deemed to have been sold to the Balancing Pool, which assumes the role of the Buyer. In that sense, the PPAs are not “terminated” but are instead transferred to the Balancing Pool, which then has the option to retain, sell or terminate (completely) the PPA.

In the event the Balancing Pool elects to terminate the PPA, it is required under the EUA to first consult with representatives of customers and the Minister of Energy and pay an amount to the owner equivalent to the generating unit’s remaining net book value. Following this process, the PPA will be terminated completely and full control of the generating unit will be returned to the owner. The Balancing Pool has discretion over whether to continue, sell or terminate a PPA that it holds, but is only likely to terminate a PPA if it considers the PPA to be uneconomic. The unit owner may then decide whether to continue to operate the unit or decommission it.

Significance to the power industry and power consumers

The ENMAX and TransCanada PPA terminations are the first of their kind in Alberta. That fact, along with the significant number of MW affected, demonstrates that the policy and legislative changes imposed by the Notley Government in 2015 are beginning to have tangible impacts on the industry. These termination decisions further suggest that a large portion of Alberta’s electricity supply may no longer be economic to produce. In that case, Alberta could find itself in a situation where much of the coal-fired capacity – which provides a very reliable and stable power source – will be taken offline much sooner than the Government planned. This may have implications for system reliability if these large-capacity plants cannot be replaced with lower emitting alternatives before they go offline. These factors are all likely to play a role in the ongoing negotiations between the Alberta Government and coal plant owners regarding compensation for the premature closure of the affected plants.

Furthermore, if the Balancing Pool determines that it is prudent to terminate these PPAs once and for all, it will represent a significant cost to power consumers in the relatively near term. In October 2005, the Balancing Pool terminated the Clover Bar PPA (for which no buyer could be found) and paid the owner the remaining net book value of $83 million. It is foreseeable that the Balancing Pool – which is funded through a charge on consumers’ power bills – may potentially owe hundreds of millions of dollars to the power plant owners if it decides to terminate the PPAs acquired as a result of TransCanada and ENMAX’s exit. If the owners subsequently decide to decommission the plants within one year of the PPA termination, the Balancing Pool may be on the hook for even more funding pursuant to the Power Purchase Arrangements Regulation (section 5).

Alternatively, if full control of the affected units is returned to their respective owners and the owners are able to operate the plants in a profitable manner, it may result in a significant shift in the market. The PPAs were originally implemented to facilitate deregulation and the establishment of a functional competitive market by transferring the ability to market the power produced by the thermal units from the incumbent utilities to the PPA buyers. Returning full control to the PPA owners essentially undoes that transfer of control. Any market impacts arising from such a change will become particularly important if the trend continues and more of the PPA buyers decide to exit as a result of the rising costs associated with managing carbon emissions in a low-price environment.

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