​The coming energy disruption

ATB discusses the opportunities of integrating renewables into Alberta power market, sponsors conference to move the energy discussion forward

Alberta is a hot renewable energy market right now and it’s getting international attention.

That’s because Ontario is mostly built out with renewables. B.C. has limited opportunities beyond its traditional base of hydro power. Saskatchewan, while potentially promising because of its reliance on coal-fired power, is a relatively small power market.

The Alberta government’s aim of phasing out coal-generated electricity by 2030 and adding 30 per cent renewable power by the same date has put the province on the alternative-energy map.

“People are looking in from other countries. In the government’s REP [Renewable Energy Procurement] Round in December, two of the winners were European. The provincial support for renewables is significant enough to attract many new aspiring entrants to the Alberta market,” says Tim Poole, managing director of ATB’s Project Finance division.

REPs

The aim of Alberta’s REP is to encourage development of 5,000 MW of renewable electricity generation capacity between now and 2030.

“The province has been successful in awarding these contracts at a competitive price,” says Darren Eurich, managing director and team lead of ATB’s Project Finance division.

In fact, Alberta secured the lowest-ever price for wind energy generation in Canada. The government signed 20-year agreements for four wind energy projects with three companies, representing approximately 600 megawatts (MW) of capacity at an average price of $37 per megawatt-hour. That’s well below both original expectations and forecast market prices.

“There was a lot of competition — 29 companies shortlisted for the first REP auction, which drove down the auction price. There were only three winners and Capital Power was the only local company. European companies made up the other two,” Eurich says.

REP Rounds 2 and 3 are expected to open in early 2018. REP Round 2 has a procurement target of 300 MW and will include an Indigenous equity ownership requirement. REP Round 3 will have a procurement target of 400 MW.

Lessons learned

As the Alberta government advances its renewable energy mandate, it is benefiting from the lessons learned in other jurisdictions such as Ontario, where the greening of its grid is criticized for driving up consumer electricity prices.

“There were issues in Ontario with early-stage technology and the bidding process,” Eurich explains. “They greened their grid, but they did it early on when renewable power cost more. There were also some concerns with how build contracts were awarded. Construction prices dropped from when the contracts were awarded to when they were carried out. So the initial proponent could then resell that contract and make profit from flipping it.”

Eurich says that while some of those lessons have been learned and the speculative dimension, for example, has been removed from Alberta’s bidding process, hurdles remain to greening Alberta’s grid.

“Alberta has been a deregulated market for 20 years and now we’re making changes to that market,” he says. “We’ve got REP 1, 2 and 3, but we also have a pending capacity market and are putting a price on carbon. Renewable technologies continue to become more competitive in terms of cost. All in all, there is a lot going on.”

Integrating Intermittent Power

Integrating intermittent renewable power onto the grid will have numerous impacts on power prices and the reliability of the overall system. In an unregulated market, power pricing is settled by supply and demand. But adding intermittent power, such as wind power (currently the most economic renewable energy in Alberta; all three REP 1 winners were wind projects), is a challenge in an unregulated market.

That’s because when the wind blows in Alberta, it tends to blow for most of the wind power producers at the same time. As electricity supply increases, the hourly price paid for that power comes down. Conversely when the wind doesn’t blow, less supply drives prices up.

“So if you own a wind project right now in an unregulated market and new wind projects are built with government contracts, it may challenge your economics,” Eurich says.

As additional wind power comes on, it amplifies price spikes and valleys. In contrast, projects with a defined floor price trade upside for price certainty.

Further, given the intermittent nature of wind and solar power, the Alberta power system will require power generation assets that can be at the ready to fill any unexpected shortfall in expected power generation (as most Albertans know, the weather can be very unpredictable). This should create opportunities for energy storage (dam hydro, pump hydro, batteries, etc.) and for gas power plants to smooth out the intermittent power characteristics associated with most renewable energy technologies.

Capacity Market

Alberta will still need base-load power generation. As coal-fired power is removed from the grid, natural gas-fired power will become the likely replacement, however, investment into these plants requires some certainty of economic returns.

“So the government plans to split up the market into two revenue streams. It’s essentially breaking the price of electricity into two components to incent the build of new capital intensive assets,” Eurich says. “In a capacity market, there is a return on invested capital. So that will incent baseload capacity development that otherwise wouldn’t get built.”

A functioning capacity market, however, isn’t expected until 2022, although there are excellent examples of capacity markets in other jurisdictions such as New England. In the meantime, project developers and financial institutions will struggle with price uncertainties. Merchant pricing may be too much risk for a project to absorb and such projects may require corporate or provincial power purchase agreements.

Energy Disruptors

Renewable energy represents an opportunity in Alberta, but for the industry to really grow money will need to flow more readily into the sector. For that to happen, a lot of pieces still need to fall into place in the next three years.

Collaboration between government, renewable energy proponents and the oil and gas industry will be needed. This dialogue will necessarily take various forms, but conferences such as the upcoming Energy Disruptors conference this May will play a role in shaping Alberta’s energy mix.

This conference bills itself as a “gathering of the world's most influential and innovative energy disruptors,” and its organizers are determined that it serve as a pragmatic conversation about the future of energy.

“Right now, the conversation is happening at the extremes,” says Graeme Edge, Calgary-based entrepreneur and co-founder of Energy Disruptors. “You have one dialogue that is anti-development and that demonizes the oil and gas industry which, I think, really lacks understanding about the fact that the world is continuing to use more and more energy.

“The other extreme is business as usual, but that’s not good enough. So what is a compelling vision of the future for the energy industry? Each side has listened to the other. We believe there is a common ground.”


Energy Disruptors: Unite 2018

  • The inaugural Energy Disruptors Unite conference is May 15 and 16 at the Stampede Big Four. ATB Financial is the title sponsor.
  • High-profile keynote speakers include Virgin Group’s Sir Richard Branson, the Quiet Revolution’s Susan Cain, and Michael Liebreich, the founder and guest contributor of Bloomberg New Energy Finance.
  • This event will host practical and rigorous discussion and workshop from a roster of the world’s leading experts, leaders, and entrepreneurs.
  • For more information click here .


ATB

ATB Corporate Financial Services is an area of expertise within ATB Financial that serves the needs of mid- and senior-market businesses with operations in the province of Alberta. Offering a wide range of business solutions from credit, deposit, cash management, financial markets and syndications, ATB provides highly responsive relationships to our clients through industry expert Relationship Management teams. Focusing on the sectors that drive Alberta’s economy such as energy, real estate, construction and food & forestry, ATB is proud to be a financial partner that is focused on the greater good of its clients and Albertans. Through the credit crunch, depressed commodity prices and global economic turmoil, ATB has remained ever loyal to our customers while building custom solutions that make banking work and help our clients do what they do best…lead.