10 questions for developers raised by Alberta’s Renewable Electricity Program
At the beginning of November, the Government of Alberta, through the Alberta Electric System Operator (AESO), launched the Renewable Electricity Program (REP) with the objective of generating an additional 5GW of clean capacity by 2030. This aligns with the provincial (and now also federal) government’s plan to phase out coal, the source of half of the province’s electricity generation last year.
The first phase of the REP is a competitive procurement of 400 MW of utility scale (>5 MW) new projects with Requests for Expressions of Interest (REOI) in Q1 2017, RFQ in Q2 2017 and an RFP in Q4 2017. AESO published the outline of the commercial terms of the Renewable Electricity Support Agreement (RESA) and is seeking to engage with stakeholders to receive feedback by 9 December 2016.
- What does the payment mechanism mean for your project? How will the move to capacity market change your assumptions?
The chosen type of payment mechanism is a contract for difference called the Indexed Renewable Energy Credit (REC). The generator is awarded a strike price in $/MWh for 20 years, with 20% of it being linked to inflation. If the power pool price is lower, then the AESO will pay the generator the difference with the strike price, while if it is higher, the opposite will occur.
On one hand, this limits the upside for generators if the pool price increases over time, and the long-term revenue forecasts are relatively fixed. On the other hand, the risk of fluctuation in the pool price is retained by the public authorities. Alberta pool prices have historically been volatile, albeit also relatively low by comparison. However, the stability expected from the announced capacity market might change your approach to bidding.
- What renewable technology should you bet on?
The first competition will be fuel- neutral, while wind, solar and other renewable technologies have different leveled cost of electricity (LCOE). Almost all programs used to benchmark the REP were allowing different technologies to compete against each other.
Large windfarms have historically achieved average LCOE of approximately $80/MWh. The existing pipeline of cost-effective wind projects ready for 2019 is already greater than 400 MW, so it’s expected that other technologies such as solar or biomass should look for competitive advantage in future rounds.
- What local partners do you need to succeed?
Because few players have a track record of renewable projects in Alberta, local partnerships will be key to accelerating the development of projects in the legal and natural environments. AESO has set strict deadlines and approval requirements for generators, but hasn’t mentioned local economic benefits as a criterion so far.
As all projects for each phase will be set with the same schedule, workforce availability might also become an issue for developers.
- What financial returns is the market looking for?
Because total revenue will be fixed for the lifetime of the project, locking the right strike price is a very important decision for developers. While competition will put pressure on the strike price, sounding the financial markets’ expectations on key metrics will be an essential part of bid development.
- What is the value of the renewable attributes?
As part of the RESA contract, generators will transfer to the AESO the renewable attributes of the electricity produced. These renewable attributes are tradable commodities that would otherwise provide additional revenues to the generators. The AESO will retain the environmental benefits of the electricity, possibly discouraging corporate sponsors looking to reduce their carbon footprints or limiting the long-term value of the plants in a carbon-taxed future.
- What innovations are you bringing to the table?
With competition probably based on strike price, technical and financial innovations will be needed to drive LCOE down while remaining profitable. Bidders will look for improvement in technical components or increased yield to achieve a competitive advantage. New financial structures can emerge from the new payment mechanism and add pressure to limit financing costs.
- Will your project be ready for operation in 2019?
Hard deadlines and associated financial penalties present a serious challenge to developers, particularly ones not already established in Alberta. The government believes there are enough projects in the pipeline and existing transmission capacity for a quick rollout of projects, even if early-stage or remote projects might not be ready in time.
- Will your project be eligible for subsidies?
The RESA contract explicitly allows for public subsidies. However, the one related to capacity or generation shall be shared 50-50 with the AESO, while any Government of Alberta funding is not permitted. Government or tax incentives can be a source of competitive advantage for bidders.
- What economies of scale can you achieve?
Developing, building and operating multiple projects in Alberta will lead to economies of scale for developers setting foot in the province. A holistic bidding strategy should be key to enhance a portfolio of projects, as total costs might be highly variable depending on the number of projects awarded. Managing real or perceived conflicts of interest for competing projects will be something to watch out for.
- Is your strategy ready for 2030?
With the phasing-out of coal, technology improvements and regulatory changes, the first phase is only the beginning of the REP, which itself is part of the global energy reform. Investments should be made on the basis of long-term market outlook while staying flexible to respond to future opportunities. In Alberta, there will be a series of such competitive auctions. Similar opportunities also exist in the rest of Canada and beyond.
Does your business strategy consider how to capitalize on knowledge gained? Is your intention to hold long-term or monetize by “flipping” projects post-commissioning?
These questions are just some that you should be asking as you review Alberta’s Renewable Electricity Program. But there may be more depending on the nature of your participation and interest in renewable infrastructure investment generally.
Contact a member of our Power & Utilities team to learn more about how your organization can successfully navigate market structure reform in Alberta.