Alberta’s First Competitive Power Procurement Begins

Courtesy of Borden, Ladner and Gervais. View original article here.


Alberta will hold its first auction for renewable electricity generation contracts in early 2017. The Province’s implementation of sweeping climate change policies in the electricity sector (previously addressed by BLG in New Opportunities in the Alberta Electricity Market – An Overview) is now supported by key details about its first procurement. A procurement that is a first step on the road to achieving Alberta’s “30 by 30” target (30 per cent of electricity used in Alberta being generated from renewable sources by 2030) – a cornerstone of premier Notley’s Climate Leadership Plan announced over a year ago.

On November 3, 2016, the Provincial Government tabled Bill 27 – Renewable Electricity Act (Bill 27) which enshrines the 30 per cent renewable target and authorizes the Environment Minister and the Alberta Electric System Operator (AESO) to procure renewable power to meet the target. On the same day, Environment Minister Shannon Phillips announced that 5,000 MW of renewable capacity would be added by 2030, beginning with 400 MW to be procured under a program based on the AESO’s recommendation to the Province for a Renewable Electricity Program (REP). Significantly, Alberta did not adopt a feed-in-tariff or a long-term government power purchase agreement to support project financing by producers. Instead, as expected, Alberta’s merchant market will remain with support for renewables in the form of indexed renewable energy certificates (RECs).

Next Steps

Substantive changes announced last week include further details on a three stage competitive procurement process. The REP will begin in Q1 of 2017 and progress as follows:

Request for Expressions of Interest (REOI) — a 4-6 week process (Q1 2017) during which industry can provide feedback on the competition without obligation. This aspect is focused on assessing interest in the overall process.

Request for Qualifications (RFQ) — a 4-6 month process (Q2 and Q3 2017) to determine on a pass/fail basis, which bidders are qualified to proceed to the final stage. At this stage, bidders will be required to pay a non-refundable qualification fee and demonstrate their qualifications for: (i) project eligibility (i.e. meets the definition of “renewable”, is located in Alberta, is 5 MW or greater and is likely to meet the specified in-service date); (ii) financial strength and capacity; and (iii) technical capability.

Request for Proposals (RFP) — a 2-3 month process (Q4 2017) during which qualified bidders must provide bid security and submit their final binding offers (i.e. bid price). Successful bidders will be selected based on lowest price.

Other key aspects of the procurement include the following:

  • the REP will be fuel neutral — wind, solar, hydro or other renewables can all participate, but successful bidders will ultimately be determined based solely on the economics of their respective projects;
  • as previously occurred for Alberta transmission facilities procurement, a Fairness Advisor will oversee the REP, with responsibility to monitor and report on the implementation of the competitive procurement;
  • 20 year contracts called Renewable Energy Support Agreements (RESAs), with the AESO as the counterparty, will be awarded to successful bidders late next year for projects of more than 5 MWs that must be in-service by 2019;
  • the financial incentive in the RESAs will be in the form of an indexed REC which, in essence, will be a contract for differences linked to the pool price for electricity. REC’s will be automatically adjusted so that when pool prices rise, the support to be paid falls and if the pool price rises above the bidder’s strike price, the bidder must pay the difference to the Provincial Government. The intent is that successful bidders will not bear the Alberta pool price risk over the term of their RESA but, in return, will forego windfall profits in times of high pool prices; and
  • the AESO will release draft material commercial terms of the RESA and REC on November 10th for comment as part of a short consultation period that will end on December 9th.

Further details on how to participate in this transformational energy procurement are set out here. Beyond 2017, it is expected that the AESO will hold a series of competitions between now and 2030 to incent the proposed 5,000 MW of renewable generation capacity. The Provincial Government indicates that future competitions will be timed to parallel the pace of coal plant retirements.

Further Questions/Industry Impacts

Through the Provincial Government’s tabling of Bill 27 and last week’s announcements, Alberta is poised for its first competitive renewable energy procurement. However, it also raises a number of questions that will be answered in the coming months, including:

  1. Will the proposed pricing regime create the expected investor certainty and access to capital?
  2. How subscribed will the process be, and what mix of participants will emerge?
  3. If lowest price is the determining factor, will only a couple of contracts be awarded before the 400 MW target is met?
  4. How will lowest price be determined? Is it simply based on the strike price under the REC?
  5. Will REC’s ensure a reasonable rate of return?
  6. How competitive will pricing be?
  7. Does the process ensure that risk premiums will be avoided?
  8. Will the AESO impose an affordability threshold, or private cap respecting the price above which projects cannot be bid?
  9. What will the ultimate ratepayer impacts be?
  10. What will be the scope of future regulations?
  11. Bill 27 includes provisions for the AESO to hold security or other interests in power projects in cases of insolvency — what are the industry impacts and is this an appropriate role for the AESO?
  12. Bill 27 prohibits the Market Surveillance Administrator from considering complaints against the AESO respecting the development of a renewable power program – will this impact participant confidence in the process?

RESA commercial terms will be disclosed this week. Subsequently, the success of the REP — and the overall procurement process — will become increasingly clear. Changes are expected to be rapid and multi-dimensional, with transformative industry effects. BLG will continue to monitor and comment on these developments.

Courtesy of Borden, Ladner and Gervais. View original article here.