Courtesy of Blakes. View original article here.
On November 3, 2016, the Alberta government announced its endorsement of the Alberta Electric System Operator’s (AESO) recommendations for the Renewable Electricity Program (REP). The purpose of the REP is to encourage the development of 5,000 megawatts (MW) of renewable electricity generation capacity in Alberta between now and 2030. If accomplished, Alberta’s renewable electricity generation capacity will increase from 11 per cent to 30 per cent of the provincial total.
The government’s endorsement of the REP coincides with the announcement of a proposed Renewable Electricity Act. The proposed Renewable Electricity Act will provide the AESO with the statutory authority to develop and implement programs (as approved by the responsible minister) to incentivize the generation of renewable electricity in Alberta. The AESO’s mandate is to encourage growth in renewable electrical generation while maintaining the reliability of the system and ensuring that the AESO’s technical requirements in respect of its oversight and system operation responsibilities are met.
The AESO plans to meet the 5,000 MW goal by holding a series of competitions that will incent the development of renewable electricity generation through the purchase of renewable attributes. Successful bidders will subsequently be able to sell both their electricity production and their renewable attributes. The AESO will award a 20-year Renewable Electricity Support Agreement (RESA) to eligible projects that can be developed at the lowest renewable attribute price per megawatt hour (MWh). The process will be subject to an affordability threshold above which bid prices may be deemed unaffordable.
After consultation with stakeholders regarding the draft commercial terms of the RESAs, which will take place from November 10 to December 9, 2016, the first competitive procurement process will begin in Q1 2017. RESAs accounting for up to 400 MW of generation capacity will be awarded to successful bidder(s) at the end of 2017. Tight timelines are necessary to ensure projects can be in-service by 2019, as directed by the government.
For further information on the REP, please see our September 2016 Blakes Bulletin: Alberta’s “30 by 30” Renewable Energy Target: Will Wind Energy Projects Now Be Permitted on Public Lands? or our June 2016 Whitepaper: Predictions for Alberta’s Renewable Electricity Program.
The government has announced that the first competition, during which up to 400 MW of renewable electricity capacity will be procured, will result in new investments totalling C$10.5-billion in the province as well as up to 7,200 new jobs.
The eligibility criteria for the first competition are as follows. Projects must:
- Be equal to or greater than five MW
- Satisfy the Natural Resources Canada definition of renewable energy
- Be a new or expanded project located in Alberta
- Be likely to achieve the prescribed in-service date of 2019
- Utilize the existing transmission and/or distribution system
Provided that these criteria are satisfied, the first competition is fuel neutral, meaning that the government has not specified a particular quantity of wind, solar, or other renewable fuel sources to comprise the 400 MW that is procured.
THE COMPETITIVE PROCESS
The AESO has recommended that the REP proceed by way of a three-stage competitive bid process anticipated to run for approximately seven to 11 months. The proposed stages are as follows:
- Request for Expression of Interest (REOI): The REOI stage is intended to attract market interest and provide pertinent information to potential bidders regarding the forthcoming bid process. This stage will be non-binding on participants and will assist potential bidders in determining whether or not to participate in the competition. It is expected to last four to six weeks, commencing in Q1 2017.
- Request for Qualifications (RFQ): The RFQ is the stage where bidders will submit their qualifications, including their project proposals. At this stage, the AESO will identify those participants eligible to participate in the REP through an evaluation of the proposed generation project and the bidder’s financial capacity and technical qualifications, such as their level of industry experience. The RFQ is expected to last four to six months, during Q2 and Q3 2017.
- Request for Proposals (RFP): The RFP stage is where bidders qualified in the RFQ stage will confirm their initial proposals and the AESO will determine the bidder(s) who will be entitled to receive support payments in exchange for renewable attributes generated by the proposed project. This stage is essentially a pricing stage where bidders will provide a final offer to the AESO and winning bidders will be given the opportunity to enter into an RESA. The RFP stage is expected to last two to three months during Q4 2017.
Further, the entire competitive process is to be overseen by an objective third-party observer, or “fairness advisor”, that will advise and report on the process with the aim of enhancing fairness and accountability.
Those bidders who are selected by the AESO to participate in the REP will enter into a renewable electricity support agreement whereby the participant will receive a payment on a per-MWh basis for the renewable attributes associated with the electricity generated by their project. These renewable attributes are certified by independent third parties and commoditized in the form of “renewable energy credits” (RECs). Accordingly, renewable electricity generation units produce both electricity and RECs. Under the REP, the generated electricity can be sold into the power pool at the market price and the AESO will purchase the RECs associated with that electricity.
For the purposes of the first competition, the AESO has proposed using an indexed renewable energy credit (Indexed REC) payment mechanism. Bidders will submit a minimum “all-in” price per MWh that they require to construct and operate their proposed renewable electricity project. Similar to a contract for differences, the dollar value of the Indexed REC will be the difference between the bid price and the price of power in the Alberta electricity market (the pool price). Therefore, the value of the Indexed REC will vary. For example, if an REP participant bids electricity from their project at C$80 per MWh and the pool price is C$30 per MWh, the value of the Indexed REC will be C$50 per MWh. If the pool price increases to C$80 per MWh, the value of the Indexed REC will be zero dollars. Finally, if the pool price exceeds the bid price, the REP participant will actually pay the excess to the government.
The government intends to pay for the Indexed RECs using the Climate Change and Emissions Management Fund, which is funded through money collected from the existing carbon levy on large industrial emitters. This fund will be backstopped by the government’s General Revenue Fund.
UNCERTAINTIES AND NEXT STEPS
It is important to note that, despite the announcement of the Renewable Energy Act and the adoption of the AESO’s recommendations in respect of the REP, there are still a number of items that remain to be clarified. For example, the Renewable Energy Act stipulates that the AESO shall levy “reasonable fees” on both the participants of the competitive process and the generators that enter into the RESAs for the purposes of recovering costs and expenses incurred in developing a proposal under the REP. The nature and quantum of such fees is still unknown.
It will likely be challenging for developers, and particularly regulators such as the Alberta Utilities Commission and Alberta Environment and Parks, to achieve the 2019 in-service deadline if a large number of projects are successful in the first competition. While the AESO originally recommended launching the first competition prior to the end of 2016 in order to achieve the 2019 deadline, the competition will not launch until Q1 2017. By requiring eligible projects to utilize the existing transmission or distribution system, or at least preferring those projects that do, the REP design has set the framework to minimize a significant potential for delay. However, it is not clear that new projects will be situated in locations that will enable their ready use of existing infrastructure, or whether they will be able to complete the requisite environmental studies, obtain regulatory approval, and complete construction prior to the end of 2019.
The eligibility criteria arguably favour projects that have already received regulatory approval and that are located in proximity to pre-existing transmission infrastructure. By stating that connection access to the transmission system may have to be prioritized in favour of winning bidders, the AESO’s recommendations may raise fairness concerns for non-renewable projects or non-winning bidders who had a pre-existing position in the AESO’s interconnection queue.
Further, the Renewable Energy Act provides that the AESO may hold a security interest in a generating unit that is part of the REP in relation to unit owner default or insolvency. At this point, the terms upon which such security interest is granted and how it will be treated are unclear. While the security interest may fall under the regime in the Personal Property Security Act (Alberta) it is also possible that the Alberta government may enact legislation granting AESO a super priority statutory lien. More information is needed from the government regarding the details of this security interest, which will likely involve input from industry participants.
Starting November 10, 2016, the AESO will engage with stakeholders on draft commercial terms for the first competition. Accordingly, the details renewable electricity support agreements will become clearer as the process progresses and the commencement date for the first competition approaches.