Courtesy of Osler. View original article here.
On October 2, 2018, the Alberta government, through the Minister of Infrastructure (Alberta Infrastructure) released a request for proposals for the first solar-specific renewable power procurement in Alberta (the Solar RFP).
Solar RFP procurement process in comparison to the REP Processes
Unlike the procurements by the Alberta Electric System Operator (AESO) under the first three rounds of the Renewable Electricity Procurements (REP), which have been technology neutral, Alberta Infrastructure is seeking to contract for generation which is produced exclusively from solar power, in the amount of up to 135,000 megawatt-hours (MWh) per year for 20 years. This is the first renewable power procurement in the province that favours one renewable resource over another. For context, the Solar RFP seeks to source the equivalent of approximately 55% of the government’s annual electricity requirements.
The Solar RFP procurement process has other notable differences from the REP processes. Firstly, the process is condensed, with the final bid submission deadline being due November 8, 2018, just over one month from issuance of the Solar RFP.
Secondly, there is no bifurcation of a qualification stage and a proposal stage, as there is in the REP processes. Following the deadline for proposals, Alberta Infrastructure will engage in a two-month evaluation process to determine which solar project(s) qualify and of those, which will be awarded the contract(s). Notwithstanding the foregoing, there is a two-week window in which potential bidders may submit enquiries regarding the Solar RFP rules or process.
Finally, unlike the currently ongoing REP 2 process, the Solar RFP does not require potential proponents to partner with qualifying Indigenous partners. Instead, bidders are given a desirability score (which amounts to a discount on their proposed strike price) based on the level of Indigenous equity participation in the project. Proposals with a 25-50% economic interest held by qualifying Indigenous communities or entities will be considered as if the strike price on which their bid is made is 5% lower, and those with at least 50% Indigenous equity participation will be given a 10% notional discount to their bid price.
Contracts for successful Solar RFP bidders in comparison to other government contracts
Successful bidders in the Solar RFP will be offered a Solar Electricity Support Agreement (SESA) which is largely similar in structure and terms to the contracts offered to renewable power producers participating in the REP procurements. Project developers must exchange all power and renewable attributes associated with their project to the government, in exchange for support payments over a 20-year term similar to the RESA. The governmental support payments are based on the difference between the contracted-for strike price and the pool price available in the market at the applicable time. Many elements of the contract-for-differences approach are mirrored from the RESA form into the proposed form of SESA set out in the Solar RFP.
However, several elements of the SESA are different from the RESA and must be taken into account by potential proponents when structuring their solar bids as these differences can impact project economics and design. For instance, there is no adjustment for inflation in the strike price under the Solar RFP. Further, while there is an acknowledgement that capacity market products belong to the generator, the solar power producer is required to pre-agree to amend the SESA when the capacity market design is announced in such a way that the risks and rewards of participation in an Alberta capacity market (to be introduced in 2021) are attributed to the government up to the contracted energy delivery volume.
In addition, there is a minimum annual energy delivery volume of 85% of the contracted volume and a rolling three-year minimum requirement of 90% of the contracted volume, where failure to meet such energy delivery requirements carries punitive penalties for the solar power developer. Given the variability in solar resources from year to year and the natural degradation of solar generation infrastructure, such requirements and associated penalties will motivate project developers to carefully size their projects and monitor maintenance and renewal schedules.
Among the discrepancies between the RESA form and the proposed SESA published in the Solar RFP are also changes made to the benefit of the power project developer. For instance, the requirement to provide the government security does not apply in this procurement process, which is attractive to bidders which rely on debt financing and securitization of the contracts in favour of third-party lenders. Notably, the successful proponents in the REP 1 process (the only REP process for which contracts have been awarded to date) have all been traditionally balance-sheet financed project developers.
All in all, the procurement process and associated government contract are largely similar between the REP procurements and the Solar RFP process, albeit on a much abbreviated timeline, and with a different government buyer. Time will tell whether the solar-technology-specific focus of the Solar RFP procurement, together with the few key structural differences in the SESA, will result in bids which are cost-competitive with the proposals made under the REP processes.