Renewable Energy Progress: Alberta's proposed Renewable Electricity Act and Key Provisions of the RESA

November 16, 2016

Written By David Macaulay, Thomas McInerney, Duncan McPherson, Jana Prete, Jason Banack and Stephanie Clark

On November 3, 2016, the Minister of Environment, Shannon Phillips, announced the introduction of the Renewable Electricity Act (the Act). The Act is currently progressing through second reading and given the current pace is expected to be proclaimed in force prior to the end of 2016.  The Minister also announced that the first Renewable Electricity Program (REP) will be developed based on the Renewable Electricity Program Recommendations issued by the Alberta Electric System Operator (AESO) in May 2016 (AESO Recommendations).  On November 10, 2016, the AESO released the much anticipated key provisions for the proposed form of Renewable Electricity Support Agreement (RESA) for comment by the industry.  Further commentary on each of these developments are set forth below.

These actions by the Government represent important steps towards the implementation of its Climate Leadership Plan and its objective of adding 5,000 MW of renewable electricity capacity in Alberta by 2030. The addition of 5,000 MW of renewable electricity is estimated by the Government to result in C$10.5 billion in new private investment and 7,200 new jobs in Alberta. The Climate Leadership Plan, which was first announced by the Government in November 2015 and set a goal of generating 30 percent of Alberta's electricity from renewable sources by 2030, is summarized in an earlier post, AESO’s Recommendations on Renewable Electricity Program. 

The Act

The Act grants substantial powers to, and imposes certain obligations on, the Minister (likely to be the Minister of Energy) to:

• implement the REPs intended to achieve the Government objectives, including powers to set targets, monitor progress (including making its findings public);
• direct the AESO, as independent system operator;
• develop a proposal for the development and implementation of renewable electricity programs to meet those targets and promote specific other goals (i.e., environmental, social and economic);
• establish the terms of the RESA for the applicable REP; and
• take security in applicable generating units.  

Although the details of each REP must be submitted to the Minister for approval, the AESO retains the authority to select the successful proponent and award a RESA following a competitive procurement process, subject, again, to the Minister's approval of the total quantity of electricity to be generated and form of RESA to be entered into (in particular, the cost associated with administering and performing the RESA).

Regarding funding of the AESO's support payment obligations, the Act provides that any payments made to generators will be made first from the Climate Change and Emissions Management Fund established under the Climate Change and Emissions Management Act. The taxes levied on large industrial carbon emitters will therefore be used in part to finance the transition to renewable electricity. Any additional funds needed to fund the support payments will be paid out of the General Revenue Fund upon request of the Minister.  It is noteworthy that the AESO has indicated that the Government will be considering an "affordability threshold", which could potentially cap the amount the Government would spend implementing the REP and/or the AESO's financial liability pursuant to the RESAs.

The Act seems to anticipate preferential treatment for renewable generators operating in Alberta's otherwise competitive electricity market and vests significant authority in the AESO. In addition, in order to streamline the process and reduce any challenges to the Government's programs, the Act provides that neither the Market Surveillance Administrator nor the Alberta Utilities Commission is permitted to investigate or consider complaints against the AESO for any reason connected with an approved REP. However, as a counterbalance, in an effort to ensure that the applicable procurement process and REP is conducted fairly, the Act requires that the AESO engage an independent fairness advisor. 

Parameters of the First REP

The Minister established an interim target of 400 MW of new renewable generation capacity to be procured by Q4 of 2017 and in-service by Q4 of 2019. The AESO expects that the pace of subsequent competitions under the Act would be determined by the schedule for the eventual phase-out of coal assets (which is not yet known). Details regarding the coal phase-out (including timelines) are anticipated in the report to be prepared by Terry Boston (which was to be published at the end of September, but is not yet available).

The AESO Recommendations specify the following in relation to the first competition:

• The project must be a new or expanded project in Alberta.
• The project must have a minimum capacity of 5 MW.
• The project must meet the Natural Resources Canada definition of "renewable energy" (water, wind, solar, biomass and other natural resources that can be naturally replenished or renewed within a human lifespan).
• The project must utilize the existing transmission and distribution system.

It is expected that each competition within an REP will have three phases occurring in the following order:

1. Request for Expressions of Interests Phase to attract/gauge the level of interest of proponents.
2. Request for Qualifications Phase to qualify proponents in categories of project eligibility, financial strength and capacity, as well as development, construction and operations capability.
3. Request for Proposals Phase in which only qualified proponents will be eligible to submit a final binding offer and the successful proponent will be selected and provided the opportunity to enter into a RESA.

This three-step process is anticipated to run for approximately 7-11 months. 

RESA

The AESO began public consultations regarding the terms of the first competition pursuant to the REP (and, in particular, the commercial terms of the form of RESA) on November 10, 2016. The deadline for receipt of stakeholder comments on the RESA is December 9, 2016.

The AESO proposes that the first competition will adopt a 20 year contract for differences model (referred to by the AESO as an "indexed renewable energy credit" pricing mechanism), under which the generator receives a support payment. The support payment amount in each case is calculated as the difference between the generator's proposed "strike price" for the project which will be quoted in its bid and the pool price. Where the pool price is lower than the strike price, the AESO would be required to pay the difference to the generator and where the pool price is higher than strike price, then the generator would be required to pay the difference to the AESO. The AESO has proposed that 20 percent of the strike price shall be escalated at Alberta CPI.

As would be expected in a contract of this nature, the key principles of the RESA proposed by the AESO present a complicated inter-relationship between risks and rewards which developers will need to carefully consider. In-service risk to the AESO is addressed by establishing longstop dates for construction commencement, target commercial operations dates (COD) and longstop CODs with a series of consequences including revenue truncation, RESA termination rights of AESO and associated liquidated damages for failures to meet such milestones. Security for such pre-COD events is contemplated as letter of credit security based on $50,000/MW. Developers will need to review the manner in which they will be able to mitigate these risks together with the contemplated force majeure relief, change in law accommodation, termination for convenience rights of AESO, ownership restructuring limitations and various other risks under the proposed principles.

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