Impact of Offsets and REC's on Economics of Alberta Wind Projects in Alberta

The Impact of Offsets and REC’s on the Economics of Wind Projects in Alberta2011 Canadian Wind Energy Association (CanWEA) Annual ConferenceVancouver, British ColumbiaOctober 6, 2011Presented by: John Goetz Research Assistance by: Keith Bishop Courtney MacQuarrie 1

Overview• Alberta’s De‐regulated Electricity Regime • Alberta’s Emission Reduction and Trading Program• California’s Renewable Energy Portfolio Standard• The Economic Impact of Offsets and REC trading 2

Alberta Wind Farms 3

Alberta Power Pool• Alberta does not have a central power purchaser like most other provinces (Ontario Power Authority, BC Hydro, SaskPower)• Alberta adopted a de‐regulated system for the purpose of increasing competition to provide the lowest possible energy prices to its consumers • All electric energy bought and sold in Alberta must be exchanged through the Power Pool of Alberta* – created by the Electric Utilities Act* Power Purchase Arrangements/contracts for differences are often entered into independently 4

Alberta Power PoolHow Does the Power Pool Work?• Power Pool functions as a spot market, matching demand and supply to establish an hourly pool price• Generators/importers submit their offer to supply energy through the Pool for each one‐hour period during the next seven days• Offers are structured in MWh volume blocks 5

Alberta Power PoolHow Does the Power Pool Work?• System Controller keeps supply and demand in balance by instructing power suppliers and purchasers about the amount of energy to be supplied to or taken out of the system• System Controller develops a “merit order” of the offers and bids ‐ an hourly operation schedule to meet forecast pool demand by ranking offers and bids from the least expensive to the most expensive ‐ takes into consideration constraint factors• Scheduling is done a day in advance and the System Controller dispatches the required generation and import offers to service the actual system demand and exports in real time 6

Alberta Power PoolHow Is the Price Determined? • Pool Price is determined by taking the weighted average of the system price over 60 minutes. All power producers receive the hourly Pool Price for power generated and all purchasers pay the Pool Price for power received• Bid functions to remove (buy) energy from the Power Pool and involves distributors, exporters, retailers and direct access customers• Offer functions to supply (sell) energy to the Power Pool and involves Power Purchase Arrangement buyers, generators, and importers• System Price reflects the up‐to‐date change in demand and price of energy during each hour 7

Emission Offsets in Alberta Alberta’s Emission Regulation and Trading System• Alberta 1st jurisdiction in North America to regulate GHG emissions• Require large emitters to reduce emissions intensity by 12% annually from established baseline• Developed flexible compliance and emission trading system• Designed to achieve emission reductions at the lowest cost 8

Emission Offsets in Alberta Alberta’s Emission Regulation and Trading System• Emission reduction compliance mechanisms: 1. Reduce emissions intensity at the source – often difficult ‐ prohibitively expensive 2. Buy Tech Fund Credits from Alberta Government (one credit for each tonne of GHG emission reduction required = $15.00 per tonne/credit 3. Buy emission offsets or emission performance credits (EPC’s) ($12.00 ‐ $14.00 per offset or EPC) Or any combination of the above 9

Emission Offsets in Alberta Alberta’s Emission Regulation and Trading System• Each offset/EPC = 1 tonne of GHG emission intensity reduction• Offsets are generated by unregulated entities/projects that generate emission reductions, such as wind power projects• EPC’s are generated by regulated entities exceeding their targets 10

Emission Offsets in Alberta Alberta’s Emission Regulation and Trading System• Alberta’s major electricity sources are coal and natural gas fired generating plants (very little hydro)• Alberta has a grid emission intensity factor of 0.65 tonnes of GHG emitted per MWh of electricity produced• Equals 0.65 offsets for each MWh wind energy produced 11

Emission Offsets in Alberta Offsets not automatically owned by purchaser• In Alberta, a wind power producer does not have to assign the “environmental attributes” to the purchaser like other jurisdictions• Offsets can be sold separately from the electricity• Offsets in Alberta have a significant value (approximately $14.00 each) 12

Emission Offsets in Alberta Value of Emission Offsets in Alberta• At .65 offsets per MWh generated, based on an offset price of $14.00, offsets add $9.00 to the price per MWh (.65 x $14 = $9)• 30 day Rolling hourly average pool price as of September 28th, 2011 was $136.10 /MWh• Year to date average pool price as of September 28th ‐ $76.43• Adding offset value would bring this to $85.43 13

Emission Offsets in AlbertaImpact of Offsets on Economics• 3 Year Average Pool Price is around $60.00/MWh Avg. Pool With Period Price/MWh Offsets Aug 2010 - Sept 2011 $ 63.43 $ 72.43 Aug 2009 - Sept 2010 $ 54.17 $ 63.17 Aug 2008 - Sept 2009 $ 61.78 $ 70.78 3 Year Average $ 59.79 $ 68.79 14

California Renewable Portfolio Standard (RPS)California Increasing RPS• Senate Bill X1‐2 (SBX1‐2), signed in April 2011, increased California’s legislated RPS from 20% of retail sales by December 31, 2013 to 25% of retails sales by December 31, 2016 and 33% by 2020• California RPS incorporates the use of Renewable Energy Credits for compliance• RECs are a certificate of proof that one MWh of electricity was generated by a Renewable Portfolio Standard (“RPS”) eligible energy resource and are issued through the Western Renewable Energy Generation Information System (“WREGIS”) *Refer to the current Energy Commission Renewables Portfolio Standard Eligibility Guidebook at www.energy.ca.gov/renewables/documents/index.html#rps for information on eligible renewable energy resources and fuels 15

California RECs in AlbertaCalifornia Renewable Energy Credits (RECs) Available to Alberta Power Producers• WREGIS tracks renewable energy generation and creates WREGIS certificates for every renewable energy credit (REC) generated, which are used to demonstrate compliance with state RPS policies• One REC represents one megawatt‐hour (MWh) of electricity generated from a renewable resource• RECs originally had to be bundled with electricity delivered for consumption in California but the CPUC have ruled that Tradable RECs (TRECs) can now be traded separately from the associated electricity – BUT, there are limitations 16

California RECs in AlbertaCalifornia Renewable Energy Credits (RECs) Available to Alberta Power Producers• Since Alberta wind generators can retain their environmental attributes when they sell their electricity ‐ they can convert emission reductions into offsets, RECs or other compliance units – whichever has highest value $$$• RECs are ostensibly available to Wind Power producers in Alberta, but there are some challenges 17

Generating RECs in AlbertaCalifornia Renewable Energy Credits (RECs) Available to Alberta Power Producers• TREC prices have reportedly ranged between $12.00 ‐ $40.00 * with a price cap of $50/REC for REC‐only contracts (due to expire December 2013 unless extended) – However, California utilities indicate $15 ‐ $20 is more realistic for the time being• At these prices, RECS offer an attractive alternative to Alberta offsets for Alberta Wind Power producers/developers, BUT…RECs may not be readily available, especially if Wind Producer not actually delivering the power to California through WECC transmission system• Some Alberta Wind Project owners have reportedly received a cool response from California utilities lately ‐ citing that it is difficult to get CPUC approval to use RECs for RPS compliance if the RECS are from out of state and worse, out of country ‐ also concerns about public perception*Bloomberg January 28, 2011 18

Generating RECs in AlbertaThe Greengate – PG&E Contract• Groundbreaking deal let Greengate sell its energy and RECs to PG&E and allowed PG&E to receive credit toward its RPS requirement in California even though it will not be selling the renewable energy in the state• This was the first transaction since California lifted a ban on buying and selling credits separately from the renewable energy that produces them• Greengate‐PG&E deal demonstrates that a market for Alberta generated RECs is possible and could be a valuable component of financing 19

Generating RECs in AlbertaThe Greengate – PG&E Contract• The Greengate ‐ PG&E transaction involved buying “green attributes” only, not power*• Under the contract with Greengate, PG&E will purchase energy, capacity and green attributes from the Alberta wind farms and then immediately and continuously resell the energy and capacity back to Greengate, while keeping the RECs for their own use** CPUC Resolution E‐4390 January 27, 2011 20

Generating RECs in Alberta25% Cap on TREC Use• Currently a 25% cap on the use of TRECs by utilities for meeting their RPS • This was due to be lifted in 2013 – but SBX1‐2 seems to have changed this ‐ use of TRECs will be reduced from current 25% cap at end of 2013 to 10% by 2017 (but 10% of 33%)• Cap has slow demand for TRECs ‐ utilities reportedly near limit for tradable RECs• This could limit the opportunity for REC only contracts 21

Economic Impact of Trading RECs• RECs could add $10.00 ‐ $50.00 (depending on price) to price per MWh• This could have a significant impact on the economics of a Wind Project in Alberta• Consider the potential impact RECs would have had over last three years Avg. Pool + $14.00 + $10 + $20 + $30 + $50 Period $/MWh Offsets RECs RECs RECs RECs Aug 2010 - $ Sept 2011 $ 63.43 $ 72.43 $ 73.43 $ 83.43 $ 93.43 113.43 Aug 2009 - $ Sept 2010 $ 54.17 $ 63.17 $ 64.17 $ 64.17 $ 84.17 104.17 Aug 2008 - $ Sept 2009 $ 61.78 $ 70.78 $ 71.78 $ 81.78 $ 91.78 101.78 3 Year $ Average $ 59.79 $ 68.79 $ 69.79 $ 79.79 $ 89.79 109.79 22

Alberta’s Wind Energy Resource• Alberta has one of the best on‐land wind energy resources in Canada• Average annual wind speeds of 6‐8 m/s (22 – 25km/hr) are abundant in south half of province, where major population is concentrated 23

Alberta’s Wind Energy ResourceConsider the following combined factors:• Above average on‐land wind resource• Sea of flat, open land ‐ cooperative owners/farmers• Simpler/faster permit process w/ less resistance• Growing Economy ‐ growing electricity demands • Looming Closure of “Old” Coal‐Fire Generating Plants • Availability of offsets and RECs to bolster economics• No local content rules 24

Challenges Main Challenges to Wind Development in Alberta• Lack of Long Term PPA’s• No guaranteed price w/o long term PPA• Some risk involved in Power Pool Pricing• Difficulty obtaining debt financing without Long Term PPA 25

Challenges Main Challenges to Wind Development in Alberta• Short‐term limitations to Grid Tie‐ins ‐ South region transmission infrastructure requires substantial improvements including: – new transmission lines and substations – upgrading of existing facilities to connect wind power and move it to large load centres like Calgary. – In September 2009, the Alberta Utilities Commission (AUC) approved a project to reinforce transmission in southern Alberta and connect 2,700 MW of wind to the grid. This project will be built in stages over next 10 years – In April 2010, AUC approved a project to reinforce the transmission system in the East Central Alberta area to accommodate anticipated growth in demand and connect about 700 MW of wind power 26

Opportunities • Alberta currently has 770 MWs of wind connected to its grid• As of April 2011, AESO has > 7,500 MW of applications for new wind generation in cue• AESO anticipates approx 1,028 MW of wind power connected to grid by the end 2011 Suncor’s 30 MW Chin Chute Wind Farm near Taber, Alberta Sean LeBlanc Photography 27

Opportunities Opportunities for Wind Developments in Alberta• Just under 50 Projects (7100 MWs) in pre‐construction/construction phase with either PPA, under construction or Construction Plan in place • Several of these projects looking for partners/financing ‐ opportunity for accelerated development – not limited to undeveloped “Greenfield” opportunities• Project Costs may be lower due to flat landscape, amenable landowners and approval process and access to international turbine/equipment suppliers • Improving Grid should provide more opportunity for more development in strong but stranded wind resource areas• Opportunity to enter into “contracts for differences” to reduce price risk• Opportunity for increased upside if price of carbon/RECs increase 28

Summary• Alberta is significantly different than other Canadian wind markets• Presents unique opportunities and unique challenges• Lack of long term PPAs requires creative financing approaches• Not limited or assisted by power authority RFPs• Potential for significant returns and accelerated payouts, but not without some risk and challenges 29

Questions 30

For Further InformationContact: John C. Goetz (403) 268‐7167 John.Goetz@fmc‐law.com

John Goetz is a partner in the Energy Group at Fraser Milner Casgrain LLP. John has extensive experience advising clients in the energy sector, including in‐house experience at a major oil company. John co‐leads the Cleantech and Emissions Trading Group and brings his energy and cleantech experience and insights to this emerging area of practice.John works closely with energy clients on their corporate commercial matters and has significant experience with large infrastructure projects, cleantech projects and commercialization, mergers and acquisitions and operational matters. John also advises energy and cleantech clients on climate change strategy, emissions trading and renewable energy projects. For more information on John’s practice, go to www.fmc‐law.com/People/GoetzJohn.aspx

The preceding presentation contains examples of the kinds of issues companies dealing with wind projects could face. If you are faced with one of these issues, please retain professional assistance as each situation is unique.

Impact of Offsets and REC's on Economics of Alberta Wind Projects in Alberta

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Impact of Offsets and REC’s on Economics of Alberta Wind Projects in Alberta — Presentation Transcript

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