Policy and market setup stall growth potential in Alberta

CANADA: With its growing electricity demand, good resources and ageing coal-plant fleet, Alberta is ideally placed to become Canada's next big wind market. But a lack of long-term contracts and political support means developers and investors are holding off

Go west… The 300MW Blackspring Ridge project, EDF EN Canada’s first in Alberta, came online this year (pic: Enbridge)

On the face of it, Alberta is a market where wind energy should be thriving. Peak demand for electricity in the Canadian province is expected to grow an average of 2.5% a year to 2034. Combined with about 4GW of pending coal-plant retirements, this will require the installation of 6.5GW of new generation by 2024 and nearly 13GW by 2034.

Alberta's wind resources are among the best in the country, with Bloomberg New Energy Finance (BNEF) calculating an average capacity factor of 35.4% and an average levelised cost of energy in the C$66-79/MWh (US$61-73/MWh) range. On top of that, markets in Ontario and Quebec, which have fuelled Canada's wind energy growth in recent years, are slowing down, leaving investors looking for new opportunities.

When the 300MW Blackspring Ridge wind project came online in southern Alberta this spring, it was co-owner EDF EN Canada's first foray into the west after amassing a portfolio of more than 1GW of contracted wind power projects in Quebec.

"I recall the words of a famous bank robber, when asked why he robbed banks, his answer was, because that's where the money is," Jon Kieran, the firm's director of development told an industry forum earlier this year. "Looking in the western provinces of Canada, you are really looking at the only power grids that are growing."

At the same time, Kieran acknowledged what he called the challenging "merchant market dynamics" developers face in Alberta. The province has a competitive power market with no specific policies or incentives to support renewable-energy deployment, leaving wind to compete purely on the spot market price, plus any additional revenue streams developers can generate from the sale, such as carbon offsets.

Difficult market

It is a daunting task in a market where power prices, driven down by low natural-gas prices, are averaging in the C$60/MWh range so far this year. And because wind generation in Alberta is skewed towards off-peak hours, and tends to flood the grid when it is operating and drive down wholesale prices, producers end up earning far less than the average. In 2013, for example, the average spot market price was C$80.19/MWh, but wind generators earned an average of C$54.97/MWh.

Blackspring Ridge was able to move forward by locking in a 20-year deal to sell renewable energy credits to Californian utility Pacific Gas & Electric, but the US state has since changed the regulations that allowed this. In fact, many of the things that helped wind make an economic case in Alberta are no longer in play. Federal wind production incentives ended years ago, and the province's carbon market is in limbo awaiting a government revamp.

"Really Alberta is entering a new kind of uncharted territory," says BNEF analyst Dan Shurey. "There is a little bit of complacency in the province that it is going to carry on as it has, but it won't unless something changes in the market."

The impact is starting to show. In May 2012 there was nearly 5.7GW of wind in the interconnection queue. By August 2014, this had dropped to just less than 2GW. The province's electric system operator has also downgraded its forecast for new wind additions.

Lack of support

"It's ironic that Alberta is the most promising market for new electricity supply opportunities. It's got the fastest growing economy. It's got lots of new demand for electricity. But it is also a region where we are seeing a steady decline in interest from wind-energy project developers," says Robert Hornung, president of the Canadian Wind Energy Association (CANWEA). "Our key message is that the status quo will not incentivise investment in wind. So if we want wind energy, we've got to find some ways to tweak the system."

One thing that would help is access to long-term power purchase agreements (PPAs) to help stabilise revenues - something large industrial and commercial consumers in Alberta have shown little inclination to sign. "The challenge we're seeing in Alberta is a challenge we're seeing in a lot of places in North America, which is a lack of PPA opportunities for projects," says Shurey.

Without that PPA backstop, it has been difficult for developers to secure financing at attractive rates, if they can get it all. The weighted cost of capital for a contracted project is around 6%, says Kelsen Vallee, managing director of power and utilities investment banking at CIBC World Markets. "For a merchant project we calculate that to be double, just over 12%."

It is an issue not unique to Alberta. In the PJM Interconnection, the largest wholesale market in the US, covering 13 states and the district of Columbia, a hotly competitive retail market has made it difficult for wind projects to find customers willing to sign long-term contracts. That raises the cost of wind at a time when the industry needs to be exploring all avenues for bringing it down, Gabriel Alonso, chief executive of EDP Renewables North America, told this year's American Wind Energy Association annual conference. "We need to favour policies that bring long-term contracts, because when we have long-term contracts, we get the cheapest capital available in the market," he said.

CANWEA has floated the idea of a clean energy standard for Alberta, which would not only encourage retailers to sign PPAs, but also create a market pull for renewables at a time when new gas-fired additions are expected to dominate. But provincial policymakers have said more than once that the government "will not dictate" what kind of fuel is used for generation, and the group representing the province's power-generation sector has also come out against the idea. "We definitely would oppose policies that pick winners and losers," says Evan Bahry, executive director of the Independent Power Producers of Alberta.

There are market solutions to the financing issue that should be explored instead, Bahry says, including working with large power consumers to develop purchase contracts that would satisfy financiers.

Vittoria Bellissimo, executive director of the Industrial Power Consumers Association of Alberta, has tried to act as a matchmaker between her members and generators in the past, with little success. "It is very difficult to talk buyers and sellers into doing it," she told a recent industry forum. "That being said, if anyone has any innovative solutions to make a product that would have a reasonable value proposition consumers would be interested in, I am completely happy to go back to everyone."

Finding that value proposition is a key element of the opportunity for future wind development, Bahry argues. Wind provides a high-quality offset for companies that want to reduce their carbon footprint, he says. Swedish furniture retailer Ikea's purchase of the 46MW Oldman 2 wind project in Pincher Creek, Alberta, last year represents an emerging opportunity to take advantage of the increasing interest corporations have in greening their own operations.

But relying on customer choice and green retail markets is only chipping around the edges of Alberta's wind-energy potential, argues Justin Thompson, president of Alberta-based developer Joss Wind. "There have been a lot of people hammering at the retail market for a long time with limited success, so I really would be concerned about touting that as a major opportunity," he says.

Policy is everything

BNEF's Shurey expects that whatever the Alberta government decides to do with its carbon policy will have the most impact on how the market for wind evolves. A regulation that requires the province's largest emitters to reduce their CO2 intensity by 12% from 2007 levels and sets a carbon price of C$15/tonne expires at the end of the year. There has been talk of increasing the reduction target to 40% and the price to C$40/tonne. That could help drive another 2GW of wind installations by 2022, says Shurey.

"If the carbon price were to go up to the proposed C$40, that could probably equate to about C$25 or C$26/MWh for a project. That is kind of vaguely comparable to the production tax credit in the US, for example, and we've seen how much of a driver the PTC can be with or without the mandate of a PPA offtake agreement," he says. "It could make a huge difference."