There is no doubt that Alberta’s decision to increase the price that large thermal electricity generators pay for carbon emissions, and to phase out pollution from coal generation by 2030, has had a huge impact on the owners of Alberta’s coal plants. But, arguably, no organization has been more impacted by these decisions than Alberta’s Balancing Pool. Why? Because, as a result of these decisions, the Balancing Pool now suddenly controls the sale of electricity generated by Alberta coal plants with over 4000 MW of generating capacity – more than two-thirds of the Province’s 6300 MW of installed coal generating capacity. This makes the Balancing Pool a very important player in today’s Alberta electricity market.
Many new entrants into the Alberta electricity market are surprised to learn that the Balancing Pool is actually a public body (a provincial corporation) formed in 1999 under Part 4 of the Electric Utilities Act (Alberta) (EUA) by the Province. It is one of four public bodies that play a key role in the Alberta electricity market, the other three being the Alberta Electric System Operator, the Market Surveillance Administrator and the Alberta Utilities Commission.
The Balancing Pool’s principal role is to meet certain obligations with respect to the Power Purchase Arrangements (PPAs) that were the subject of an auction in 2000 when Alberta was transitioning to a competitive electricity market. These PPAs were used as a way for the Province to introduce competition (more sellers of power) into the Alberta electricity market. The PPAs allowed a concentrated group of “Owners” of generation facilities the opportunity to recover their fixed and variable costs over the term (generally 20 years) of the arrangement (a legislated contract), while transferring the right to sell the output from those generating facilities to a broader group of “Buyers” who were successful in the public auction. The PPAs were, in a sense, a virtual divestiture in 2000 of the existing facilities of the then three big generators (TransAlta, ATCO and EPCOR (now held by Capital Power)). The PPAs left the ownership and operation of the plants with the original Owners, but transferred to a number of Buyers of the PPAs the right to offer the output into the Alberta electricity market at prices determined by each of the Buyers. The PPAs require that the Buyers pay the Owners their remaining fixed and variable costs, plus a reasonable return on these assets. Accordingly, the Buyers make money when the power pool prices for electricity in Alberta exceed the amount they are required to pay to the Owners under the PPAs, but lose money when the power pool prices do not exceed the amount they are required to pay to the Owners under the PPAs. There are seven (7) coal PPAs still in existence in Alberta.
With respect to these PPAs, the Balancing Pool has two key roles. First, it acts as the Buyer for any PPAs that were not sold to a third party in the public auction held in 2000. In this role, it has for some time been the Buyer under the 762 MW PPA for the Genesee 1 and 2 coal units. Second, and an often forgotten role, is for the Balancing Pool to act as a backstop if Buyers exercise their right to terminate the PPAs under certain provisions of the PPAs. A forgotten role, that is, until the Government of Alberta’s 2016 decision to increase the price that large thermal electricity generators pay for carbon emissions. That change in Alberta’s carbon laws, at a time when Alberta was experiencing historic low power pool prices, made these PPAs unprofitable (or more unprofitable) and caused the Buyers under the remaining coal PPAs to exercise their right to terminate these PPAs (Terminated PPAs) pursuant to certain change in law provisions that were contained in the Terminated PPAs to protect the Buyers. This right of termination (really just a turnover to the Balancing Pool), including the decision of the Balancing Pool to accept the termination of one Buyer (ENMAX), was subsequently challenged in court by the Province. However, last December the Province settled this messy (not a legal word we know) matter with all of the Buyers other than ENMAX. The settlement resulted in the acceptance of the PPA terminations, such that the Terminated PPAs have now been turned over to the Balancing Pool who now assumes the role of Buyer under these arrangements.
The net result of the settlement is that today, as a result of its new role as the Buyer under the Terminated PPAs, the Balancing Pool controls the sale of electricity from more than two-thirds of the Province’s 6300 MW of installed coal generating capacity. That includes units at the Genesee, Sheerness and Sundance and (even though ENMAX’s termination dispute with the Province has not yet been resolved) Battle River and Keephills coal plants.
The Balancing Pool has suddenly become a very important player in the Alberta electricity market. Its name is now regularly mentioned in the media, including, for example, because:
- its Board chair resigned and another director decided to not renew her term on the Board late last year in the middle of the PPA termination dispute with the Buyers and the Province – the Province named three new directors last week to the Board of the Balancing Pool;
- all of the Terminated PPAs are unprofitable, meaning that the payments that the Balancing Pool is now required to pay to the Owners under the Terminated PPAs are more than the revenue that the Balancing Pool is expected to earn by selling the related power in the Alberta electricity market. After all, that is the reason the original Buyers exercised their termination rights and turned the Terminated PPAs over to the Balancing Pool in the first place. The resulting losses of the Balancing Pool will be passed on to electricity consumers in Alberta as a charge on their power bills. The Province recently decided to soften the impact on electricity consumers by lending money to the Balancing Pool to fund the losses. The loans will be paid back over time – until 2030. Without such loans the monthly charge on residential consumer bills would now be about $8.40 per month, but with the loans by the Province to the Balancing Pool the monthly charge on residential consumer bills is reduced to only about 67 cents per month over the next thirteen years. This is because the repayment of the Terminated PPA losses is spread out over a longer period of time. Readers from Ontario will recognize this loan approach as something that Ontario is proposing to do in its market to help reduce electricity prices for consumers in that province. The total amount of money that the Province expects to loan to the Balancing Pool to cover losses before the Terminated PPAs expire on December 31, 2020 was estimated in last month’s Alberta budget to be $2.3 billion. As you would expect, the estimated size of the loan received some press (and attention from the opposition parties) after the Alberta budget was released;
- the Balancing Pool has a right under section 97 of the EUA to, itself, terminate the Terminated PPAs on six months’ notice to each Owner by making a payment to each Owner equal to the net book value of its generating unit. Some stakeholders in Alberta have called on the Balancing Pool to exercise that right, rather than to continue to act as Buyer and purchase the electricity under the unprofitable Terminated PPAs. We suspect that this Balancing Pool decision is complicated by Alberta’s yet unknown coal phase out schedule, uncertainty over estimates of net book value and future power pool prices, and by the prospect of certain decommissioning cost obligations that the Balancing Pool may have under section 5 of the Power Purchase Arrangements Regulation (Alberta) until December 31, 2018; and
- the opposition Wildrose Party in Alberta has asked the Auditor General of Alberta to investigate whether the Government of Alberta improperly interfered with the decisions of the Balancing Pool and caused it to operate outside of its legal mandate during last year’s dispute between the Buyers and Province over the termination of the PPAs. Also, the Auditor General is currently assessing whether, for financial reporting purposes, the Balancing Pool is now controlled by the Province and has indicated that it will make that decision before dealing with the Wildrose Party request.
As you can see, the Balancing Pool, historically viewed in Alberta as a small, under the radar, arms-length government body for over 15 years, has suddenly become a very significant player in Alberta’s electricity market. The supply offers it makes every day in the market for the coal-fired electricity it now controls under the Terminated PPAs affects power pool prices in Alberta. How the Balancing Pool funds its losses from the unprofitable Terminated PPAs affects the related charges that appear each month on the bills of Alberta’s electricity consumers. Finally, any decisions that the Balancing Pool makes in respect of its own statutory right under the EUA to terminate the Terminated PPAs will greatly affect coal generation and the coal plant owners in the Province. We would also be remiss to not point out, as others have done, the irony in the fact that a government, which is committed to the phase out of coal generation, now controls the public body that sells the majority of the coal-fired electricity in Alberta. It is strange sometimes how these things work out.
Please stay tuned to AlbertaPowerMarket.com as we are sure to hear more from, and about, the Balancing Pool in the coming months and we will update you when that occurs.
Kent Howie and Peter Bryan
Kent and Peter are both partners in the Calgary, Alberta office of the national law firm Borden Ladner Gervais LLP. Both practice in the Alberta electricity market and are regular contributors to AlbertaPowerMarket.com.