We attended the Q&A session (Q&A) put on last week by the Alberta Electric System Operator (AESO) for REP Round 1. REP Round 1 is the first of what is promised to be regular procurements in Alberta that will see the Province procure 5000 MW of renewable electricity between now and 2030. AlbertaPowerMarket.com has already written about REP Round 1 here. The Q&A was well attended, with over 200 people in the room and more than 100 people participating by webinar. For those that could not attend, we thought we would share with you ten things that stood out to us – some of the berries shall we say:
- Consultation on the terms of the Renewable Electricity Support Agreement (RESA) that successful proponents will sign with the AESO is over, even though we have not yet seen a draft form of the actual legal agreement. We will get that legal draft on April 28, 2017 when the RFQ stage for REP Round 1 begins. So, if like us, you had some concerns about the last RESA term sheet that the AESO issued, and wanted to see and comment on the actual fine print of the contract, you will be disappointed. The AESO suggested that its hands are tied because under section 5(2)(c) of the Renewable Electricity Act (Alberta) it has to have the Minister sign off in advance on a draft form of RESA. Apparently, that is expected to occur this week. We note that section 7(3)(c) of the same statute also provides for the Minister to later approve the final form of the RESA so, if the draft RESA that gets issued contains a bust, there is room for the AESO to make a last minute fix for the Minister to approve. However, given the hullaballoo Alberta recently experienced over last minute amendments made in 2000 to the change in law provisions contained in certain Power Purchase Arrangements that exist in this province (the so-called “ENRON Clause”), we rank the likelihood of changes being made to the draft RESA as slim – unless there is a complete bust in the RESA that makes it unbiddable.
- There had been a lot of chatter in Alberta that the AESO was going to require that a project be at a certain stage in its approval processes before it could participate in REP Round 1, for example that the project had to be at Stage 3 or farther along in the AESO Connection Process. That is not going to be the case. Instead, each proponent will be required to submit a project plan in the RFQ stage which demonstrates to the AESO (pass or fail) that it can achieve COD by the required December 1, 2019 date. The AESO also made clear that it will not treat projects in REP Round 1 any different than other electricity projects. In other words, it will not expedite permits and approvals for the successful projects in REP Round 1 – all of the existing legislative and regulatory framework (including ISO Rules and Tariffs) in Alberta will apply to these projects. A proponent will have to satisfy the AESO in the RFQ stage that it can meet the December 1, 2019 date without any special help from the AESO or any other government body.
- Anyone who was hoping that there would be a minimum number of successful projects in REP Round 1 will be disappointed. Though it may be better politically for the government to have multiple projects, perhaps in different locations, this might not occur. If one 400 MW renewable electricity project were to bid into REP Round 1 with the lowest bid price then there will only be one winner. The number of successful projects will be determined solely based on the projects (size and bid price) required to fill the 400 MW being procured.
- Behind the fence generation projects cannot participate in REP Round 1. Eligible projects must be separately metered, connected to either existing transmission or distribution, and sell all of their electricity into the Alberta Power Pool.
- The RFP stage will be skinny. The RFQ stage will be detailed and qualify (pass or fail) the projects eligible to participate in the RFP stage. Once done, the RFP stage will simply be the proponent’s submission of a bid price (strike price for the RESA) and a confirmation that nothing material has changed for the project or its proponent since the RFQ stage. And yes, at the RFP stage it is simply strike price – no benefit is given for local content, the ability to achieve early COD, attributes of the generation, or the pool price that a particular project is likely to capture in the Alberta Power Pool – sometimes called “Capture Rate” and an issue we discussed in an earlier article here.
- Projects will go through a transmission base case assessment in the RFQ stage to determine if they meet (pass or fail) the REP Round 1 requirement that they be located where the available capacity of the relevant region of the grid, under normal conditions, can accommodate 100 percent of the project’s capacity under the RESA. The base case will be set using June 16, 2017 data for existing and expected generation, transmission and load metrics on December 1, 2019. Given the importance of this transmission requirement for projects, the methodology is sure to raise many questions. In fact, the AESO anticipates that some projects will be competing for the same grid capacity and may be “conditionally qualified” in the RFQ stage. In addition to competing against all other projects on price in the RFP stage, the conditionally qualified ones will also be competing against one or more other conditionally qualified projects for the same transmission. For example, let’s assume Project A and B are both 200 MW projects in the same area with limited transmission. Assuming they both meet all of the other tests for qualification, they will be only conditionally qualified because the existing transmission system can only accommodate one of them. Let’s then assume that in the RFP stage Project A bids a strike price of $65 per MWh and Project B bids $66 per MWh, which are the lowest bids of all bids received by the AESO. In that case, it appears that Project A would be selected (ranked first), but Project B would then be disqualified as unable to satisfy the transmission requirement, with the AESO moving on to the project ranked with the third lowest bid price.
- It appears that the AESO is going to mandate the use of a single purpose vehicle by the successful proponent as a way to ring fence each project. This was only alluded to in an AESO answer to a question so we will have to wait for the draft RESA to confirm if and how this is mandated. Most power projects are done in this manner anyway, often using a limited partnership or corporation, so this should not be an issue, but mandating it, as opposed to permitting it, would be a new feature for REP Round 1.
- One question asked was whether a project could bid only a portion of its electricity into REP Round 1. The premise of the question is likely the idea that someone with a 200 MW project would bid the energy from only 100 MW of the project into REP Round 1 and choose to have the other 100 MW remain merchant or be contracted separately with someone else (e.g. corporate market). The AESO answer was unclear, and suggested that the RESA had to be for the nameplate capacity of the project. We will have to wait for the RFQ terms and form of RESA to get a final answer, but in our view this should be permitted provided that there is separate metering for the portion of the project bid into REP Round 1. After all, the AESO has already indicated that “expanded” projects in Alberta are eligible for REP Round 1 as long as they are separately metered.
- To be qualified in the RFP stage a project will have to provide evidence of site control. Site control will be either actual legal title to (ownership), or a lease of or an option to lease, the project lands. Evidence will require a solicitor’s legal opinion to confirm the existence of that site control.
- The AESO is levying a fee of $1.05 per MWh over the first 3 years of the RESA, and $0.30 per MWh over the remaining 17 years, on successful projects to cover the cost of the AESO implementing and administering REP Round 1. Someone else can do the math on what that fee is likely to add up to over 20 years for the 400 MW that is to be procured. The fee will of course apply to all projects, so it will be a cost that every bidder will have to build into its RFP response – sounded to us like it would have to be built into the strike price that is bid though we will know more when the RESA is released later this month.
The AESO answered a number of written questions from the 250 or so submitted at the Q&A. It appeared to pick the softball questions from those submitted, including some of ours, though it is hard to criticize the AESO for that given the forum and time limits they were under for the Q&A. However, the AESO has undertaken to post answers on its website by April 28th to the other questions that it did not get to and which were not covered in the Q&A. There are sure to be many other questions that will arise as the procurement moves along. Accordingly, the AESO promised that it will use a SharePoint site (which will require your registration) to facilitate answers to other questions as part of a Request for Information component of the RFQ stage. Some of those answers which have general application and are not confidential will also be posted by the AESO for all to see. All in all, the AESO is clearly signalling that it will do its very best to clarify proponent concerns throughout the procurement while, of course, running a fair and legally defensible procurement process.
Finally, for anyone interested in reading more than just our ten takeaways, the AESO slides from the Q&A can be found here .
Kent Howie and Bill Woodhead
Kent and Bill both practice law in the Electricity Markets Group at the Calgary, Alberta office of the national law firm Borden Ladner Gervais LLP. They are regular contributors to the postings made each Monday morning to AlbertaPowerMarket.com.