The Alberta Electric System Operator (AESO) is not accepting any further comments on the contract, called the Renewable Electricity Support Agreement (RESA), which it will award to the winners of the REP Round 1 procurement currently underway for 400 MW of renewable electricity in Alberta. While the AESO did issue and consult on “key provision term sheets” in advance of issuing the current draft form of RESA, when it issued the RESA on April 28, 2017 (at the same time that it issued the RFQ terms for REP Round 1) it was very clear that there would be no more consultation on the RESA. This is likely because under Alberta’s Renewable Electricity Act the Minister had to approve the draft form of RESA before it was issued to proponents in the procurement. The Minister also has to approve a final form of RESA later in the procurement process, but we suspect that the AESO did not want to open up further consultation and create an expectation among stakeholders that changes would be made to the form of RESA that the AESO had already recommended and the Minister approved. Thus, absent final changes to the RESA being approved by the Minister, without a formal AESO consultation process, the RESA terms will not change.
It is in this context that project proponents and their lenders in REP Round 1 are reviewing the RESA. As you would expect, the review involves identifying, quantifying and pricing all of the risks that a generator would assume under the RESA. One big risk that repeatedly comes up in our discussions with project proponents and their lenders regarding the RESA, including at last week’s Alberta & Saskatchewan Renewable Energy Summit here in Calgary, is what the market calls “dispatch risk”.
Dispatch risk to the generators, and indirectly to their lenders, arises because the support payments paid by the AESO to the generator under the RESA are calculated based on the metered energy of the generator’s facility. It is not enough that the generator is ready, willing and able to generate electricity; the generator will only get support payments from the AESO if the facility is actually generating and delivering electricity to the grid that is metered. A generator can only generate and deliver electricity to the grid in Alberta if its facility is actually dispatched by the AESO, and there is no obligation for the AESO to dispatch the generator under the RESA. In other words, the RESA is not a “take or pay” power purchase contract with the AESO. So, not surprisingly, generators and their lenders are busy trying to assess the likelihood that, despite being ready, willing and able to generate, the generator’s facility is not actually dispatched by the AESO for a period of time such that there is no metered energy, and therefore no support payment.
In our view, what the market is calling dispatch risk also includes curtailment risk. It is essentially the risk that a renewable project with a RESA will not be dispatched at all, or will be dispatched down or curtailed for a reason that is beyond the control of the project. In the RESA, the AESO has provided for some limited protection and compensation to generators if a transmission constraint limits generation at the generator’s renewable facility. However, the RESA is also clear that no compensation will be paid by the AESO to the generator if Alberta’s supply surplus rules (ISO Rule 202.5) apply so as to limit generation during those times that the supply of electricity available at zero dollars exceeds system load. Such a situation could occur more frequently, for example, if over time Alberta procures more renewable electricity than it needs to meet system load.
Project proponents and their lenders in REP Round 1 are coming to grips with the fact that the RESA is structured differently than the contracts they have seen in other jurisdictions. It is not a “take or pay” power purchase contract with the AESO. Instead, the AESO will only have to make a support payment to the generator if the AESO actually dispatches the project. This dispatch risk is now being quantified and priced behind the scenes in REP Round 1. Such quantification and pricing requires an understanding of the rules governing the merit order dispatch of power in the Alberta market, knowledge of the provisions of the RESA (especially the change in law provisions), and a prediction about how the Alberta power market might unfold over the 20 year term of the RESA. The risk is likely to result in higher bid prices in REP Round 1 than would otherwise occur, though the impact will depend on how different proponents and lenders assess the dispatch risk.
Some people are suggesting that the RESA needs to be changed to expressly deal with the dispatch risk. A good argument can be made that it is a risk that is better left with the AESO, being the party best able to quantify and manage that risk considering that it dispatches power in Alberta. Plus, the AESO is the entity that may increase the probability that the supply surplus rules (discussed above) will be invoked, since it will be the party which procures more renewable electricity in the future. After all, if Alberta wants new renewable electricity projects to be built, and a successful proponent in REP Round 1 builds such a project, which is ready, willing and able to generate renewable electricity and offer it to the power pool at zero dollars at any time over the term of the RESA, shouldn’t the generator receive support payments under the RESA from the AESO? Even if the AESO disagrees with that proposition, some dialogue by the AESO with stakeholders on this issue might help to alleviate the concerns we are hearing and might reduce the dispatch risk price premium that might otherwise be built into REP Round 1 bids.
We will continue to monitor the terms of the RESA and let you know if, despite the AESO’s refusal to consult more on the RESA, the AESO and Alberta decide to deal with the dispatch risk concern that generators and their lenders are now struggling to quantify and price.
Kent Howie and Peter Bryan
Kent Howie and Peter Bryan 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.