AlbertaPowerMarket.com previously described here how the Balancing Pool, a public body here in Alberta, has become a very important player in the Alberta electricity market. We also promised to update you on important Balancing Pool developments. Earlier this week, when our neighbours to the South were celebrating July 4th, the Balancing Pool announced that, subject to consultation with electricity customer representatives, it proposes to terminate its Sundance A, Sundance B and Sundance C Power Purchase Arrangements (Sundance PPAs) with TransAlta.
These Sundance PPAs are part of the suite of power purchase agreements (PPAs) that were put in place when Alberta restructured its electricity market in 2000. These PPAs, generally with a 20 year term, left the ownership and operation of the generation plants in the hands of owners like TransAlta, but gave buyers, who purchased the PPAs in an auction, the right to sell that power into the Power Pool. Buyers pay the plant owners their remaining fixed and operating costs, plus a rate of return, for the power under the terms of the PPAs, and then turn around and sell that power into the Power Pool at Pool Prices. It is often described as a “virtual divestiture” of the power plants; done in 2000 to enhance competition by introducing more and different sellers of power into the Power Pool.
The PPAs however contained a termination right (really a turnover of the PPAs to the Balancing Pool) for the buyers in the event that a change in law made the PPAs unprofitable – or perhaps more unprofitable – for the buyers over the remaining term of these agreements.
In late 2015 and early 2016, the buyers under six remaining coal PPAs triggered that termination right as a result of Alberta changes in law that increased carbon prices on coal plants in Alberta. The terminations spawned litigation between the buyers and the Province of Alberta. The litigation was settled by the Province in late 2016 with all buyers, except ENMAX, with the result of the settlement being that the Balancing Pool is now the default buyer under the Sundance PPAs and the Sheerness PPA. It also continues to be the buyer under the Genesee PPA, a role it has always played. It also acts as the default buyer under the Battle River 5 PPA and the Keephills PPA while litigation with ENMAX continues to go on over the validity of the terminations of those PPAs by ENMAX.
Complicated I know, so maybe a table will help to illustrate:
|PPA/Facility||Buyer (Pre-Termination)||Litigation Settled (1)||MWs||Owner||PPA Expiry Date|
|Battle River 5||ENMAX||No||368MW||ATCO||December 31, 2020|
|Genesee||Balancing Pool||N/A||762MW||Capital Power||December 31, 2020|
|Keephills||ENMAX||No||766MW||TransAlta||December 31, 2020|
|Sheerness||TransCanada Energy||Yes||756MW||TransAlta/ATCO||December 31, 2020|
|Sundance A (Units 1 and 2)||TransCanada Energy||Yes||560MW||TransAlta||December 31, 2017|
|Sundance B (Units 3 and 4)||TransCanada Energy and AltaGas Pipeline||Yes||706MW||TransAlta||December 31, 2020|
|Sundance C (Units 5 and 6)||Capital Power||Yes||710MW||TransAlta||December 31, 2020|
(1) Settlement signifies that the Balancing Pool is officially the default buyer under the PPA according to the settlement terms.
The Balancing Pool has its own right under section 97 of the Electric Utilities Act (EUA) to terminate the terminated PPAs on six months’ notice to each plant owner by making a payment to each owner equal to the current net book value of its generating unit. Remember, the buyers terminated the PPAs on the basis that they were unprofitable based on forecasted Pool Prices over their remaining terms. Accordingly, many people have urged the Balancing Pool to exercise its EUA termination right, rather than to purchase the electricity from the plant owners under the PPAs and then sell the same power into the Power Pool at a loss. A loss, incidentally, that is passed on to Alberta’s electricity consumers as a charge on their bills. The Balancing Pool appears to have listened – a little late some may say.
Earlier this week, the Balancing Pool issued an information package to certain customer representatives who have to be consulted, according to Section 97 of the EUA, before a final termination decision is made by the Balancing Pool. In short, the Balancing Pool’s information package concludes that terminating the Sundance PPAs is a prudent decision for the Balancing Pool to make that is consistent with its mandate to conduct itself in a fashion that is not contrary to a fair, efficient and openly competitive electricity market in Alberta.
The expected aggregate net present value of the savings to the Balancing Pool (and therefore to Alberta consumers) from terminating the Sundance B PPA and the Sundance C PPA is estimated by the Balancing Pool to be between $475 and $518 million. This is really the difference between (i) the net present value of the estimated losses, over the remaining term of the PPAs, from the power purchased under these PPAs (estimated power pool revenues less estimated PPA payments to owners over the remain term), and (ii) the net book value payment that the Balancing Pool is required to make to TransAlta under Section 97 of the EUA.
The proposed termination of the Sundance A PPA by the Balancing Pool outlined in the information document is a bit of a red herring, as that PPA expires anyway according to its terms on December 31, 2017. Six months’ notice of termination must be given to TransAlta according to Section 97 of the EUA, so there are no real savings to the Balancing Pool for terminating that PPA unless TransAlta agreed to waive or shorten the 6 month notice requirement.
The information package also concludes that:
- A termination of the Battle River 5 PPA would save between $188 and $209 million, and that the termination of the Keephills PPA would save between $98 and $127 million. However, the Balancing Pool claims that those PPAs cannot be terminated by the Balancing Pool until the litigation with ENMAX over the termination of those PPAs is resolved. These mounting losses are an incentive for Alberta to settle that litigation with ENMAX;
- The Balancing Pool’s financial analysis does not support a termination of either the Genesee PPA or the Sheerness PPA by the Balancing Pool. This is because Genesee and Sheerness are newer plants that have a higher net book value that would have to be paid by the Balancing Pool to their owners if those PPAs were terminated;
- Average Pool Prices are estimated by the Balancing Pool to increase slightly as a result of the termination of the Sundance PPAs, by $4 in 2018 and 2019 and by $2 in 2020. This is because the Balancing Pool believes that its “commercial but conservative offer strategy” may be replaced by “more aggressive offer strategies”. That comment is sure to raise the eyebrows of those market participants who have been critical of the conservative pricing strategy used by the Balancing Pool to offer its power into the Power Pool. Eyebrows are also likely to be raised by the fact that the Balancing Pool went out of its way to point out that the recently announced end of economic withholding in Alberta will also limit any Pool Price increases caused by the Balancing Pool’s termination of the Sundance PPAs. We discussed that development here; and
- The Balancing Pool forecasts that Pool Prices will average $36 in 2018 and 2019, before increasing to $44 in 2020. These forecasts will provide more fodder for the continuous Pool Price prediction discussions that occur in Alberta.
We will have to wait to see if any customer representatives take issue with the Balancing Pool’s analysis and its proposal to terminate the Sundance PPAs. The concern, if any, may be about the forecasted Pool Prices, including the Pool Price increases that might occur as a result of the terminations, though the estimated savings described above to the Balancing Pool (and therefore to Alberta consumers) are significant.
The other party affected by this proposal is, of course, TransAlta. After all, the effect of a termination by the Balancing Pool is that though TransAlta gets paid the remaining net book value that it is owed, it has to assume full control of the Sundance generating units and the related power – no more PPAs.
TransAlta’s public response cautioned consumers and other stakeholders to fully consider the impacts that the termination of the Sundance PPAs will have to them given that it is occurring well in advance of the new capacity market, which isn’t slated to start until 2021. As we have previously written about here, TransAlta is already proposing to convert the Sundance coal units to natural gas, but not until the 2021 to 2023 period – after December 31, 2020 when the Sundance B and C PPAs were originally scheduled to expire. Will it now perform that coal-to-gas conversion of the Sundance units earlier than planned, like ATCO has said it will do for its coal plants? What will TransAlta do with Sundance in the meantime?
TransAlta also indicated that there is a difference of opinion between the net book value that the Balancing Pool estimates it would owe to TransAlta ($171 million) under Section 97 of the EUA, and what TransAlta estimates it is owed ($231 million). If that is true, more PPA litigation may be in the works for Alberta.
AlbertaPowerMarket.com will continue to monitor the proposal by the Balancing Pool to terminate the Sundance PPAs and update you should a final decision be made by the Balancing Pool on whether or not to proceed with the termination of the Sundance PPAs after it completes its consultations.
Kent Howie is a partner in the Calgary, Alberta office of the national law firm Borden Ladner Gervais LLP. He practices in the Alberta electricity market and is the editor of and contributor to AlbertaPowerMarket.com.