RESAs Handed Out in Alberta: Ten Takeaways from the REP Round 1 Results

Round 1 of Alberta’s Renewable Electricity Program (REP) concluded this week with the award of the following Renewable Electricity Support Agreements (RESAs):

Proponent Project Size (MW) Location
Capital Power Corporation Whitla Wind 201.6 Medicine Hat
EDP Renewables Canada Ltd. Sharp Hills Wind Farm 248.4 Oyen
Enel Green Power Canada, Inc. Part 2 of Castle Rock Ridge Wind Power Plant 30.6 Pincher Creek
Enel Green Power Canada, Inc. Riverview Wind Farm 115 Pincher Creek

 

Round 1 was being closely watched because it is the first time Alberta has had a procurement offering long-term (20 year) government backed contracts (called RESAs) for new renewable electricity projects.  Like many others, AlbertaPowerMarket.com has been reviewing and reflecting upon the Round 1 results for the past few days.  Our takeaways include:

  1. A weighted average price of $37/MWh, the lowest competitive renewable pricing in Canada to date, demonstrates that Alberta has an excellent wind resource. Yes, capital costs for wind projects are coming down, finance costs are low, and running very competitive procurement processes helps to lower prices, but a $37/MWh weighted average price only arises if proponents can harness winds that produce high capacity factors for their projects. The results prove that Alberta has that wind resource in spades.
  2. The range of winning bid prices was wide, from $30.90/MWh to $43.30/MWh. No detail was provided on which winning project bid which price, but one might surmise that Enel’s expansion project at Castle Rock may be able to leverage existing interconnection infrastructure and therefore is the lowest bid price. Still, an over $12/MWh spread across winning bid prices seems high to us.  Also, though the $37/MWh weighted average price is getting the news most developers looking forward to Round 2 are reflecting on the $43.30/MWh successful bid price.
  3. Wind is still cheaper than solar in Alberta. And, as we have discussed here, that is certainly the case if the procurement does not assign any value to the fact that solar projects capture higher pool prices than wind projects in Alberta. Most solar developers therefore did not even bother to bid in Round 1, though it was nice to see from the announcement that Canadian Solar and Bowmont Capital teamed up and submitted a solar bid.
  4. Southern Alberta is windier than the rest of this province. No surprise for anyone familiar with Alberta, though AlbertaPowerMarket.com did note that 75% of the new renewable capacity will be situated in South Eastern Alberta (Medicine Hat and Oyen) versus in South Western Alberta (Pincher Creek).
  5. Though final bids were received for 26 projects (3 projects qualified in the RFQ phase of Round 1 appear not to have bid in the RFP phase) with an aggregate capacity of 3600 MW, there were only 12 different proponents that submitted these bids. In other words, the proponents that chose to bid in Round 1 did so for multiple projects.  Also the 12 proponents that bid are all large developers (some bigger than others), and no small local developers qualified and bid their projects in Round 1. That said, some large developers with wind projects on the AESO project list apparently chose to sit out Round 1.
  6. The winners are diverse and include a long-standing Alberta generator (Capital Power), an international generator that already had a 76.2 MW wind project in Alberta (Enel) and a brand new international entrant to the Alberta market (EDP). The conspiracy theorists who believed the incumbent generators would win all the RESAs in Round 1 were wrong.  Alberta is open for new entrants.
  7. Though the target for Round 1 was 400 MW, RESAs were awarded for 595.6 MW. We assume that the AESO organized the projects by strike prices, started awarding RESAs to the lowest strike price projects, but concluded that to get to 400 MW it had to exceed its target. If that assumption is correct by our calculations the AESO either got to 394 MW or 347.2 MW, and decided that it needed to award another RESA to exceed the 400 MW target.  And, yes, we did include this takeaway to add to the bid price speculation that goes on after every renewable procurement.
  8. Neither Capital Power nor EDP appear to have bid the full capacity of their projects into Round 1. Coincidentally, each of their winning projects were originally designed to have 83 3.6 MW turbines and be capable of generating 298.8 MW.  Perhaps they will now build out these projects in phases with the subsequent expansion phase participating in a future Round of REP.
  9. We will have 4 (3 anyway, since 1 is an expansion) new renewable projects in Alberta. There was some concern that with only 400 MW being awarded there may only be 1 winner with 1 new project. More ribbon cutting in different locations will be good for the renewable electricity industry in Alberta.
  10. Finally, and importantly, we take away that the AESO can run an efficient fair competitive procurement for renewable electricity in Alberta that is completed on time in a condensed period. Though there were successful and unsuccessful proponents in Round 1, AlbertaPowerMarket.com is not hearing many complaints about the process. That is important for Alberta and the success of future Rounds of REP.

AlbertaPowerMarket.com is interested in your takeways.  So please let us know what else stood out to you from the results of Round 1.

Kent Howie

Kent Howie is the head of the Electricity Markets Group at the Calgary, Alberta office of the national law firm Borden Ladner Gervais LLP.  He is also the editor of and regular contributor to AlbertaPowerMarket.com. The views expressed in this article are the personal views of the author, and not the views of Borden Ladner Gervais LLP.

11 thoughts on “RESAs Handed Out in Alberta: Ten Takeaways from the REP Round 1 Results

  1. Thoughtful analysis. The news reports though were a little confusing to me on the potential subsidy the Government will be forced to pay these successful bidders. The bidders get $ if average price falls below the average bid and will have to pay back to Gov if price is above? The assumption apparently is the average price of electricity will be below the bid price at least in the short run which may cost the treasury 10m a year?

    Colin P MacDonald, Q.C.

    Cell: (403) 831-2631

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    1. Thanks Colin. Yes, today’s pool prices are in the low $20 range. But pool prices are going up in 2018 for a number of reasons, including a change in the way the carbon levy is calculated and TransAlta mothballing coal units at Sundance. Most people forecast the pool prices above $40 in 2018, such that if these projects were built and generating power next year they would be writing cheques to the Province. Remember, historically pool prices have been $50 and above and certainly north of $37. These projects will not come on line until the end of 2019, and hard to know what pool prices will be then, and for 20 years thereafter, but I do not buy that this will cost the Province. Fact is no one knows. Other fact is that power at $37 is fair and no windfalls for developers. Sharpened their pencils and bid very competitive prices based on their costs and required investment returns. Good story for renewable power in Alberta.

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  2. Please help me with my math.
    — 1 MW of wind costs ~$2 million (CanWEA numbers and close to the press release at $1.7 million)
    — Annual wind output averages 31.5% of capacity (4-year average in Alberta…AESO numbers… annual range is ~28% to 35%)
    — So the actual output per installed MW is equal to 0.315 MW (over the year)
    — There are 8,760 hours per year
    — Output will average 2,759 MWh/year or 2,759,400 Kwh
    — At 3.7 cents the gross income is ~$103,000 per year exclusive of:
    *other costs to connect to the grid (that we pay for) … not clear if the ~$2 million includes all legal, engineering fees, applications, fees etc.
    * depreciation at 4% = $80,000 (assumes 25 years)
    * maintenance at 2% ??? = $20,000 est
    * municipal taxes and land easement = $10,000 est
    Total annual costs are about $110,000+

    Depreciation, maintenance, taxes and easements are greater than (or about the same as) gross income. Where is the profit incentive? What am I missing?

    Are there hidden grants or subsidies not mentioned in the press release?

    Thank you,

    CAS
    Coaldale

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    1. Clive, there is a lot of folks wondering how projects make money at these bid prices. That said, these are credible profitable developers. You should take a look at the Capital Power press releases from this week. For example, they have the Whitla capital cost estimated at 1.6M per MW – not 2. Also estimate 27 million of EBITA in first full year. I suspect they also have capacity factors at these sites that are higher than your average number, likely closer to 40%. That all said, competitive procurements do not result in proponents earning large returns. Some accelerated tax deductions for wind farms, but no hidden revenues or grants. In fact, the RESA provides that if there were any other federal or provincial government subsidies they get paid to the Province.

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      1. Thanks for the insights albertapowerlaw. I will look at the Capital Power press releases. Achieving annual wind output of 40% is highly unlikely and there are years of Alberta-wide data from AESO that show lower output. Will be interesting to see how their estimate of 40% unfolds. Thanks again. Clive

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    1. Nick, I do not believe that any of these projects are distributed connected projects. Instead, they will be connected to the transmission system. My understanding is that they will therefore not receive any option M credits. Distributed connected projects are generally smaller for technological reasons – less than 20 MW. They would generally be solar projects. I suspect that the solar bidder may well have bid in a small distributed connected solar project hoping that with lower interconnection costs and option m credits that it could compete with the large utility scale wind projects. Hope that helps. Wrote an article on the website a month or so ago on option m that might be helpful for you.

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  3. I share the same opinion as Clive, would it be possible that these operators are also get RECs as well and selling those over and above the $37/MWh?

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    1. No, Ian the generators do not get RECs. The RESA is actually a contract whereby the AESO acquires all of the renewable attributes related to the electricity in exchange for locking in the generator’s price at the bid/strike price. Those renewable attributes include the right to any RECs that the generator could otherwise sell. Some people call the RESA an Indexed REC for that reason. A payment, indexed to the pool price, by the AESO in exchange for acquiring the RECs and any other monetary benefits that might flow from the electricity being renewable.

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  4. Interesting that Sharp Hills was awarded a contract as there has been (and continues to be) strong local opposition to this development. Local residents have formed an opposition group and are continuing to lobby against this project. There are at least three private airstrips located right in the heart of the proposed development, resulting in serious hazards to local aircraft and in addition, various landowners are strongly opposed to the placement of turbines in the immediate area of their homes.

    It seems the Alberta government is providing a clear signal of what it believes the outcome of the ongoing dispute will be before the courts have made a ruling.

    LJ

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