Alberta’s future energy mix: exploring the potential for renewables Issue: 3 February 2014 kpmg.ca © 2014 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG invests in the industry through thought leadership papers and journals, share forums and whitepapers on trends, opportunities and challenges affecting the Canadian Power & Utilities sector. Issue one, A New Era for Clean Energy in Canada, provided an update on project finance market trends and commented on the prospects of new power generation developments in British Columbia and the rest of Canada. Issue two, Wind Energy in Canada: Realizing the Opportunity, examined wind financing activities given the significant activity in the sector in the last 18 months and highlighted the next wave of wind opportunities in the province of Québec. In this issue we focus on Alberta’s future energy mix, by discussing the opportunities that will arise for new electricity generation in Alberta, the energy sources that will feature most prominently and assess the potential for renewable energy projects. We also analyze the complexities of the Alberta market, the impact that power policy revisions may have on investment in renewable energy and the issues related to project financing in the province. © 2014 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Clean Energy Report | 01 Summary findings Alberta is one of the few jurisdictions in Canada with significant new generation requirements. However, with limited opportunities for long-term contracts to support developments, new projects need to rely on merchant prices to provide sufficient returns and debt coverage. There is a growing consensus in industry that increased demand and pending changes to existing policies are converging to support significant generation investments in Alberta, including new renewables. Combination of significant load partly being driven by oil sands growth and retirements creating developments in the northern parts of new generation requirements the province and from the addition of new generation planned to come into Alberta’s oil sands industry continues service in transmission constrained to drive new electricity demand. The areas, both of which require an Alberta Electric System Operator upgraded system to connect to the (AESO) estimates that peak demand grid. will hit 18,194 MW by 2032, a significant increase on the 10,599 MW Gas to plug capacity gap in the peak demand in 2012. This represents a next five years compound annual growth rate (CAGR) of almost 3% without considering New combined cycle natural gas-fired coal-fired plant retirements in excess power plants, and to a lesser extent of 4,500 MW.1 This is significantly some simple cycle peaking facilities, more than the forecast US load CAGR are expected to be the preferred mode of 0.8% during the same period.2 The of generation built to meet Alberta’s AESO estimates that 6,190 MW of new supply gap in the next five years. effective electricity capacity will need Gas plants currently remain attractive to be built in Alberta by 2022 to meet due to the current and expected demand and that 12,965 MW will need future low price of natural gas and to be installed by 2032.3 the comparatively fewer restrictions on site selection compared to other Generation and load growth jurisdictions. The AESO estimates that driving transmission development gas-fired installed capacity will reach over 11,000 MW in 2022, representing needs 53% of Alberta’s energy mix. In 2012 It has been estimated that 5,359 MW (representing about 40% approximately $13-$15 billion will be of the overall energy mix) of gas-fired invested in transmission assets in generating capacity was operational.4 Alberta in the next five to 10 years. The AESO predicts that new wind This investment requirement is capacity will make up the balance. 1, 3, 4 Alberta Electric System Operator, AESO 2012 Long-term Outlook Update (Calgary, AB: AESO, 2013) 2 US Energy Information Administration, Annual Energy Outlook 2013 © 2014 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 02 | Clean Energy Report Economics for new wind projects framework that will encourage are challenging investment in renewable energy projects. New provincial policies are Despite the recent rise in natural gas expected to be announced in 2014. prices, depressed pricing challenges the economic case for wind energy. Natural gas prices are expected to Solar an option in Alberta average $3.48/GJ in 2014 and $3.50/ The solar industry feels that it is often GJ in 2015, an increase on the 2012 given short shrift when considering average price ($2.28/GJ) but in line Alberta’s future energy mix. However, with the average price in 2011 ($3.48/ the province’s solar resource is 25% GJ), according to Gas Alberta.5 Despite better than Ontario’s and 30% better a challenging pricing environment, than Germany’s, according to the //Given Alberta’s some major wind farms in Alberta have Canadian Solar Industries Association made considerable progress in the (CanSIA).6 Despite this, virtually no economic growth past 18 months by realizing value from solar capacity is currently operating a California Renewable Energy Credit in Alberta. If the province adopts profile, we’re very (REC) measure. This measure, which is an attractive alternative energy no longer available, enabled some level framework, solar would certainly excited about of debt financing to be added to the complement wind as it could generate projects’ capital structure. electricity during the intervals when new generation wind farms are not operating. This is New policies could mobilize especially true given that the average opportunities in the renewables investment peak price is close to grid parity. The bulk of a solar photovoltaic (PV) Both the Alberta and Federal generator’s margin will be made when province.// government are considering a series the power price moves above $80 per of policy initiatives relating to carbon MWh. Craig Walter emissions. The Federal government Partner and GTA Energy Leader released its Reduction of Carbon Debt financing KPMG LLP Dioxide Emissions from Coal-fired Generation of Electricity Regulations The lack of offtake agreements in 2012, which is expected to be provides a challenge to debt financing effective in 2015. Provincially, while of projects. While some debt providers the Alberta government has not yet have financed power projects in announced any formal policies, it Alberta without any offtake agreement, is expected to bolster the current these have typically been smaller hydro Specified Gas Emitters Regulation plants. Providing debt financing to a in a way that will incentivize oil and wind farm or a Combined Cycle Gas gas companies to offset their carbon Turbine (CCGT) plant will continue to emissions through renewable energy be challenging unless some market investments. In addition, the Alberta mechanism can be introduced to government has committed to manage downside risk, or some level implementing an alternative energy of contracting can be arranged. 5 Gas Alberta: www.gasalberta.com 6 Solar resource is expressed in terms of solar irradiance per equivalent area in different jurisdictions © 2014 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Clean Energy Report | 03 Assessing the load growth challenge There is a signifi cant need for new annually between 2012 and 2021, electricity generation capacity in before falling to 1.5% annual growth Alberta. By 2032, the AESO expects between 2021 and 2041.9 peak demand to hit 18,194 MW, a However, load growth is only part of the //With planned signifi cant increase on the 10,599 MW story. New electricity generation is also peak demand in 2012.7 required to meet the planned closure generation retirement This anticipated growth is a direct of a series of coal-fi red power plants. result of Alberta’s growing oil sands Federal government policy requires all and strong demand industry. Crude oil prices in the range coal-fi red generation to be retired at 45 of $100/barrel, combined with low years of operation or the expiration of growth, Alberta is interest rates, has led to predictions a plant’s power purchase agreement that up to $218 billion could be (PPA). Proposed regulations due to be poised to benefi t invested in Alberta’s oil sands sector enacted in 2015 also require coal-fi red in the next 25 years. Alberta’s Energy generation capacity to curb carbon from renewable Resources Conservation Board emissions to natural gas levels. This will estimates that this investment could make new coal plants relatively more lead to production almost doubling expensive from 2015. energy investments to 3.8 million barrels per day in 2022, These two factors will result in a series up from 1.9 million barrels per day in in the short and of coal plant retirements during the next 2012.8 two decades to the extent that only medium term.// The oil sands industry is also indirectly 5,906 MW of coal capacity is likely to increasing electricity demand by be operating by 2022 and 2,856 MW attracting an infl ux of workers and by 2032, a considerable reduction from Georges Arbache their associated new non-commercial the 6,242 MW that was operational Vice President demand.