TransAlta Corporation Management’s Discussion and Analysis December 31, 2020 Management’s Discussion and Analysis Management’s Discussion and Analysis TableBusiness Modelof Contents M2 Competitive Forces M56 Forward-Looking Statements M3 Power-Generating Portfolio Capital M58 Corporate Strategy M5 Other Consolidated Analysis M59 Highlights M10 Critical Accounting Policies and Estimates M63 Significant and Subsequent Events M12 Accounting Changes M70 Segmented Comparable Results M16 Financial Instruments M72 Additional IFRS Measures and Non-IFRS Measures M28 Environment, Social and Governance ("ESG") M74 Discussion of Consolidated Financial Results M29 Reliable, Low-Cost and Sustainable Energy Production M76 Fourth Quarter M33 Natural Capital Management M79 Discussion of Consolidated Financial Results for the M35 Climate Change Management M88 Fourth Quarter Human Capital Management M97 Selected Quarterly Information M38 Social and Relationship Capital Management M101 Key Financial Ratios M39 Manufactured Capital Management M107 Financial Position M44 2020 Sustainability Targets Performance M109 Cash Flows M46 2021+ Sustainable Targets M111 Financial Capital M47 Governance and Risk Management M113 2021 Financial Outlook M53 Disclosure Controls and Procedures M126 This Management’s Discussion and Analysis (“MD&A”) should be read in conjunction with our 2020 audited annual consolidated financial statements (the "consolidated financial statements") and our 2020 annual information form ("AIF"), each for the fiscal year ended Dec. 31, 2020. The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) for Canadian publicly accountable enterprises as issued by the International Accounting Standards Board (“IASB”) and in effect at Dec. 31, 2020. All dollar amounts in the tables are in millions of Canadian dollars unless otherwise noted and except amounts per share, which are in whole dollars to the nearest two decimals. All other dollar amounts in this MD&A are in Canadian dollars, unless otherwise noted. This MD&A is dated March 2, 2021. Additional information respecting TransAlta Corporation (“TransAlta”, “we”, “our”, “us” or the “Corporation”), including our AIF, is available on SEDAR at www.sedar.com, on EDGAR at www.sec.gov and on our website at www.transalta.com. Information on or connected to our website is not incorporated by reference herein. TransAlta Corporation | 2020 Annual Integrated Report M1 TRANSALTA CORPORATION M1 Management’s Discussion and Analysis Management’s Discussion and Analysis BusinessWe are one of ModelCanada’s largest publicly traded power generators with over 109 years of operating experience. We own, Ouroperate Business and manage a highly contracted and geographically diversified portfolio of assets representing 8,128 megawatts ("MW")(1) of capacity and use a broad range of fuels that include water, wind and solar, natural gas, and thermal coal. The Corporation is currently undertaking a multi-year transition to convert or retire all of our thermal coal units completely by the end of 2025. This transition will see our thermal units in Alberta discontinue all firing with thermal coal and the discontinuation of all coal mining operations by the end of Dec. 31, 2021. Our Centralia coal-fired facility in Washington State is committed to be retired under the TransAlta Energy Transition Bill. Consistent with our commitment under this bill, Centralia Unit 1 retired on Dec. 31, 2020, and the remaining unit is set to retire on Dec. 31, 2025. Our energy marketing operations maximize margins by securing and optimizing high-value products and markets for ourselves and our customers in dynamic market conditions. Our vision is to be a leader in clean electricity and we are committed to a sustainable future. Our mission is to provide Visionsafe, low-cost and Values and reliable clean electricity. With our 109-year history of powering economies and communities, we apply our expertise, scale and diversified fuel mix to capitalize on opportunities in our core markets and grow in areas where our competitive advantages can be employed. Our values are grounded in safety, innovation, sustainability, integrity and respect, all of which enable us to work towards our common goals. These values are the principles that define our corporate culture. They reflect our skills and mindset, while providing a framework for everything we do, guiding both internal conduct and external relationships. These values are at the heart of our success. Our goals are to deliver shareholder value by delivering solid returns through a combination of dividend yield and Strategydisciplined for growth Value in cash Creation flow per share. We strive for a low to moderate risk profile over the long term while balancing capital allocation and maintaining financial strength to allow for financial flexibility. Our segmented cash flow growth is driven by optimizing and diversifying our existing assets and further expanding our overall portfolio and presence in Canada, the United States of America ("US") and Australia. We are focusing on these geographic areas as our expertise, scale and diversified fuel mix create a competitive advantage that we can leverage to capture expansion opportunities to create shareholder value. Sustainability means ensuring that our financial returns consider short- and long-term economics, environmental 2 Materialimpacts and Sustainability societal and community Impacts needs. We refer to this as E SG. This MD&A integrates our financial or economics ("E") and sustainability or environment, social and governance (“ESG”) reporting. Key elements of our sustainability disclosure are guided by our sustainability materiality assessment. To help inform discussion and provide context on how E2SG affects our business, we have referenced the provincial securities commission guidance, Global Reporting Initiative, Sustainability Accounting Standards Board and the Task Force on Climate-related Financial Disclosures. Our content is structured following guidance on non-traditional capitals from the International Integrated Reporting Framework. In addition, we track the performance of 80 sustainability-related Key Performance Indicators ("KPIs") and have obtained a limited assurance report from Ernst & Young LLP over material KPIs. (1) We measure capacity as net maximum capacity (see the Glossary of Key Terms for the definition of this and other key terms), which is consistent with industry standards. Capacity figures represent capacity owned and in operation unless otherwise stated, and reflect the basis of consolidation of underlying assets. M2 TransAlta Corporation | 2020 Annual Integrated Report TRANSALTA CORPORATION M2 Management’s Discussion and Analysis Management’s Discussion and Analysis This MD&A includes "forward-looking information" within the meaning of applicable Canadian securities laws, and "forward-looking statements" within the meaning of applicable US securities laws, including the US Private Securities LitigationForward-Looking Reform Act of 1995 Statements (collectively referred to herein as "forward-looking statements"). All forward-looking statements are based on our beliefs as well as assumptions based on information available at the time the assumption was made, and on management's experience and perception of historical trends, current conditions and expected future developments, as well as other factors deemed appropriate in the circumstances. Forward-looking statements are not facts, but only predictions and generally can be identified by the use of statements that include phrases such as "may," "will," "can," "could," "would," "shall," "believe," "expect," "estimate," "anticipate," "intend," "plan," "forecast," "foresee," "potential," "enable," "continue" or other comparable terminology. These statements are not guarantees of our future performance, events or results and are subject to risks, uncertainties and other important factors that could cause our actual performance, events or results to be materially different from that set out in or implied by the forward-looking statements. In particular, this MD&A contains forward-looking statements including, but not limited to: operating performance and transition to clean power generation, including our goal to eliminate coal as a fuel source in the Alberta thermal fleet by 2021; our Clean Energy Investment Plan and the benefits thereof; transitioning to 100 per cent clean electricity by 2025; the source of funding for the Clean Energy Investment Plan; our transformation, growth, capital allocation and debt reduction strategies; growth opportunities from 2021 and beyond, including potential for growth in renewables and on-site and cogeneration assets, including the demand therefor and greenfield development acquisitions; the amount of capital allocated to new growth or development projects and the funding thereof; our business, anticipated future financial performance and anticipated results, including our outlook and performance targets; our expectation that the sale of TransAlta's interest in the Pioneer Pipeline will close in 2021; receiving funding under the Canada Emergency Wage Subsidy program; the ability to reach a commercial solution with Energy Transfer Canada regarding the construction and operation of the Kaybob 3 cogeneration facility; the timing and the completion of growth and development projects, and their attendant costs; our estimated spend on growth and sustaining capital and