In this blog series, LevelTen shares insights into recent power purchase agreement (PPA) prices, regulatory updates, and competitive supply for a different renewable energy market. Leveraging the latest data on PPA pricing from our 330+ developer partners, LevelTen equips companies with the information they need in order to procure high value and low-risk renewable energy PPAs.
A couple weeks ago, LevelTen Energy and the Business Renewables Center of Canada hosted a webinar about the AESO Corporate PPA market, which is now available on demand for BRC members. It was great fun, and many of our partners have requested more information about the opportunities that Alberta renewable energy projects offer.
AESO Market Overview
The Alberta Electric System Operator (AESO) has been in operation for over 20 years, serving Albertans as their wholesale electricity market operator and grid reliability coordinator. In this role, AESO manages the sale and transmission of wholesale electricity that eventually makes its way to the homes and businesses of Albertans. For retail electric providers, utilities, and co-ops ("market participants") in AESO, the centralized management of the grid results in enhanced grid reliability and long-term planning, which is intended to lower costs for end consumers.
In 2019, the United Conservative Party (UCP) became the majority party of the Canadian government. A swift change in the regulatory landscape of the Alberta energy market followed the election.
Since 2017, the AESO had been designing and seeking approval for a capacity market that was intended to launch in the fall of 2019. However, shortly after assuming control of the provincial government, the UCP determined that the capacity market would not be implemented. As a result, forward energy prices increased significantly.
The graph below illustrates the dramatic upward shift of AESO forward energy prices that occurred after the UCP terminated the implementation of the capacity market. The blue line shows energy prices in June 2019, just before the UCP announcement, and the orange line shows energy prices in July 2019, just after the UCP announcement. Prices increased dramatically because power plant operators who had been expecting additional revenue from the capacity market had to "make up" that value from energy market revenues. This caused the forward price of wholesale energy to increase, as energy traders expected the price of energy to rise in the future.
Alberta was one of the first markets to establish a price on carbon with the Specified Gas Emitters Regulation (SGER). The SGER program originally set a price of $15 CAD per ton of carbon emissions that had since gradually increased to $30 CAD per ton. Earlier this year, the UCP replaced the existing carbon pricing scheme with a new system called Technology Innovation and Emissions Reduction (TIER), which maintains the $30 CAD per ton price, but relaxes the overall targets that large emitters need to achieve. The Canadian federal government also established a carbon pricing policy that took affect on January 1, 2020 to serve as a backstop to provincial programs such as Alberta's. The federal carbon pricing policy will ramp the price of carbon emissions above $30 CAD per ton in 2021 and beyond. These systems create a regulatory requirement for certain large energy consumers and carbon emitters to seek out renewable energy projects as a compliance mechanism, a dynamic that is not as prevalent in U.S. markets.
AESO Generation Mix
Alberta still has a ways to go to achieve its goal of 30% renewable energy by 2030. Currently, renewable energy contributes only 11% of the total annual electricity generation. In terms of installed capacity, wind projects dominate the grid. According to AESO 2019 Annual Market Statistics, as of 2019, there were 1,781 megawatts (MW) of wind connected to the grid and only 15 MWs from Alberta's first utility-scale solar project. The graph below shows the Average Net-to-Grid Generation (MW) capacity by technology on the AESO grid. Since 2015, the capacity of coal has dropped considerably, as it's been incrementally replaced by natural gas combined cycle (CC) power plants or converted to co-gen facilities.
Considerations for Buyers
While wind has been the dominant renewable energy resource on the grid and procured by the Alberta government, solar is on the rise in the province. In August 2019, the Alberta Utilities Commission approved the construction of Greengate Power's Travers Solar project, a 400 MW solar asset in Vulcan County, which is expected to come online in 2021. Perhaps, more telling, is the availability of solar projects for corporate investment in AESO. There are just over 70 wind and solar projects under development and currently listed in the LevelTen Marketplace. The image below (left) shows a breakdown of these projects by the contract start date of their PPA offers. The image on the right shows the available energy (MWh/year) available from AESO solar and wind projects. Today, corporate renewable energy buyers can source anywhere from 5,000 MWh/year up to 900,000 MWh/year from individual projects directly from the LevelTen Marketplace.
Because Alberta has both a competitive wholesale electricity market and offers deregulated retail choice, energy buyers in Alberta are fortunate to have a long menu of approaches to buying renewable energy, including virtual power purchase agreements (VPPAs). VPPAs have become the preferred option for most corporate renewable energy buyers seeking to procure cost competitive renewables at scale. On the LevelTen Marketplace, project developers are actively offering bids for VPPAs, inclusive of the following contract terms:
PPA Prices and Settlement Value in AESO
In LevelTen's Q1 2020 PPA Price Index report, the lowest quartile of PPA offers were less than CAD $48.46/MWh (USD $35.49/MWh) for wind projects and CAD $68.69/MWh (USD $50.30) for solar projects. While these PPA prices are higher than some of the most competitive projects in the United States, the financial value of Alberta PPAs are comparable. This is because prices in AESO's energy market are relatively high. In 2019, for example, the average price for energy during peak hours was CAD $64.12/MWh, and, after the capacity market reform (or lack thereof), we anticipate on-peak pricing to be even higher in years to come. In fact, as opposed to some areas in the United States, Alberta pool prices are forecasted to remain at a premium to the current PPA prices for the next several years. Solar projects, especially, which are able to capture this on-peak pricing, present a strong financial opportunity for buyers seeking to meet renewable energy goals in Canada.
For many buyers, unlocking the value of Alberta renewables will depend on being able to aggregate load with others. Though some project developers in Alberta have been able to finance their projects purely based on the expectation that AESO market prices will remain high (i.e., so called "merchant projects"), most developers still heavily rely on, and even require, contracted project revenues to be secured through PPAs in order to get their projects financed. With the increase in large, cost-competitive, and high-value projects under development in Alberta, this creates an opportunity for buyers. In particular, buyers who can aggregate their load with others to procure at greater volumes can benefit from economies of scale and enter into a cost-competitive PPA. Buyers who are interested in this option should contact firstname.lastname@example.org for a free consultation.
Exchange Rate Risk
In wholesale electricity markets, the buyers' financial risk exposure in the PPA is subject to natural gas pricing and renewable energy penetration, among other factors. The interplay between these factors is foundational to LevelTen's methodology of quantifying risk. Another factor to consider for buyers whose reporting currency is the U.S. dollar and who contract a PPA in Canadian dollars, is exchange rate risk (e.g. FX risk). Determining an approach to manage FX risk both while analyzing the value and also negotiating the PPA is an important measure to take before moving forward in the transaction.
Want to learn more?
As a buyer, you can access real-time cashflow analyses of nearly every wind and solar project in North America through the LevelTen Marketplace to understand the value and risks associated with each PPA offer. With over 1 billion data points being processed daily, LevelTen offers buyers a data-driven approach to renewable energy procurement. Reach out to a LevelTen representative today to learn more.