Power Purchase Arrangements (PPAs) 101
As part of the government’s action on climate change, the costs of carbon emissions from Alberta’s coal-fired plants are increasing. In 2018 alone, TransCanada’s carbon costs for these PPAs would have gone up to $152 million, compared to $23 million in 2015.
What is a Power Purchase Arrangement?
Created in 1999 by the provincial government, power purchase arrangements (PPAs) lay out the detailed terms under which the government would transfer the right to sell the electricity from power plants built and operated by the three incumbent utilities (PPA Owners) to a larger group of investors (PPA Buyers). The objective of the PPA process was to increase competition in the newly formed wholesale and consumer electricity markets, thereby enabling competitive electricity prices into the future.
What is the Balancing Pool?
The provincial government created the Balancing Pool to assume certain risks and perform various responsibilities to support the PPA process. For example, the Balancing Pool transferred the proceeds from the sale of the PPAs from the PPA Buyers to Alberta consumers through a rebate on their bill. In addition, the Balancing Pool administers the unsold PPAs from the initial auction, acting in the same manner as a buyer, purchasing power from the owners and selling it into the market. The Balancing Pool transfers the profit and loss from the administration of these unsold PPAs to consumers through either a rebate or charge on their bill, called the Balancing Pool Allocation.
What was the process to sell these PPAs?
The government sold PPAs to buyers during its first auction in August 2000, then at the Market Achievement Plan auction in December 2000, and it sold the Sheerness PPA to TransCanada in 2005. Before entering the auction process, prospective buyers, including TransCanada, evaluated the risks associated with acquiring the PPAs by reviewing the rights and obligations of the PPA Owners, PPA Buyers and the Balancing Pool. The various elements were approved by the Alberta Energy and Utilities Board (AEUB) after an extensive public hearing process. The Alberta government then enacted the PPAs as government regulations in order to give bidders in the August 2000 auction a high level of confidence that the terms of the PPAs would be respected and enforceable for the full life of each PPA, many of which had 20-year terms. Establishing this confidence was critical to the prospective participants in the auction given the large investment required to purchase a PPA.
How did the creation of PPAs benefit Albertans?
PPA Buyers collectively paid a total of nearly $3 billion for the PPAs and the Balancing Pool distributed those proceeds to Albertans via monthly credits on their power bills. The Balancing Pool also returned an additional $1 billion to Alberta electricity consumers from the profits it earned from sales of electricity from the unsold PPAs that it retained.
Why did TransCanada return their PPAs to the Balancing Pool?
The PPAs included a number of rights and assurances that allowed companies to confidently enter into the PPA auction, one of which was a "change in law" clause that allows PPA buyers to return a PPA to the Balancing Pool without penalty if a change in law made by the government either made the PPA unprofitable or more unprofitable. Specifically, a clause in the PPA states:
Notwithstanding any of the foregoing, to the extent that a Change in Law, after giving effect thereto and to this Section 4.3, could reasonably be expected to render continued performance by the Parties to this Arrangement for the balance of the Effective Term unprofitable, or more unprofitable, to the Buyer in respect of a Unit, having taken account of any compensation entitlement under Section 4.3(i) or any amount due from the Balancing Pool, then the Buyer may terminate this Arrangement and shall not be liable for, nor entitled to any Termination Payment.
The government made changes to the Specified Gas Emitters Regulation (SGER) that rendered TransCanada’s PPAs more unprofitable, and with that, TransCanada engaged the change in law clause.
What was the change in law that caused TransCanada to return their PPAs?
The Specified Gas Emitters Regulation regulates the cost of carbon dioxide emissions. It initially charged large carbon dioxide emitters a tax of $15 per tonne on emissions above a certain threshold. In 2015, the provincial government announced changes to the SGER that nearly doubled the impact of the tax in 2016 and tripled the impact for 2017. This change in law made TransCanada PPAs unprofitable or more unprofitable and caused TransCanada to return the PPAs to the Balancing Pool.
What impact do the SGER changes and future carbon levies announced by the government have on the PPAs that TransCanada returned to the Balancing Pool?
The effect of the change to the SGER, combined with announced future carbon levies is that, if TransCanada had retained its PPAs, its costs would have increased from approximately $23 million in SGER levies per year in 2015 to $152 million in carbon levies per year by 2018. That's an increase of a factor of more than 6.5 times.
When a PPA is returned to the Balancing Pool, what options does it have?
The Balancing Pool has the option of continuing to hold the PPA, reselling the PPA, or terminating the PPA by providing six months' notice and then paying the plant owners the remaining value.
Will the Balancing Pool have to pay the increased SGER carbon levy costs?
Yes. As the holder of the PPA, the Balancing Pool is responsible for the increased SGER costs.