The Magrath Wind Power Project in southern Alberta. Photo by Chuck Szmurlo
On the morning of December 13, 2017, news from Alberta refashioned the discussion of affordable energy in the country. From the heartland of Canadian oil and gas, the results of the province’s first renewables procurement were announced.
As the Alberta government took its first steps towards a planned 30 per cent reliance on renewable electricity by 2030, it scored an early victory: the province had received bids with the lowest energy prices in Canada. The average figure of $37 per megawatt-hour (MWh) came from four successful bids for 600 MW worth of new wind power projects. Even with an additional 200 MW over the initial 400 MW goal, the auction still came in under budget. This further burnished Alberta’s recent reputation as a climate leader in Canada under the NDP government of Premier Rachel Notley.
“The one big thing that stands out is the price it came in at,” says Binnu Jeyakumar, program director of electricity at the Pembina Institute. Even though wind power has been dropping in price across the globe, Canada hadn’t yet reached any superlatives.
Mexico, on the other hand, received the lowest price for wind – $17 per MWh. In 2016, a large-scale renewables procurement in Ontario came in at $85 per MWh. Now Alberta was the undisputed domestic price leader in the electricity market.
“That caught everyone’s attention across the country of all political stripes and all provinces,” Jeyakumar says. Even the NDP’s opposition, the United Conservative Party, as well as the centrist Alberta Party have expressed some interest in renewable electricity as part of their party line.
Affordability and the potential for job creation in rural areas have endeared renewable electricity to conservative politicians in a new way. Jeyakumar points out that south of the border, the 10 congressional districts producing the most wind energy, for example, are represented by Republicans in Congress. “It shows that it’s a sound economic decision regardless of your political stripes.”
As Alberta looks to phase out coal-fired power plants, another goal to be achieved by 2030, affordability of alternatives is key. Without coal, most of the province’s 70 per cent of non-renewable electricity will be gas, making prices especially volatile to market changes.
“As coal is shut down, if you replace most of it permanently with gas that means that both your heating bill as well as your electricity bill, in provinces like Alberta, would be really tied to the price of gas,” says Jeyakumar. “Renewables can help hedge against that.” Natural gas-fired plants, while producing substantially lower carbon dioxide emissions than existing coal plants, also continue to be a source of greenhouse gases.
Jeyakumar calls the results of the procurement process the “new Alberta advantage,” in reference to the nickname given to the low taxes and high-quality services into which the province invested oil and gas royalties during the boom years. Alberta’s “new” advantage, however, has renewables at its core.
Implementing the renewables projects is expected to mean at least a $10.5 billion investment into Alberta’s economy by 2030 with at least 7,200 related jobs created. Jeyakumar envisions quality of life spinoffs too: jobs and tax revenues flowing into non-urban centres and infrastructure investments, such as high-speed internet, which is required to run a wind facility but doesn’t yet exist in many of Alberta’s rural corners.
Wind has a moment
Robert Hornung, president of the Canadian Wind Energy Association, said his industry peers like to talk about how wind is the cheapest source of non-emitting power generation. But now he feels comfortable going further.
“I think the results in Alberta demonstrate that wind is actually the lowest cost source of generation, period,” he says.
The low prices are tied to the competitive market auction system in Alberta that was used to accept bids. It had never been used in Canada for large-scale renewables procurement before, though some markets like Mexico and portions of the U.S. are reliant on it.
In the first procurement round, bidders offered the lowest price they’d accept on a 20-year energy contract for their proposed projects. The lowest bids won. In practice, if their bid price falls lower than the market price of electricity during the contract, then the firm must pay the Alberta Electric System Operator (AESO) the difference. In the inverse situation, the AESO pays the firm the difference out of the province’s carbon levy. This allows the process to be heavily derisked for both parties.
Despite the procurement being platform neutral, there was little surprise that wind contracts would win the first round, especially given the global decline in wind energy prices. A November 2017 report from financial advisory firm Lazard states that the levelized cost of energy for wind has declined by almost 70 per cent since 2009.
To achieve the most out of the process, however, there will eventually have to be a greater focus on value than cost, which could include considerations for electricity storage, combined-cycle plants and ushering solar power generation into the mix.
Southern Alberta is the sunniest location in Canada and the provincial government has already taken a bet on solar energy. Last summer it launched a program that provides rebates for solar panels on homes and businesses. Experts like Jeremy Barretto, a lawyer in Osler’s environmental, regulatory and aboriginal law group, have argued that utility-scale solar in Alberta offers unique benefits – such as generating power closer to when and where people use it – that were not reflected in the first renewables procurements.
The value vs cost dilemma
Blake Shaffer, a doctoral candidate in economics at the University of Calgary, says the heavy focus on cost in the procurements presents a potential problem. As the province adjusts its energy infrastructure to complement the procured renewables, there needs to be diversity in where they’re located and what kind of energy they produce.
Shaffer points out that there’s a lot of potential for overtaking gas generators if renewables prices hold. He says that when we reach at least parity, or can go below it, we have the opportunity to switch over existing energy sources to help reach renewables targets and save money.
“(At current wind prices) it’s probably going to be worth something around offsetting the running cost of fuel of a marginal gas generator for at least 10 to 20 years, (if) that fuel cost is probably anywhere between $25 and $40.”
But this requires a system that can meet the demand. One way he sees this happening is by boosting interconnection with other provinces. “Alberta’s going to have raw energy in the form of intermittent wind whereas B.C. has an abundance of dispatchable hydro,” Shaffer says. It may also represent an efficient way to avoid a reliance on wind, he adds.
Part of hedging with a “value” portfolio instead of a “cost” portfolio is to avoid geographic concentration of power sources, especially wind. “You have more of a likelihood of it being worth less because it’s going to blow at the same time,” he says. “You’ve got to have diversity.”
Being required to connect to current power grid infrastructure, for instance, adds a layer of difficulty to diversifying. So far, the projects selected through the process are all in close proximity in southern Alberta: two in the Pincher Creek area and two further east near Medicine Hat.
Another way to ensure that the new sources of renewable electricity are meeting demand is through procurements that combine renewables plus storage. In jurisdictions like Ontario, variability from renewables has required peaker gas plants to sit on standby for the vast majority of the year. While prices for renewables plus storage are still higher than building new gas plants, costs have plummeted in recent years across the U.S.
“I can’t see a reason why we should ever build a gas peaker again in the U.S. after, say, 2025,” said Shayle Kann, a senior adviser to GTM Research and Wood Mackenzie, at an Energy Storage Summit last December.
Regulators recently suspended work on a gas peaker plant in Oxnard, California, after an analysis determined that alternatives would be cheaper. A request for Colorado-based proposals put out by utility Xcel Energy last year resulted in median bids for a wind project at $18.10 per MWh; the median for wind plus storage came in at $21, only three dollars higher.
For other provinces, the biggest takeaway from the auction was the value of having competitive bidding and basically removing all the commodity price risk from the developer. While in Alberta, the auction rewarded participants who had low costs, the elements rewarded differ across the country. In Ontario, for instance, there was consideration of community impact and Indigenous participation which resulted in different types of bids to meet these goals.
Jeyakumar insists that, by the fourth and fifth renewables procurements, there will need to be a framework in place to promote portfolio diversification. That day might arrive faster than we think.
In February, the Alberta government announced two new parallel rounds of procurement building upon the success of the first. The second round has a target of 300 MW and features an Indigenous equity requirement while the third round features a 400 MW target. Results from both rounds are expected this December.