Capital Power added new generation in 2015; braces for Alberta coal phase-out

Capital Power Corp. (TSX: CPX) said Feb. 18 in an earnings report that it took major strides in 2015, including the addition of a new solar facility, a new wind project and new gas-fired generation.

Capital Power is a growth-oriented power producer headquartered in Edmonton, Alberta. It owns more than 3,200 MW of power generation capacity across North America and owns 371 MW of capacity through its interest in the acquired Sundance power purchase arrangement (called the “acquired Sundance PPA”) related to coal-fired capacity in Alberta. An additional 530 MW of owned generation capacity is in advanced stages of development in Alberta.

During 2015, commercial operation of the Shepard Energy Centre, K2 Wind, and Beaufort Solar commenced, and the company continued its development plans for Genesee 4 and 5.

  • On Dec. 22, 2015, Capital Power’s 15-MW Beaufort Solar facility in North Carolina was commissioned and commenced operating under a 15-year power purchase agreement with Duke Energy Progress. The company constructed the facility and then entered into a sale and leaseback agreement with an A-rated U.S. financial institution for proceeds of C$46 million (US$34 million) and a lease term of 10 years with an option for extension at the end of the lease term.
  • On March 11, 2015, Capital Power and ENMAX announced that Shepard was fully operational and capable of generating over 800 MW to the Alberta grid. Capital Power became a 50% owner of this natural gas-fired facility in 2012 and its final construction costs are expected to be C$848 million, which includes a performance bonus paid to the turbine manufacturer. The commercial arrangements with ENMAX include a 20-year tolling agreement where 75% of the company’s owned capacity is contracted from 2015 to 2017 and 50% thereafter to 2035.
  • On May 29, 2015, Capital Power, Samsung Renewable Energy and Pattern Energy Group LP announced that K2 Wind was fully operational and capable of generating 270 MW for the province of Ontario and would operate under a 20-year power purchase agreement with the Ontario Independent Electricity System Operator (IESO). Capital Power owns 90 MW or 33.3% of the capacity of this facility. Capital Power’s share of final construction costs was C$297 million, including both debt and equity financed components.
  • Genesee 4 and 5 in Alberta are natural gas-fired combined cycle facilities due on-line as early as 2020. They would have 1,060 MW of total capacity. It is a merchant generation project with approximately 250 MW contracted to ENMAX for an initial term of eight years.

Capital Power working in Alberta on phase-out of coal-fired capacity

A priority for Capital Power in 2016 will be to work with the Alberta government to receive fair compensation for the proposed accelerated closure of its coal facilities in connection with the province’s Climate Leadership Plan (CLP). The company will also work with regulators and other generators in the province to implement the Carbon Competitiveness Regulation (CCR) and develop a planned transition away from coal-fired generation that does not compromise the electricity market design in Alberta.

Further investment in the Alberta market, including continuation of construction of the Genesee 4 and 5 project, will be considered once sufficient detail about the CLP is released and the company has assessed the impact on its existing Alberta assets. At that time Capital Power said it will further clarify if and when it will continue its construction of the Genesee 4 and 5 project and the planned construction and commercial operation date.

In June 2015, the Alberta government announced changes to Alberta’s regulations governing carbon emissions and a comprehensive review of Alberta’s climate change policy. The changes to the Specified Gas Emitters Regulation (SGER) will increase the required reduction in emissions intensity from 12% to 15% in 2016 and 20% in 2017, and increase the cost of contributions to the Climate Change and Emissions Management Fund from C$15 per tonne of greenhouse gases to C$20 per tonne in 2016 and C$30 per tonne in 2017.

In August 2015, a five member panel, appointed by the Alberta Minister of Environment and Parks, was announced with a mandate to provide recommendations to the Alberta government on how to address climate change in Alberta. Capital Power participated in the consultation process that led to the Alberta Climate Leadership Plan (CLP) that was announced in November 2015.

The CLP provides guidance in three primary areas that affect the company: changes to the compliance requirements for coal emissions, procurement of target renewable generation, and the accelerated retirement of Alberta coal-fired generation. The CLP recommends that the existing SGER be replaced in 2018 with the CCR. Under the CCR, electricity generators will pay C$30 per tonne of greenhouse gas emissions above an electricity sector performance standard, which has yet to be determined.

Emissions from coal-fired generating plants will be zero by 2030, subject to release of final CLP legislation and ensuring Alberta electric system reliability. It is expected that two-thirds of the phased out coal-fired generation will be replaced by renewable generation.

Capital Power’s Genesee 1 and Genesee 2 coal units (860 MW total) and its 50% interests in the Genesee 3 (516 MW total, with 258 MW of that belonging to Capital Power) and Keephills 3 (also 516 MW total and 258 MW Capital Power share) coal units are all affected by this recommendation of the CLP. The Alberta government has committed to treat workers, communities and affected companies fairly, and avoid stranding capital. The CLP recommends that Renewable Energy Credits (RECs) be offered through a competitive process to the developers of renewables projects. The CLP maintains Alberta’s deregulated market structure with new generation outside the renewable procurement process to continue to be built based on price signals from the energy only market.

Capital Power said it expects that the increase in the company’s compliance costs under the CCR will be mitigated by higher wholesale power prices from owners passing through the compliance costs and the use of its inventory of low-cost carbon offset credits. The projected incremental impact of the CCR, between 2018 and 2020, is an average annual increase of approximately C$20 million in adjusted EBITDA. From 2021 to 2029, the projected annual impact to adjusted EBITDA is a decrease of approximately C$100 million, due to increased compliance costs of the CCR due to the depletion of the company’s carbon offset inventory and the expiration of the Genesee 1 and Genesee 2 power purchase agreements (PPAs). Under the terms of those PPAs, any carbon offset costs as a result of a change in legislation (like the CCR) are and will be borne by the PPA holder, the Balancing Pool, until 2020. Thereafter, the full CCR cost for Genesee 1 and Genesee 2 will be borne by Capital Power.

Although unrelated to the CCR, the decrease in adjusted EBITDA is expected to be more than offset by the sale of electricity from Genesee 1 and Genesee 2 into the Alberta wholesale market at prices which are expected to exceed the contracted price under the PPA. The contracted prices under the PPA are projected to be approximately C$37 per MWh in 2020. These projections do not take into account the compensation to be received from the Alberta government for the accelerated closure of Alberta’s coal-fired plants and assume no actions by Capital Power to further reduce greenhouse gas emissions.

“There are numerous uncertainties associated with the CLP,” Capital Power added. “Most significantly, it represents a proposed framework that has not been substantively enacted in legislation and therefore the final legal form and substance of the CLP is unknown. The Alberta government has indicated that an independent facilitator and the Alberta Electric System Operator (AESO) will work with owners of coal-fired power generation to address compensation and develop a transition plan.”

About Barry Cassell 20414 Articles
Barry Cassell is Chief Analyst for GenerationHub covering coal and emission controls issues, projects and policy. He has covered the coal and power generation industry for more than 24 years, beginning in November 2011 at GenerationHub and prior to that as editor of SNL Energy’s Coal Report. He was formerly with Coal Outlook for 15 years as the publication’s editor and contributing writer, and prior to that he was editor of Coal & Synfuels Technology and associate editor of The Energy Report. He has a bachelor’s degree from Central Michigan University.