TransAlta Corp. said in an Aug. 9 quarterly financial report that in March and May of this year, the buyers under the legislated Sundance, Sheerness, and Keephills power purchase arrangements (PPAs) announced their intention to transfer their obligations under the PPAs to the Alberta Balancing Pool as a result of a change in Alberta law.
TransAlta owns these coal-fired power plants, with the PPAs providing a guaranteed revenue stream from them. TransAlta (TSX: TA; NYSE: TAC) said March 8 that it had received formal notice from TransCanada Energy Ltd. of its intention to terminate the power purchase arrangements for Sundance A Units 1 and 2 and Sheerness Units 1 and 2. TransAlta also said that it had gotten a formal notice from ASTC Power Partnership, a partnership between TransCanada and AltaGas Pipeline Partnership, of its intention to terminate the PPA for Sundance B Units 3 and 4.
Said TransAlta in the Aug. 9 financial report: “The Balancing Pool is presently investigating whether these transfers are permitted by the terms of the PPAs in the current circumstances and, if so, when the transfers would become effective. The outcome remains uncertain. If the Balancing Pool confirms the transfers, it will assume the role of the buyers and carry out the responsibilities of the buyers under the PPAs, including dispatching the generating units and making the capacity and energy payments to TransAlta until the end of the PPA terms.
“Pursuant to the Electric Utilities Act (Alberta), it could also choose to terminate the PPAs after following the requirements of legislation, which would include paying TransAlta an amount equal to the applicable closing net book value of the generating units. TransAlta does not presently expect the transfer of the PPAs to the Balancing Pool to have a material impact on our business.
“On July 25, 2016, the Attorney General for the Province of Alberta filed a claim against all buyers who have purported to transfer their respective obligations under the PPAs, the owner of the Battle River #5 PPA, the Alberta Utilities Commission, and Balancing Pool, challenging the basis on which the buyers have purported to transfer their PPA obligations to the Balancing Pool. The outcome of this claim is uncertain. Notwithstanding the above, TransAlta continues to operate the PPA generating units in their ordinary course and receive the capacity and energy payments due to it under the PPAs.”
The rush by several parties to get out of the PPAs is largely due to the fact that in November 2015, the Government of Alberta announced through the Climate Leadership Plan its intent, among other things, to phase out emissions from coal-fired generation by 2030, replace two-thirds of the retiring coal-fired generation with renewable generation, and impose a new carbon price of C$30 per tonne of CO2 emissions based on an industry-wide performance standard.
On March 16 of this year, the Government of Alberta announced the appointment of a Coal Phase-out Facilitator to work with coal-fired electricity generators, the Alberta Electric System Operator, and the Government of Alberta to develop options to phase out these emissions. The Coal Phase-out Facilitator is tasked with presenting options to the government that will strive to maintain the reliability of Alberta’s electricity grid, maintain stability of prices for consumers, and avoid unnecessarily stranding capital. Discussions with the coal-fired generators, including TransAlta, are now in progress.
On May 24, Alberta passed the Climate Leadership Implementation Act, which establishes the carbon tax framework for its application to fuels. It is expected that additional regulations will be developed later in 2016 governing the treatment of large industrial emitters. The Climate Leadership Plan will be implemented for the electricity sector on Jan. 1, 2018. In March 2016, Alberta began development of its renewable energy procurement process design for the Alberta Electric System Operator to procure a first block of renewable generation projects to be in-service by mid-2019. A decision on the final design parameters is expected by the end of 2016, TransAlta noted.