Coal power plant shutdown could hit Alberta taxpayers

It's pretty clear that Alberta is moving away from coal. But how quickly? And who will pay?

Stage set for a fight over corporate compensation as Alberta moves away from coal

TransAlta and Capital Power's KeepHills 3 coal-fired plant has been in operation since 2011. Albertans could be asked to compensate the companies if KeepHills is decommissioned early. (Capital Power)

Over the past week, it has become pretty clear that Alberta will soon announce the phase-out of coal-fired electricity in the province.

This is a big deal. Coal power is the second biggest emitter of greenhouse gases in the province, behind the energy industry. As Alberta formulates a climate change policy, it's an obvious step forward.

We would be expecting a certain amount of compensation for plants that are shut down earlier. –John Kousinioris, TransAlta

But it's not going to be easy, partly for logistical reasons; 55 per cent of Alberta's power comes from coal, so replacing that capacity will be challenging.

The other problem is that the power industry was spending billions of dollars building new coal-fired plants in the past decade — one was commissioned in 2005 and another in 2011. Industry is not keen to see newer, efficient plants closed before they've earned back their capital investment.

The stage is therefore set for a fight over compensation, if Alberta moves quickly to wean itself off coal.

Timeline for shutdown

Alberta named a climate change panel in August, and part of its role was to consider moving away from coal-fired power in the province. The public, industry and environmental groups were all consulted.

It will surprise no one that that industry and environmental groups took different approaches to the timeline.

The industry submission from TransAlta, ATCO, and Maxim Power was called Dial Down, Dial Up. It suggested a cap on emissions, a 20 per cent decrease in coal-fired generation immediately and ultimately having only 10 per cent of Alberta's power generated by coal, presumably from the more efficient, newer plants, by 2030. 

TransAlta makes the case that a gradual shift will protect jobs and communities where it mines coal and operates power plants and will allow it to increase investment in renewable energy. 

The submission from the environmental NGO, the Pembina Institute, suggested that 10 of the province's 18 coal plants be shut down within five years and that no coal power be produced after 2030, unless there was a system to capture carbon or otherwise offset the emissions.
TransAlta has suggested that it will 'dial down' coal-fired power generation and invest in renewable energy such as wind and hydro. (Canadian Press)

Compensation question

Under its Dial Down, Dial Up plan, TransAlta said no compensation is needed. However, that stance would change if the phase-out happens more quickly.

They took a business risk when they built these things.– Ben Thibault, Pembina Institute

"Building a plant like KeepHills 3 [built in 2011] is a multibillion-dollar exercise for us," said John Kousinioris, chief legal and compliance officer with TransAlta, in an interview with CBC News.

"I think that it's fair for our investors and all of our employees to make sure that the company they work for is a stable one, and that means getting a return of the capital we've invested, a return on the capital that's invested, so yes, we would be expecting a certain amount of compensation for plants that are shut down earlier."

The counterpoint to that argument is fairly simple: What were you thinking when you built a coal-fired power plant in 2011? The winds of climate change were certainly blowing by then.

"They took a business risk when they built these things," said Ben Thibault, program director of electricity with the Pembina Institute, referring to KeepHills 3, as well as the Genesee 3 coal-fired plant commissioned in 2005. 

"Electricity prices were high, so they took a risk to take advantage of some high pricing, but knowing that there was risk that they were going to be subject to climate policy. So what was the actual investment expectation that they had?"
The Sheerness power plant near Hanna, Alta., has been in operation since 1986. The Pembina Institute recommends it be shut down in 2026, after earning back its capital costs and a return on investment. (ATCO)

Middle ground

The Pembina Institute released research last week that it says shows no compensation would be required to power producers under a 15-year phase-out plan. 

All but two of Alberta's coal-fired plants have power-purchase agreements that were negotiated in the days when the electricity industry was still regulated in Alberta. Those power-purchase agreements included a negotiation as to how long the plants needed to operate to make back their capital plus a return, called the effective life of the unit (ELU).

The effective life is typically 40 to 50 years, but a plant can continue operate after that period. Kousinioris suggested that 60 years is a typical lifespan for a power plant, but after the ELU ends, the company is deemed to be whole.

According to research done by Pembina, the ELU of all coal plants, except the two built in the 2000s, will end by 2029, and therefore the companies don't require compensation.

Climate vs. economy

Almost all climate change discussions come down to weighing the cost to the economy against the benefit to the climate. Alberta's move away from coal-fired power is no different. The province can chose to move slowly and buffer the industry, or move quickly to have an effect on greenhouse-gas emissions. 

There's a cost to any decision; consumers will possibly face higher power bills, companies could face stranded assets and taxpayers might be on the hook for potential compensation.

Alberta's government has said repeatedly in the past six months that it wants to create a "globally credible climate policy." 

This will be the first test of its resolve.