Report examines the costs and the causes of Alberta's ongoing PPA fight
Economists split blame between policy and prices, argue against government's $2B figure
A new report calls into question the Alberta government's cost estimates in relation to power companies walking away from agreements and outlines the combination of factors that are making those agreements unprofitable.
Written by economists Trevor Tombe and Andrew Leach — who chaired the province's climate change advisory panel — and published by the University of Calgary's School of Public Policy, the report deals with the controversy surrounding Power Purchase Arrangements in Alberta's complex private energy market.
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The government is going to court in an attempt to prevent the companies that own the PPAs from walking away from the arrangements — something the government said will cost Albertans $2 billion — citing the new increased emissions fees and Alberta's new climate policy.
The government argues the clause in the PPAs that the companies are using to justify leaving the agreements was inserted illegally after a year of public consultations and was never made public — the so-called "Enron clause," as it was negotiated by a then Enron executive.
"For something that clearly put so much liability back onto the public, not being discussed with the public, certainly doesn't speak to that kind of fair and open relationship," said deputy premier Sarah Hoffman while discussing the new report.
PPAs are agreements between electricity suppliers and power plants that existed prior to privatization of Alberta's grid.
Those who own the PPAs agree to pay the plants at established rates and then take the power and sell it on the open market in the hopes of turning a profit.
This was meant to soften the blow to power plants during the transition to an open market.
Splitting the blame
The report splits the blame for the current unprofitability of those agreements between increased charges on greenhouse gas emissions, falling electricity prices and changes to how emissions and subsequent credits are measured.
The change to emissions credits hit coal-fired plants particularly, and intentionally, hard.
According to the report, the true cost to Albertans will be somewhere closer to $900 million, or $600 million if you consider the public is already essentially the owner of one of the PPAs.
"To put that cost into perspective, it works out to roughly $2.25 per month on average between now and 2020, so a pretty moderate cost," said Tombe on the $900-million price tag.
He said that figure is based on "naively" assuming the cost will simply be spread out over that time on power bills.
Tombe said the government may have used older — and lower — price estimates to come up with its $2 billion figure.
Of course, the future cost to Albertans, if there is any, is a little more complicated than that.
The problem of prices
Currently, households receive a discount on their bills from the profits generated by the Balancing Pool, the central body that manages the PPAs.
That discount on bills could be reduced, or it could turn into a charge, depending on how things shake out.
That depends on the price of electricity and throws a wrench into simple explanations when it comes to cost.
Albertans will only pay for the PPA fiasco if electricity prices — and therefore electricity bills — remain low, according to the report.
Which leads to the contention that low prices are at least partially responsible for the falling profits associated with PPAs.
While the report said policy changes — both fees on emissions and changing measurements and credits — reduced the value of PPAs by $1.3 billion, falling prices have resulted in a further reduction of $1.1 billion.
The province's court case rests on the idea that the clause being used by the companies to justify their actions — which states they can walk away when those agreement become "more unprofitable" — was inserted illegally into the agreements.
The report quotes Nigel Banks, a University of Calgary law professor, as saying, "It is hard to overestimate the breadth of this definition and the scope of the protection it offers an owner."
Hoffman said the government believes the clause is not only illegal, it's plain unfair.
"I think they made $10 billion when prices were good, and now that prices are low they believe they have the opportunity to try to give these back — that they're trying to maximize their profits and pass back any risk back onto Albertans," she said.
The court proceedings will begin on Nov. 2, and the report suggests the case could provide a strong negotiating position for the government.
"A negotiated settlement may be one where PPA holders take on at least some of the losses due to low prices, while Albertans bear the costs of changing policies — something more in line with the spirit of the arrangements," it reads.
- A previous version of this story stated some companies had insisted government policy alone was to blame for PPAs no longer being profitable. Government policy is the reason the companies argue they can bail out of PPAs, but it's not the single reason why PPAs are no longer profitable. They are less desirable due to the effects of changing government policies and plummeting prices.Aug 10, 2016 5:12 PM MT
With files from Carolyn Dunn and Jennifer Lee