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Power Purchase Arrangements: a deal that could cost taxpayers $2 billion

Residential and commericial electricty users could be on the hook for losses

Sep 6, 2016

by Michael Ganley

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Low natural gas prices have contributed to an unprofitable electricity market
Photo CPImages

In a turn of events predicted by precisely nobody, “power purchase arrangements” have hit the headlines. In July, the provincial government launched a lawsuit to have a phrase in PPAs declared void, upsetting the electricity generators and distributors in the province, and the opposition parties.

Quick background: PPAs came into being in 2001 as Alberta introduced competition into the electricity-generation market, which was then heavily regulated and dominated by three incumbents. PPAs separate ownership and operation of a power plant from the right to sell the electricity. The buyer of the PPA compensates the generator for its fixed and variable costs and takes the market risk of selling the power. The theory was that this would open the market to new entrants, and it has worked in that regard.

But there is a clause in PPAs that allows buyers to terminate the deal if a “change in law” renders a PPA “unprofitable,” or – and here’s where the litigation happens – “more unprofitable.” The latter phrase was introduced late in the game, as PPAs were being finalized and interested buyers were kicking the tires. Even with the change, there was not a lot of interest in the initial PPA auctions, and the buyers are generally considered to have gotten excellent deals, generating steady profits for more than a decade with little risk.

That has changed recently. Electricity prices are at or near record lows because of the low price of natural gas, excess capacity and low demand. So the buyers have turned to the change of law clause, saying the province’s move to increase the price they have to pay for CO2 emissions has rendered PPAs “more unprofitable.” Never mind that most of the unprofitability is driven by market conditions.

MLAs from the Wildrose and Progressive Conservatives got off their chairs to object to the lawsuit, as they should. The buyers entered PPAs in good faith and relied on the changed wording, which was accepted by the Independent Assessment Team that established the PPAs and communicated to the Department of Energy and the Alberta Energy and Utilities Board back in 2000 (contrary to the NDP’s assertion that the clause is the result of “secret back room deals” by previous governments).

Calgary Mayor Naheed Nenshi also came out swinging against the province’s move, since the City of Calgary-owned utility Enmax is in the mix. In fact, Enmax was the first buyer to terminate a PPA, last December. Then in March, TransCanada Energy gave notice that it would walk away from obligations under three PPAs.

The NDP has estimated the potential cost of terminated PPAs at $2 billion. Other commentators have suggested a quarter of that. Terminated PPAs revert to the Balancing Pool, a government agency set up to distribute the proceeds of the initial auctions and to administer the deals. The cost to the public will depend on how much the Balancing Pool can get for the power it is now responsible for selling.

The litigation will be long and expensive, and will likely involve a countersuit by PPA buyers that they relied, to their detriment, on the government accepting the change in the first place.

There is a case to be made that the public interest was not protected in 2000 when the “more unprofitable” phrase was accepted by the Department of Energy. It was a huge concession to PPA buyers, and the government demanded nothing in return. But that’s a political matter, not a legal one.

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