Electricity market changes causing anxiety among investors says BMO
By: Nick Clark
Let’s not dance around the mess our electricity market is in. It is going to get worse and the cost of electricity is going up. The only little bit of good news is that as a local private company, our guaranteed rates are lower than the government subsidized 6.8 cent cap. Why spend taxpayer dollars to subsidize utilities such as ENMAX, EPCOR and Direct Energy. They don’t need tax relief.
What does the future look like? What are those in the know telling investors and consumers?
During the last 20 years investors put about $17 billion into building a fleet of coal, gas, co-gen, and wind generation facilities in Alberta. Private sector money at work in Alberta. Today, money is not as easily found to rebuild and replace the generation facilities that are being closed and mothballed. For the Alberta government’s Climate Leadership and Social License plan to work, it needs investors to risk their money to build new renewable generation facilities. Before putting up the billions of dollars that are necessary, wary investors are looking for regulatory certainty and sound economics.
Aaron M. Engen, Managing Director of BMO Capital Markets addressed the Independent Power Producers Society of Alberta (IPPSA) this week and laid down the cold hard facts from an investment bankers perspective.
According to Engen, at this point in time, global investors are taking a wait-and-see approach. They not only need to know the rules of the market but need to see how the new market rules laid out by our government really function. Are the regulatory rules subject to change? Are generators who are forced to mothball coal plants and invest in gas-fired generation going to face the same type of regulatory constraints in the future? It is possible that one day a politician may simply push forward with closing gas plants because there is a newer green technology on the market. It has happened elsewhere. Our government’s handling of coal generation under the Climate Leadership Plan is a worrisome precedent.
Remember the PPA fiasco which was in the news last year? It ended up in court and not only did the government lose the case; it cost consumers over a billion dollars, which was added to our long-term debt. Every month for the next dozen years we all will be paying a fee to the Balancing Pool in order to pay for this cost.
Currently on deck is Bill 13: An Act to Secure Alberta’s Electricity Future. This legislation, will enable the creation of a capacity market, provide options for community generation, and will empower the Alberta Utilities Commission (AUC) to penalize electricity and natural gas service providers for breaches of customer service.
Bill 13 is causing anxiety among investors. They are asking what becomes of the climate policy if there is a change in government? This issue is magnified by the Progressive Conservative win in Ontario in which premier-designate Doug Ford has vowed to axe Ontario’s cap-and-trade system and the Green Ontario Fund consumer rebate program it fuels.
Here in Alberta, some investors expect a new government would mean an end to carbon tax on retail consumption. If the Carbon Levey is reduced or cancelled by the next government, the question that was not asked in the BMO forum discussion is, what will happen to all the subsidized ventures if the next government doesn’t have the tax dollar income to support the projects that are currently envisioned by those in power today?
As Engen pointed out; the first auction of renewables by the government was a big success in terms of obtaining a low price for renewables, but there is an imbalance between the cost of energy and construction costs. Will cash flows be sufficient to support debt service coverage ratios?
Next on the horizon under Alberta’s attempt to buy a Social Licence is a concept called Capacity Payments. A financial guarantee to encourage investors to finance the building of new generation plants in Alberta. Will it work? Ontario tried this concept with their Global Adjustment tax on consumers, which paid generators even if they didn’t produce. I think that everyone knows what happened in Ontario with the cost of electricity.
Government watchdogs worry Alberta's new power market could trigger higher costs. Consumer complaints have been filed with the Alberta Utilities Commission by Jim Wachowich of the Consumers Coalition of Alberta, raising several concerns. Under the new capacity payment scheme, generators will get paid regardless of whether the facility is actually used. This is going to push prices up. Will the cost of this premium be hidden in a rate rider added to the Transmission Fees. Watch out! Even the government’s own Utility Consumer Advocate raised concerns about its “extremely abbreviated” timelines. Months ago, Duane Reid-Carson of EDC Associates warned the government that its subsidy program on the regulated rate is going to cost consumers hundreds of millions of dollars. Again, he is raising the flag. It is the people of Alberta who will be on the hook to pay for generation facilities that may end up sitting on standby.
According to Engen, from an investors perspective it will be difficult to commit to large-scale gas-fired generation in the proposed capacity market. The investors may need long-term Power Purchase Agreements (PPA), in addition to capacity contracts, to ensure enough capacity is built to meet the demand. Does this sound familiar? Let’s keep in mind that the government ended up in court over the PPA issues and it cost tax payers over a billion dollars to bail out the Balancing Pool.
After the IPPSA forum, we asked one of the capital market investors on the stage if he would be willing to risk their money in the transition from coal to gas with the fear of future of assets being stranded? The answer was no. The reality is that there are too many other global markets that offer lower risks and better returns. Yet the consensus incumbent generators who also had a vertically integrated retail book of customers would most likely invest if subsidized by our government.
What is the bottom line? The Alberta market currently favors incumbents and existing players who can finance new generation based on their balance sheet and other government subsidies. But, one must wonder if there is enough incumbent/on-balance sheet developer interest in Alberta? Obviously, some will – especially those that have control over generation and a retail customer base to finance the cash flow necessary. More than likely, some of the incumbent generators will profit by being able to take advantage of the government’s willingness to pay them a premium for capacity while they still have the opportunity of profiting from the volatility in Alberta’s Energy Only market.
We are seeing this happen today:
At the same time, even the city municipalities reached deeper into the tax payers pocket by increasing their taxes for the Local Access Fees collected. What a difference a year makes. July 2017 compared to July 2018 the city Local Access Fee is up 100%. Isn’t it time to stop dancing around the issue and say enough already? Dear MLA’s …. Slow down. Roll back the tax grab. Create a stable market, like we enjoyed over the last few years. Listen to people like Wachowich, Engen, Reid-Carson, and the Consumers Advocate.
What can you do? Switch to a competitive retailer who does not receive subsidies. Their rates are lower, so by switching you are not only helping Alberta save money, but you are supporting a local small business at the same time.
What does the future look like? What are those in the know telling investors and consumers?
During the last 20 years investors put about $17 billion into building a fleet of coal, gas, co-gen, and wind generation facilities in Alberta. Private sector money at work in Alberta. Today, money is not as easily found to rebuild and replace the generation facilities that are being closed and mothballed. For the Alberta government’s Climate Leadership and Social License plan to work, it needs investors to risk their money to build new renewable generation facilities. Before putting up the billions of dollars that are necessary, wary investors are looking for regulatory certainty and sound economics.
Aaron M. Engen, Managing Director of BMO Capital Markets addressed the Independent Power Producers Society of Alberta (IPPSA) this week and laid down the cold hard facts from an investment bankers perspective.
According to Engen, at this point in time, global investors are taking a wait-and-see approach. They not only need to know the rules of the market but need to see how the new market rules laid out by our government really function. Are the regulatory rules subject to change? Are generators who are forced to mothball coal plants and invest in gas-fired generation going to face the same type of regulatory constraints in the future? It is possible that one day a politician may simply push forward with closing gas plants because there is a newer green technology on the market. It has happened elsewhere. Our government’s handling of coal generation under the Climate Leadership Plan is a worrisome precedent.
Remember the PPA fiasco which was in the news last year? It ended up in court and not only did the government lose the case; it cost consumers over a billion dollars, which was added to our long-term debt. Every month for the next dozen years we all will be paying a fee to the Balancing Pool in order to pay for this cost.
Currently on deck is Bill 13: An Act to Secure Alberta’s Electricity Future. This legislation, will enable the creation of a capacity market, provide options for community generation, and will empower the Alberta Utilities Commission (AUC) to penalize electricity and natural gas service providers for breaches of customer service.
Bill 13 is causing anxiety among investors. They are asking what becomes of the climate policy if there is a change in government? This issue is magnified by the Progressive Conservative win in Ontario in which premier-designate Doug Ford has vowed to axe Ontario’s cap-and-trade system and the Green Ontario Fund consumer rebate program it fuels.
Here in Alberta, some investors expect a new government would mean an end to carbon tax on retail consumption. If the Carbon Levey is reduced or cancelled by the next government, the question that was not asked in the BMO forum discussion is, what will happen to all the subsidized ventures if the next government doesn’t have the tax dollar income to support the projects that are currently envisioned by those in power today?
As Engen pointed out; the first auction of renewables by the government was a big success in terms of obtaining a low price for renewables, but there is an imbalance between the cost of energy and construction costs. Will cash flows be sufficient to support debt service coverage ratios?
Next on the horizon under Alberta’s attempt to buy a Social Licence is a concept called Capacity Payments. A financial guarantee to encourage investors to finance the building of new generation plants in Alberta. Will it work? Ontario tried this concept with their Global Adjustment tax on consumers, which paid generators even if they didn’t produce. I think that everyone knows what happened in Ontario with the cost of electricity.
Government watchdogs worry Alberta's new power market could trigger higher costs. Consumer complaints have been filed with the Alberta Utilities Commission by Jim Wachowich of the Consumers Coalition of Alberta, raising several concerns. Under the new capacity payment scheme, generators will get paid regardless of whether the facility is actually used. This is going to push prices up. Will the cost of this premium be hidden in a rate rider added to the Transmission Fees. Watch out! Even the government’s own Utility Consumer Advocate raised concerns about its “extremely abbreviated” timelines. Months ago, Duane Reid-Carson of EDC Associates warned the government that its subsidy program on the regulated rate is going to cost consumers hundreds of millions of dollars. Again, he is raising the flag. It is the people of Alberta who will be on the hook to pay for generation facilities that may end up sitting on standby.
According to Engen, from an investors perspective it will be difficult to commit to large-scale gas-fired generation in the proposed capacity market. The investors may need long-term Power Purchase Agreements (PPA), in addition to capacity contracts, to ensure enough capacity is built to meet the demand. Does this sound familiar? Let’s keep in mind that the government ended up in court over the PPA issues and it cost tax payers over a billion dollars to bail out the Balancing Pool.
After the IPPSA forum, we asked one of the capital market investors on the stage if he would be willing to risk their money in the transition from coal to gas with the fear of future of assets being stranded? The answer was no. The reality is that there are too many other global markets that offer lower risks and better returns. Yet the consensus incumbent generators who also had a vertically integrated retail book of customers would most likely invest if subsidized by our government.
What is the bottom line? The Alberta market currently favors incumbents and existing players who can finance new generation based on their balance sheet and other government subsidies. But, one must wonder if there is enough incumbent/on-balance sheet developer interest in Alberta? Obviously, some will – especially those that have control over generation and a retail customer base to finance the cash flow necessary. More than likely, some of the incumbent generators will profit by being able to take advantage of the government’s willingness to pay them a premium for capacity while they still have the opportunity of profiting from the volatility in Alberta’s Energy Only market.
We are seeing this happen today:
- The government has caused a shortage of supply in the market.
- the price per MWh has increased three-fold this year over last.
At the same time, even the city municipalities reached deeper into the tax payers pocket by increasing their taxes for the Local Access Fees collected. What a difference a year makes. July 2017 compared to July 2018 the city Local Access Fee is up 100%. Isn’t it time to stop dancing around the issue and say enough already? Dear MLA’s …. Slow down. Roll back the tax grab. Create a stable market, like we enjoyed over the last few years. Listen to people like Wachowich, Engen, Reid-Carson, and the Consumers Advocate.
What can you do? Switch to a competitive retailer who does not receive subsidies. Their rates are lower, so by switching you are not only helping Alberta save money, but you are supporting a local small business at the same time.