About half the electricity Albertans rely on to power their smartphones, toasters and light bulbs, as well as everything else they plug in, comes from burning coal.

Coal is a lifeblood of the Alberta economy, as it has been across Canada for generations. But coal releases carbon into the atmosphere and contributes to global warming, which is why the province’s NDP government wants to eliminate it by 2030.

“It’s aggressive,” said Gary Reynolds, an energy industry consultant in Calgary, about the government’s timetable to kick Alberta’s dependence on coal.

It’s also expensive. And messy. Albertans are only now waking up to just how expensive and messy the cost of going green might be, something Ontarians already know all too well.

Eight years ago, Ontario passed its Green Energy Act. It then closed its coal-fired power plants and signed pricey long-term deals to buy wind and solar energy.

As a result, the province that once had some of the cheapest electricity in North America now has some of the most expensive.

It would be a cruel irony if Alberta, the energy capital of Canada, experiences the same fate, but numbers tucked into a footnote in the province’s recent budget provide a hint of the pain that may be coming.

The budget includes a $2.3-billion charge to bail out a supposedly arms-length provincial agency called the Balancing Pool, whose role has been to bring power from the companies that make it to the consumers who use it. Last fall, the pool’s chair and a director resigned.

Alberta had to step in because its new carbon tax left the once-profitable Balancing Pool holding billions of dollars worth of unprofitable contracts to purchase coal power. Now the money-losing agency has to figure out how to move forward.

The government in acting so hastily didn’t understand what the implications would be

“I hope to carry out the mandate of the Balancing Pool, which is to responsibly and efficiently manage the electricity assets that we have,” said Robert Bhatia, a retired provincial government mandarin who, late last fall, took over as chair of the Balancing Pool’s board, in an interview from Edmonton this week. “How we will achieve that I don’t really know.”

The province’s goal — to eliminate coal — is laudable for environmental reasons. But it will not come cheap.

About a month after Rachel Notley took office as Alberta premier in 2015, she introduced her Climate Leadership Plan, which hiked the carbon emission reduction, or offset for industrial emitters, to 20 per cent from 12 per cent over two years, and jacked up the carbon levy to $30 per tonne in 2017 from $15 per tonne in 2015.

“The government in acting so hastily didn’t understand what the implications would be,” said Reynolds, who was once the Balancing Pool’s chief executive. “They didn’t think it all the way through.”

The move triggered an unintended consequence: TransCanada Corp. and other companies that had agreed to buy electricity from coal-fired power plants found a legal way to exit what are known as power purchase arrangements or PPAs.

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Click to enlarge

The companies had already been losing money on these deals and the climate plan opened a pathway to turn them over to the Balancing Pool.

The Pool had until that point been profitable: a “Balancing Pool” credit even appeared on consumer power bills. But the tide quickly changed and the Balancing Pool is now hemorrhaging money. 

Internal memos released late last year by the Wildrose party show how the board of the Balancing Pool scrambled to sort out the mess by doing what any business would do: it liquidated investments and made a plan to increase revenue. Instead of a credit, it planned to slap a charge on electricity bills.

“As there is a reasonably high probability that the Balancing Pool will require additional funds in 2016, invoking a consumer charge later this year will also likely be necessary to ensure that a sufficient contingency exists,” one internal memo notes.

But the Alberta government blocked the move for a Balancing Pool charge on electricity bills.

Instead, Margaret McCuaig-Boyd, the minister of energy, wrote a letter to William Stedman, chair of the pool, stating that the government would bail out the pool with taxpayer funds. Effectively stripped of his power to make decisions, Stedman quit, as did fellow director Monica Sloan.

Last month, Alberta released, as part of its budget, a 148-page fiscal plan for 2017-2020. Tucked into the footnotes on page 119, the government estimated its costs to prop up the Balancing Pool: $227 million in 2016-2017, $494 million in 2017-2018; $833 million in 2018-19, and $699 million in 2019-20.

This total cost, $2.3 billion, will be repaid through charges to consumers.

Jason Franson/THE CANADIAN PRESS
Jason Franson/THE CANADIAN PRESSAlberta Energy Minister Margaret McCuaig-Boyd intervened to tell the Alberta Balancing Pool that the provincial government would use taxpayer funds to cover any shortfall experienced by the Pool.

The fiscal gymnastics Alberta is going through are reminiscent of the plan announced last month by Ontario Premier Kathleen Wynne. To reduce the power bills of Ontario consumers by 25 per cent this year, she agreed to refinance some debt over a longer period.

As a result, Ontario consumers will pay more later, with experts estimating the move will cost roughly $14 billion over 10 years.

Mike McKinnon, press secretary to Alberta’s energy minister, does not like the comparison to Ontario.

“The previous government secretly created a system that allowed businesses to pocket $10 billion during good times and transfer losses to Alberta families when times got tough,” he said in an email.

“The opposition parties have attempted to scare Albertans into thinking PPAs were returned because we took action on climate change. In reality, these PPAs are unprofitable because of the historically low power prices.”

The Balancing Pool, meanwhile, lives on, though no longer, it seems, at arm’s length from the government.

The province just named three new directors to the Balancing Pool: Sandra Scott, who worked at Alberta Innovates – Technology Futures, a provincial agency; Michelle Plouffe, general council at Edmonton’s MacEwan University; and Adam Hedayat, who has worked with TransAlta Corp.

They join Greg Pollard, a retired oil executive, the only member of the old board who did not resign.

The Pool on Friday published the names of the new directors on its web site.

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According to Robert Bhatia’s expense report disclosures, the Balancing Pool’s chair saves Alberta money by riding the Red Arrow bus from his home in Edmonton to Calgary to attend board meetings. He was in Calgary for two days this week for that purpose.

“We’ve got a new board up and running,” said Bhatia, 61.

Asked whether the Pool is solvent, he replied, “Our financial results will be coming out in due course. Clearly, there have been major expenses in terms of the value of the power purchase agreements that we have taken back. Maybe the simple answer is that the liabilities on our balance sheet will exceed the assets.”

He agrees that scenario would not be a good thing, but said, “We have back-stopping ability from the province.”

The energy minister’s office calls the previous government “secretive.” But some say secrecy is a problem right now. Reynolds, the former CEO of the Pool, notes that when he ran things, he held an annual stakeholders’ meeting that gave anyone a chance to ask questions of the board. The Pool has not had such a meeting recently.

“We don’t have specific plans for a meeting,” Bhatia said. “I wouldn’t rule it out in the future.”

David Gray, an electricity economist in Edmonton, praises Bhatia as “a very bright, very dedicated public servant.”

But he adds, “I worry whether (the Pool has) enough experience around the market to function properly.”

After learning the identity of the Pool’s new board members, he said, “There are no names that come to my mind as being deep in the electricity industry.”

Gray said the Pool can become solvent by a simple act: raise the price of power to cover its costs.

They are the 800-pound gorilla in the kiddie pool. Why would they need to lose any money at all? They could set the price at anything they want

“They are the 800-pound gorilla in the kiddie pool,” he said. “Why would they need to lose any money at all? They could set the price at anything they want.”

Despite Alberta’s hiccups, Gray does not think the province will repeat the mistakes of Ontario as it moves to greener sources of electricity.

Ontario copied a German model where it agreed to pay a fixed price — up to a whopping 80 cents per kWh for 20 years— for solar and wind power.

Alberta will go out to the market later this year to buy 400 megawatts worth of renewable energy, but it will accept the lowest bid from providers rather than setting a fixed price.

“I’m pretty bullish on Alberta having a pretty stable, pretty reasonable long-term rates for energy,” Gray said.

Reynolds is less bullish.

“Right now, the market is completely upside down,” he said. “It’s broken. It’s not a competitive market structure.”

Financial Post
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