Elsevier

Energy Policy

Volume 171, December 2022, 113266
Energy Policy

Alberta's Renewable Electricity Program: Design, results, and lessons learned

https://doi.org/10.1016/j.enpol.2022.113266Get rights and content

Highlights

  • •Alberta used a reverse-auction to award contracts for over 1300MW of wind generation.

  • The procurement was completed at low cost and has generated a financial surplus.

  • The procurement included a call for projects with Indigenous equity participation.

  • The procurement spurred substantial private-sector development of renewable power.

  • More market price exposure could have improved the efficiency of the procurement.

Abstract

We present a case study and analysis of Alberta's Renewable Electricity Program, one of a suite of policies implemented between 2015 and 2019 to increase the share of renewable generation in the Canadian province's fossil-fuel-dominated electricity system. The program consisted of a series of reverse auctions for contracts-for-differences which provided successful proponents with a project-specific guaranteed price for power generation. We find that the Renewable Electricity Program was successful in three important ways. First, it contracted for new renewable generation at prices in the range of CA$30 to CA$43/MWh (US$23 to US$33/MWh), well below expectations and among the lowest procurement costs globally at the time. These contracts have resulted in gains to the government of CA$75.5 million (US$60 million) to date. Second, the program ushered new entrants into Alberta's power market, including through mandated Indigenous equity participation in one round of auctions. Third, we find that price discovery and the incentive to develop new projects provided by the program spurred privately-financed development. While the program was a success, we argue that its design did not adequately reward high-value generation, which could have become an issue in future auction rounds. We analyse design alternatives that would have improved the program's dynamic efficiency.

Introduction

In 2015, the Canadian province of Alberta pledged to phase out coal-fired electricity and to supply 30% of the province's electricity from renewable sources by 2030. When these goals were adopted, less than 10% of the province's generation came from renewable sources, while more 60% came from coal-fired facilities (Alberta Electricity System Operator (AESO), 2016a). We present a case study of one of the policies implemented to meet Alberta's goals: the Renewable Electricity Program (REP). REP was comprised of three rounds of reverse auctions which awarded government-backed, two-sided contracts-for-differences which effectively guaranteed project revenues for 20 years. Contracts for over 1360 MW of wind generation were signed under REP, at costs well below levels that government advisors and industry analysts had predicted. Our results show that, to date, REP contracts have resulted in gains to the government of over CA$75 million on electricity. In addition to this, we estimate that at least CA$56 million in tradeable greenhouse gas emissions credits have been surrendered to the government under the REP contracts. Thus, we estimate a cumulative surplus of over CA$130 million to date.

The REP design was informed by expert advice (Leach et al., 2015), stakeholder input (AESO, 2016b) and by global experience with renewable energy auctions (AESO, 2016c). The choice to deploy a reverse auction mechanism was consistent with global trends for government renewables procurement at the time (Anatolitis et al., 2021; Bayer, 2018; Bayer et al., 2018a, 2018b; Fitch-Roy et al., 2019; Gephart et al., 2017; Haufe and Ehrhart, 2018; Jansen et al., 2022; Matthäus, 2020). REP's procurement through two-sided contracts for differences is most closely comparable to procurements in New York State, the United Kingdom, and Denmark, and shares common elements with procurement programs in Greece, Poland, and Hungary (Beiter et al., 2020, 2021; Szabó et al., 2020). The REP also had several notable features. First, the REP was open to most renewable generation technologies, with no technology-specific caps or quotas. Second, any financial shortfall was to be supported by revenue from carbon taxes, not through on-bill charges on electricity ratepayers. Third, in addition to a financial pre-qualification procedure, projects were only eligible they required no new transmission investment beyond that required for connection to existing infrastructure. Finally, one of the auction rounds stipulated Indigenous equity participation as a necessary condition for support.

We evaluate the cost-effectiveness and dynamic efficiency of the REP. REP's competitive auction produced costs that were among the lowest globally at the time, the lowest in Canadian history (Szabó et al., 2020, p. 15), and close to the theoretical minimum procurement cost for North American onshore wind (Stehly et al., 2020). We estimate that the procurement has resulted in surplus value to the government, but also note that the government took on substantial electricity market and climate policy risk through the REP. The surpluses earned to date are, in part, compensation for the assumption of those risks. We argue that the assumption of risks in the initial REP auction rounds assured the cost-effectiveness of the procurement; had those risks remained with project proponents, the procurement cost could have been much higher (see Jansen et al., 2022; Neuhoff et al., 2018), and the program may not have succeeded.

The REP accelerated early-stage development of prospective renewable energy projects and provided important information on the cost of renewable energy. REP led to a significant increase in the number of projects in the development queue and subsequently led to an historic increase in private power purchase agreements (PPAs) for renewable electricity. The REP also increased the diversity of actors involved in Alberta's market, including through its Indigenous equity participation requirement. Private sector projects built with Indigenous partners have followed the REP's targeted call for such partnerships.

Our analysis raises concerns about the dynamic efficiency of the REP design. The REP selected for the lowest levelized cost of electricity, but was agnostic to the value of a project's generation. This likely came at a minimal cost for the initial rounds of REP, as the procurements were relatively small compared to the overall size of the market. We find that future rounds using the same design would have been likely to procure less valuable contracts, and to erode the value of previously-supported projects. We discuss two design modifications which could have mitigated this concern in later rounds: a fixed premium to market prices and a benchmarked contract-for-differences similar to that used in the procurement of offshore wind power in New York State (New York State Energy Research and Development Authority, 2018, Appendix C. See also Beiter et al., 2021). We argue that either could have mitigated long-term inefficiencies inherent in the REP design. We also discuss potential implications of Alberta's approach to transmission and solutions for cost-allocation in future renewable electricity procurement.

The balance of the paper proceeds as follows. We first provide relevant context from Alberta's electricity market and economic conditions. We then summarize the conception, design, and implementation of the REP. We evaluate the REP in terms of static and dynamic efficiency and its compatibility with Alberta's electricity system. We end with a discussion of design alternatives and conclude with policy implications.

Section snippets

Alberta's electricity market

Alberta has had a competitive, energy-only wholesale market for electricity since 2002 (Daniel et al., 2007). Alberta has no capacity market or equivalent opportunities for generators to receive long-term payments based on installed capacity. A separate ancillary services market operates alongside the hourly wholesale market, but does not factor into our analysis. Generators submit hourly offers from each facility and offered blocks are dispatched in increasing order by price. The pool price,

Renewable Electricity Program (REP) implementation

Based on the AESO (2016c) recommendations, the Government of Alberta launched the first round of REP in March 2017 with a call for up to 400 MW of capacity from new or expanded renewable energy facilities of a minimum size of 5 MW (Government of Alberta, 2017a). Two additional rounds were launched on March 29, 2018: a 300 MW procurement reserved for projects with a minimum 25% equity position held by Indigenous communities, and a 400 MW open procurement (AESO, 2018).

The REP offered two-sided

Cost minimization

We first consider the static efficiency of REP, asking whether renewables were procured at the lowest possible cost (Mezősi et al., 2018; Winkler et al., 2018). The REP reverse auctions had many participants, with major global entities represented (AESO, 2018; Menzies and Marquardt, 2019). A sealed-bid auction with a large number of participants suggests, although does not prove, that the offered strike prices were close to each entity's reservation value.

REP procured 1363 MW of wind generation

Discussion

The REP was a successful procurement, in particular with respect to minimizing costs and spurring additional development. The positive fiscal flows to the government stand in contrast to many historical renewable support policies (Aklin, 2021; Beck et al., 2018; Stokes, 2013, 2015). However, REP CfDs also insulated project revenues from market prices. While this design is simple and easy to understand for developers, financial partners, and the public, it rewards low cost rather than high value

Conclusion and policy implications

Alberta's REP used a reverse-auction-based procurement to award contracts-for-differences on electricity revenues in return for the surrender of environmental attributes. It delivered a cost-effective procurement of renewable power, and lead directly to a nearly 50% increase in installed wind capacity in the province. Substantial private-sector development followed REPs demonstration of the low cost of renewable power.

The REP design featured a relatively simple structure, provided price

Funding

Leach and Weis acknowledge funding through the Canada First Research Excellence Fund (CFREF), Grant number CFREF-2015-00001.

CRediT authorship contribution statement

Sara Hastings-Simon: Conceptualization, Methodology, Background research, Writing – review & editing. Andrew Leach: Data collection, Methodology, Background research, Writing – review & editing, Correspondence with editors and reviewers. Blake Shaffer: Methodology, Background research, Writing – review & editing. Tim Weis: Methodology, Background research, Writing – review & editing.

Declaration of competing interest

The authors declare the following financial interests/personal relationships which may be considered as potential competing interests: Andrew Leach reports financial support was provided by Canada First Research Excellence Fund. The funders had no involvement in the study design, in the collection analysis or interpretation of data, nor in the writing of the report or the decision to submit the article for publication.

Sara Hastings-Simon reports a relationship with Business Renewable Centre

Acknowledgement

The authors would like to thank Marc Vermette of the University of Alberta for timely research assistance.

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    In addition to standard megawatt (MW) and megawatt-hour MWh) units, we use the following abbreviations and acronyms in this paper: 1) CA$ denotes nominal Canadian dollars. The exchange rate was approximately 1 US dollar (US$) to CA$1.30 during the time period of this study; 2) Financial instruments: contracts-for-differences (CfD) and power purchase agreements (PPA); 3) Alberta-specific acronyms: Renewable Electricity Program (REP) and the Alberta Electric System Operator (AESO); and 4) financial metrics: Levelized Cost of Electricity (LCOE).

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