TRANSALTA, PROVINCE ARE INEXTRICABLY LINKED
Company, NDP are not natural partners but they find themselves dancing together
It’s not often a company is accused of “dancing with the devil” simply because it’s dealing with a duly elected government.
But that odd moment during TransAlta Corp.’s annual meeting Thursday seemed to crystallize some of the broader issues the company — and Alberta’s tumultuous electricity sector — now faces.
As one of the province’s major generators, the Calgary-based firm must work with the Notley government and comply with provincial rules to phase out coal-fired power by 2030.
Burning coal to generate electricity has been a staple of the company’s business — and the entire province’s grid — for decades, but businesses like TransAlta are under pressure to reduce carbon emissions and evolve the industry.
How it handles the upheaval will define its future. But that also means not everyone will be happy with the change.
“I see it as a big political risk to be dancing with the devil,” one shareholder told chief executive Dawn Farrell during a questionand-answer session.
“I wonder how you evaluate it, the political risk of putting more of the shareholders’ money into Alberta, when maybe Alberta isn’t the place you should be investing at all?”
It’s true the province’s power market has been a rocky place to do business recently, from new government policies and the planned change to a new capacity energy market and dismally low prices.
With excess supply in the province, electricity prices have slumped over the past two years. Demand for power fell by 1.1 per cent last year as the province was stuck in a recession.
In Alberta, TransAlta, ATCO and Edmonton-based Capital Power own several newer coalfired facilities that initially were allowed under federal rules to keep operating past 2030.
The NDP government’s new climate plan alters the timeline.
After months of negotiation, the province agreed last fall to compensate the companies for their stranded assets. In TransAlta’s case, it will receive $524 million, paid out over 14 years.
It also signed a memorandum of understanding with the Notley government that will let it convert some of TransAlta’s coal-fired plants to burn natural gas instead.
At relatively low capital costs, these facilities will help backstop some of the intermittent supply of renewable energy Alberta is now seeking, while extending the life of these plants.
TransAlta is also busy developing plans for a new $2.5-billion to $3-billion hydro development, known as the Brazeau expansion project, near Drayton Valley.
In short, the company and the sector are in the midst of a dramatic transition, firmly entangled in a thicket of power politics and policy.
As the CEO correctly noted, governments are elected by the people. Companies must work within their policies, or find somewhere else to do business.
“The trends on carbon have been coming for a long time. I will never debate the science with anybody, there are lots of views on that. All I can do as a leader is look at the policy that’s been set,” Farrell told the shareholder.
“Like all decisions, there are risks of staying where we’re at and there are risks of changing. We believe fundamentally this will set the company up going forward.”
Earlier this week, TransAlta took one of its biggest steps to prepare for the future. The company will shut some of its older coal-power plants early, while converting others to burn gas.
Next January, two years ahead of schedule, it will retire Sundance unit 1, built in 1970 on the shores of Wabamun Lake. It will also mothball Sundance unit 2 for up to two years.
As well, it will convert three other Sundance coal-fired units to natural gas, and two units at its Keephills facility, sometime between 2021 and 2023.
This will add five to 10 years to their useful lives, lower emissions by 40 per cent and reduce its carbon costs.
With Alberta flush with natural gas and prices expected to remain low, the decision is understandable. Some U.S. coalfired plants are already converting to gas purely because of economics.
“When you looked at all the factors, it made more sense to not continue to run on coal, but actually get ready to run on gas earlier,” Farrell told reporters after Thursday’s meeting.
The cost of conversion is $300 million, while it will save TransAlta $120 million a year on carbon taxes, said a report by analyst Ian Gillies of GMP FirstEnergy.
Analyst Jeremy Rosenfield, with Industrial Alliance Securities, said the announcement punctuates the company’s commitment to moving its power portfolio away from coal-fired assets to gas and renewable energy, such as wind and hydro.
“The company is playing the hand it’s been dealt,” he said Friday.
“It’s really a question of what future do you envision for Alberta ... It’s something that is extremely uncertain.”
While TransAlta has generation facilities in other provinces, the United States and Australia, about 63 per cent of its total capacity remains inside its home province.
Having operated in the Alberta marketplace for more than 105 years, the company’s fate is inextricably tied to the province’s fortunes. Whether it’s dancing with the devil or not, it’s not the one calling the tunes.