CUT COAL, SAVE CASH
TransAlta looks to natural gas
TransAlta Corp.’s surprising decision to shut down its coal-fired power plants early and convert them to burn natural gas will save the company $1.5 billion, based on a projected $50-pertonne carbon tax in 2022.
TransAlta president and CEO Dawn Farrell said Monday that while “it may be an intuitive conclusion that running the (coal plants) for the longest period of time that you can is the most valuable, in the end our analysis showed that accelerating the conversions was actually the right thing to do.”
TransAlta is poised to save $200 million per year by converting the coal fired units to gas. Farrell told analysts during an earnings call the capital cost to run its coal plants past 2021 would have approached $500 million — $200 million to run its mines and as much as $300 million to run the power plants, when the cost of carbon is factored in, compared to a one-time cost of $300 million to convert the power plants to burn gas.
The company’s decision to retire one coal plant, mothball another and convert eight more facilities to burn natural gas would save the company $1.5 billion in incremental capital costs, the CEO said. “These converted plants will run for up to 15 years with roughly half the annual capital spend.”
The availability of cheap natural gas also played into TransAlta’s decision.
“Today we have an oversupplied gas market here in the West due to a lack of demand and the inability to get the gas to markets in the East,” Farrell said, adding the situation “allows us to utilize this lowcost resource when it’s available.”
GMP FirstEnergy analyst Martin King said last week that TransAlta’s coal-to-gas conversion would drive a 10 per cent increase in demand for natural gas in Alberta and is one reason he was bullish on natural gas prices.
King estimated Alberta natural gas prices would average $3.26 per thousand cubic feet this year, rising to $3.87 per mcf in 2018. AECO benchmark gas prices closed at $2.74 on Sunday, according to Gas Alberta Inc. data.
TransAlta, which is among the largest providers of coal-fired electricity in Alberta, saw its share price tumble five per cent after announcing last month it planned to retire and convert its wholly owned coal-power generating stations to natural gas.
The company’s shares have recently rallied and were up 0.96 per cent to close at $7.33 on Monday, after the company announced its results and explained the rationale behind the decision.
The company reported net earnings of $32 million in the first quarter of the year, which is roughly 55 per cent less than the $71 million in net earnings it reported for the same period last year.
BMO Capital Markets analyst Ben Pham said in a research note that TransAlta’s financial results missed analysts’ expectations, due in part to unplanned outages in the company’s Canadian coal operations.
Earnings before interest, taxes and depreciation from TransAlta’s Canadian coal business declined to $91 million in the first quarter, from $103 million last year. At the same time, the company earned more from its Canadian gas business – EBITDA rose 35 per cent to $88 million in the first quarter, from $65 million last year.
Farrell said Monday that part of the company’s rationale for converting its coal-fired generating stations to burn gas earlier than planned was due to expected increases in carbon taxes, which she said are likely to follow federal guidelines and rise to $50 per tonne.
TransAlta expects the conversions would reduce its greenhouse gas emissions 40 per cent.
“We concluded that there would always be pressure on the power sector to minimize the use of carbon, whether it’s through a carbon tax or some other mechanism,” she said, adding. “So we concluded that the sooner we convert, the sooner we start to save on the cost of carbon.”