City’s possible power plant sale a unique situation: analyst
A potential sale of Medicine Hat’s city-owned power plant provides a rare glimpse on how the utility sector is now considering the arrival of green power production, according to some analysts.
Others say that while it’s a valuable exercise, it may might not be an issue for years.
It’s also an unprecedented look at a potential deal before it happens in a highly competitive industry populated by large, publicly traded companies.
“It’s fascinating,” said Benjamin Thibault, a former executive director of the Solar Energy Society of Alberta and adviser to the Notley government on energy policy.
Now working as an independent analyst and consultant, Thibault told the News this week that Medicine Hat officials studying potential risks of green power to traditional generation companies is “a great analogy” for the sector as a whole.
“It’s the first open discussion about generation going forward and starting to (absorb) renewable production,” he said.
He said there had been a growing interest among analysts on the subject, but no real public action from companies.
He says he has no special insight into the local situation, but “it appears to be a fairly sophisticated discussion that’s happening” in Medicine Hat.
But he said all major power producers are likely considering the question on some level, even as they propose new gas-fired plants to replace coal while the capital costs for wind and solar facilities continue to drop.
City administrators stated last week that they are seeking “strategic alternatives” for Medicine Hat’s power generations assets, including the potential sale of the power plant coupled with a supply agreement with the city’s distribution company.
City councillors posed the question as a risk management exercise, hoping to determine a peak value for assets before green power and emerging trends like battery storage potentially cut export profit margins.
Other market observers said the conversation is somewhat academic at this point, and there are still unknowns about how quickly technological aspects, like battery storage, may come, or what the actual effect may be.
“It’s not clear how quickly that could happen, and there’s great debate about it,” said Mark Kolesar, a former chair of the Alberta Utility Commission who now operates as a consultant.
He said battery storage advances would shift production, essentially delaying its release to maximize returns in Alberta’s unique bid-in energy only market.
But that could also raise non-peak prices as production is held back and supply is affected.
As for the economics of gas-fired production, Kosker said it is the obvious replacement as coal plants are fully retired or converted in two years.
“There’s a need to replace that and it’s clear that gas, for the foreseeable future, will be a significant part of the (generation) mix,” he said.
Thibault said traditional operators appears to be “very bullish” on natural gas-fired power production.
But with the cost of renewables coming down, and battery storage now being included in power plant proposals, the issue will grow in prominence across the sector, he said.
The AUC is now considering approval for several battery storage projects, including one at the proposed Chappice Lake Solar plant, northeast of Medicine Hat.
Those systems are currently sized to about 10 megawatts, small compared to the size of the installed wind capacity (about 1,800 megawatts) or solar (110).
But both are expected to grow rapidly, and the effect of widespread battery deployment, said Thibault, could remove price spikes in the lucrative power export market.
That’s where Medicine Hat makes most of its extraordinary income — more than $30 million in profits in both 2018 and 2019. Figures for 2020 are not yet available.
Profits were hived into reserve funds for a tax-rate stabilization fund that partly replaces the previous system of using dividends directly in the city budget, as well as a longer term savings endowment.
Going forward, a recently approved dividend policy would see dividends considered in concert with expected and unavoidable losses in gas production as most of the city’s portfolio is closed down over the next five to seven years.