TransAlta Corporation Submission to Alberta's Climate Change Advisory Panel - October 1, 2015
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TransAlta Corporation
Submission to
Alberta’s Climate Change
Advisory Panel
October 1, 2015
October 1, 2015 Dr. Andrew Leach Chair, Alberta Climate Change Advisory Panel (submitted electronically) Dear Dr. Leach: TransAlta Submission to the Climate Change Advisory Panel I am pleased to provide you and Panel Members with TransAlta’s submission to the Alberta Climate Change Advisory Panel. A clear and robust climate change policy for Alberta is both possible and necessary, and it should carefully balance environmental objectives with economic considerations. TransAlta strongly supports a proposal, created jointly with ATCO and Maxim, to dial down production and GHG emissions from coal fired generation. The proposal as described in the attached submission achieves immediate and sustainable GHG reductions, protects jobs, keeps power price impacts to a minimum, maintains system reliability, and avoids stranded investments. In addition, it also supports a smooth yet accelerated transition to renewable energy supply, by providing firm supporting capacity from reduced but available coal generation, and providing a mechanism for new renewable resources to enter the market in a competitive manner We refer to this proposal as “Dial Down (Coal) – Dial Up (Renewables).” The concept was presented to the Panel on September 15th. In comparison to other policies that have been proposed, it is substantially less costly in total and more efficient in terms of costs per tonne reduced. Our attached submission also provides substantial analysis of various greenhouse gas and renewables policy options and their effects on Alberta’s electricity sector. We have collaborated with London Economics International to contribute experiential assessments of various policy alternatives in other jurisdictions and to conduct modeling of some of those alternatives within the Alberta market context. We trust you will find that work useful. The work with London Economics continues. While not available for this submission, we intend to subsequently provide the Government with detailed macro-economic modeling of the socio- economic impacts of various GHG policies, including jobs, taxes and GDP effects. Finally, we provide commissioned independent work through the University of Alberta on air quality in the Edmonton airshed, with particular attention to the contribution of coal-fired generation. This work was done in response to continued unsubstantiated claims that coal-fired
generation was a major contributor to Edmonton’s air quality events, and a rationale for the
need to accelerate the retirement of coal units. You will see that the research shows minimal
airshed impacts from operation of coal-fired generation to the west. Clearly the Edmonton
airshed should not be an important determinant in the Panel’s climate change-related
considerations.
We intend to continue our analytical work beyond the timeframes for the Panel submission, and
will be providing the Government with additional information as it becomes available, with the
objective of supporting good policy decisions.
We wish you and the Panel well in your upcoming deliberations.
Yours truly,
TRANSALTA CORPORATION
Original signed by
Dawn Farrell
President and CEO
Enclosure
(attached electronically)
Page 2
Contents
EXECUTIVE SUMMARY ........................................................................................................... 3
DIAL DOWN DIAL UP SOLUTION ........................................................................................... 9
Coal Dial Down ................................................................................................................. 9
Renewables Dial Up ........................................................................................................ 11
Modeling Results ............................................................................................................. 12
GHG Reductions ...................................................................................... 12
Price Impacts ............................................................................................ 13
Cost of GHG Reductions ......................................................................... 14
Remaining Market Sustainability Questions ................................................................... 16
INVESTMENT COSTS & REQUIRED RENEWABLE INCENTIVES ................................... 17
INDEPENDENT ANALYSIS OF POLICY OPTIONS.............................................................. 19
Summary of Analytical Work .......................................................................................... 19
Policy Guidance from Case Studies in Other Jurisdictions ............................................. 20
Modeling of Various GHG policy Options ...................................................................... 33
Early Retirement of Coal in Other Jurisdictions .............................................................. 50
Review of Energy Efficiency Policies ............................................................................. 56
Review of Pembina Report “Power to Change” .............................................................. 68
Macro-Economic Analysis – Work in Progress............................................................... 77
AIR QUALITY CONSIDERATIONS ........................................................................................ 80
APPENDICES ............................................................................................................................. 83
Appendix 1 - Centralia Experience .................................................................................. 83
Appendix 2 - Detailed Report on Policy Case Studies .................................................... 83
Appendix 3 - Detailed Review of the Pembina Report “Power to Change” ................... 83
Appendix 4 – Detailed Presentation of Edmonton Air Quality Study ............................. 83
Appendix 5 – London Economics Corporate Resume ..................................................... 83
1
Executive Summary
1) Overview:
The enclosed report contains three major components:
A proposal for a smart policy solution to reduce greenhouse gas emissions and grow
renewable generation, referred to as dial down coal and dial up renewables
A review of alternative policy options, including lessons from case studies in other
jurisdictions and detailed modeling of their emission and cost impacts
A recent study of air quality in the Edmonton region as a science-based indicator of
minimal impacts of coal-fired generation to that airshed
2) A Proposed GHG framework for electricity
The Alberta Government has stated two principal objectives relevant to the electricity sector and
related to the Panel’s work – those being the reduction of the Province’s greenhouse gas
emissions and the growth of renewable energy within the Alberta fuel mix. TransAlta, ATCO
and Maxim propose a policy framework that would dial down greenhouse gas emissions from
Alberta coal units in a planned and cost-effective manner. Further, the dial down of coal would
be coupled with a dial up of renewable energy build.
Under this proposal, coal-fired generators would implement a 20% reduction in output
immediately, resulting in physical GHG reductions of 8-10 Mt’s per year from coal. In
return, SGER obligations are considered met for coal generators.
The dial down coal – dial up renewables proposal minimizes the cost associated with reducing
GHG emissions from the power sector, provides a mechanism to ensure renewables investment,
and ensures an orderly transition for the industry.
The proposed dial down – dial up policy has the following characteristics:
• Immediately implementable
• Delivers the least cost per tonne of GHG reduced
• Maintains system support for renewable build without a rush to new gas generation
• Protects consumers from price shocks
• Self-funding through physical SGER compliance rather than financial compliance
• Protects jobs and mitigates economic impacts of low carbon transition
• Adjustable by government
• Compatible with the Alberta market design
The dial down coal – dial up renewables proposal has been modeled and compared to other
modeled policy options, summarized in the table on the next page:
3
Dial Down – Accelerated
Cap & Trade RPS
Dial Up Shutdown
GHG reductions
(cum. 2016 – 2030) 95 Mt 127 Mt 61 Mt 111 Mt
(net of replacem’t*)
Cost per tonne reduced $72/t $278/t $186/t $206/t
Air quality co-benefits Early reductions Uncertain Later reductions Uncertain
Renewables by 2030 Large ~25% 20% 10% - 15% Large ~35%
Modest gas and Larger than dial Early gas Large gas req’mts to
Gas replacement
delayed down replacement backstop renewables
Customer impacts** $75B $103B $79B $91B
Small increases Short term gains,
Effects on jobs Uncertain High impacts
relative to BAU Mid Term Losses
Mid Term need to
Market design change Small, Mid term
None incent back stop Market Failure
req’mts review required
capacity
Some Transmission Some Transmission
Small Transm’n Large Transmission
Transmission impacts costs for costs for
impacts Build Costs
renewables renewables
Costs will force RPS allocations will
Stranded capital None coal out – strands Strands capital force coal out –
capital strands capital
Policy impacts Creates gov’t debt,
Investment climate Breaks regulatory
Smooth transition existing investment changes market,
impacts compact
viability winners & losers
*Cumulative GHG reductions assume greater natural gas % replacement early, more renewables % later
**Customer impacts can be compared against a business-as-usual cost forecast of $68B over the same period.
Includes energy, transmission and all out-of-market costs.
3) Analysis of Policy Options
TransAlta in association with London Economics International has completed a series of work
products that will contribute to thoughtful policy making.
a) Lessons from Policy Case Studies
Case studies were carried out based on first-hand experience, including:
California’s cap and trade design and experience to date
The UK’s carbon levy as an example of a carbon tax
The RPS experience in Texas
Feed in tariff programs in Germany and Ontario
A large scale energy efficiency program in California
4
The report details the success factors (and sometimes failure causes) in those jurisdictions
but also comments on the challenges associated with application to the Alberta context,
especially given the uniqueness of the Alberta electricity market in terms of market design
and industrial intensity.
b) Modeling of GHG policies in Alberta’s electricity sector
LEI modelled the Relative performance of the Dial Down Dial Up approach against three
other policy scenarios. LEI uses a dynamic model of the Alberta electricity system. For
comparability, scenarios were created to achieve reduction of GHG emissions from sector
levels of 58 Mt/yr today to 35 Mt/yr in 2030.
The scenarios modeled were:
a) a sector-wide cap and trade program,
b) an accelerated retirement of coal scenario, and
c) a sector-wide renewable portfolio standard.
The results were compared to a business-as-usual forecast assuming only the federal GHG
regulations for coal units and the recently-adjusted SGER regulations.
Comparative results are shown below.
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c) Examining early retirement of coal in other jurisdictions
Experiences in Germany, California and Ontario are described. These experiences are
instructive but there are also major differences compared to the Alberta situation in terms
of government ownership and market structure, and the ability to pass on costs through
rates
d) Energy efficiency programs
Alberta does not have an active history in promoting energy efficiency in the electricity
sector, in part because of the deregulated market structure and in part because of the high
industrial intensity. Examples of activities in several U.S. states are described and their
relevance to the Alberta context.
e) Review of the Pembina report “Power to Change”
The report issued by the Pembina Institute in 2014 was useful in generating discussion
about the benefits, challenges, costs and opportunities of a major transformation of the
Alberta electricity system. In order to add to this constructive conversation, a review of
the report was undertaken to identify improvements and deepen the level of discussion.
The review identified that the transformation alluded to in the report would face tougher
challenges than originally thought, and is perhaps overly optimistic about it’s potential to
both reduce emissions and grow renewable generation.
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f) Macro-economic considerations
Detailed macro-economic modeling of various policy scenarios is underway and will be
provided separately to Alberta. Earlier work conducted in 2014 for TransAlta by Dr.
Robert Mansell provided the following data representative of the impacts of all coal-fired
generation in Alberta:
Alberta Coal Generation Fleet Economic Contribution
Direct, indirect and induced effects (2015 to 2020)
GDP add to the Alberta economy $10 billion
Labour income (wages) $4.4 billion
Employment 44,500 person-years
Total federal and provincial tax income $2.6 billion
4) Air quality and coal-fired generation
In the Spring of 2015, TransAlta funded research on a detailed review of data associated
with air quality in the urban Edmonton airshed. This work was in response to a series of
claims that coal-fired generation units 60 kilometers west of Edmonton were a major
contributor to air quality events being observed in Edmonton, and therefore closing those
units as quickly as possible was justified.
Based on a five-year monitoring data set and cognizant of both short range and long
range sources, the study found the following composition of PM2.5 in the Edmonton
airshed:
7
Taken in aggregate, the study found there was only a minor signal associated with
coal combustion emissions as a portion of secondary sulphate, and estimated to be
no more than 10% of the PM2.5 contribution.
Further, the study examined trends in Edmonton’s air quality and observed the
following trends:
Hourly concentrations of nitrogen dioxide (NO2), sulfur dioxide (SO2),
total hydrocarbon (THC) and carbon monoxide (CO) have steadily
decreased since 1998.
Hourly concentrations of particulate matter (PM2.5) are unchanged
since 1998.
Hourly concentrations of ozone (O3) show inconsistent change.
Chemical species present in PM2.5 unchanged or decreasing
(for organic carbon, elemental carbon, barium and lead) since
measurements began in 2007.
------------------ End Summary ------------------
8Dial Down Dial Up Solution
TransAlta, ATCO and Maxim, representing the majority of coal-fired generation in Alberta, are
proposing a policy framework that would dial down greenhouse gas emissions from Alberta coal
units in a planned and cost-effective manner. The dial down of coal would be coupled with a
dial up of renewables. Coal units would first reduce output and then begin to retire. Dial down
dial up delivers:
The most cost efficient mechanism to achieve carbon reductions in the electricity sector
Guaranteed reduction in greenhouse gas emissions from coal starting in 2016
Minimal market disruption
Job protection
Guaranteed renewables development
We believe this approach represents a balanced, pragmatic and responsible policy framework
that would achieve the optimal solution between environmental benefit and current and future
economic impacts including the impact to employment and sustainability of local communities.
Independent analysis conducted by London Economics (LEI) supports the Dial Down Dial Up
solution for reducing GHG emissions and delivering a cost effective solution for both
customers and generators.
The coal dial down component can be implemented as soon as 2016 resulting in immediate GHG
reductions. The renewables dial up component with early incentives could begin to show results
as early as 2018. Challenges such as an agency to provide contractual certainty, transmission
requirements and construction timeframes will need to be addressed over the next few years. If
the approach is taken, renewables can be commercially operational by as early as 2020.
The more aggressive the RPS goals in terms of scale and pace the more likely market design
changes will be needed to ensure the market remains cost effective sustainable and most
importantly reliable. Procurement of renewables greater than 20% creates significant risk for
market design failure.
Overall, the proposal minimizes the cost associated with reducing GHG emissions from the
power sector, provides a mechanism to ensure renewables investment, and ensures an orderly
transition for the industry.
Coal Dial Down
The coal dial down restricts energy production from coal generation by subjecting it to a fixed
production cap. This results in a guaranteed reduction of emissions from the coal generation
fleet. Further, the coal dial down maintains coal generation capacity on the system for reliability,
avoiding an immediate capital investment in new generation. Near term market price impacts
are also minimized as the capacity is still available based on economic signals.
9Key Attributes
The policy details proposed below have been developed in such a way as to exhibit the
following attributes:
Immediate implementation
Lowest Cost per tonne GHG reductions
Creates “space” for a renewable buildout while avoiding a dash to gas
Keeps electricity consumer’s bills low
Self-funding – no payment to coal generators is required
Protects jobs
Mitigates economic impacts of low carbon transition
Adjustable by government
Compatible with the Alberta market design
Description
Coal-fired generators would implement a 20% reduction in output immediately, resulting in
gross coal GHG reductions of 8-10 Mt per year. In return, SGER obligations are considered met
for coal generators. In the near term, the decrease in coal generation will be replaced with
natural gas generation, but longer term the Dial Up will offset the Dial Down with renewables.
Details
• January 2016 Implementation - convert the existing intensity-based SGER to a mass-
based approach immediately, allowing the application of a tonnage cap on coal-based
emissions. Reductions could begin as early as 2016.
• 20% Mass Based Cap for Coal - a 20% reduction from a base level of emissions
proposed. For the sake of modeling 2014 actual emissions levels from the coal fleet are
used as the baseline. The cap would be a hard cap with large financial consequences for
any exceedances.
• No Change for Gas Units - gas emission reduction burden is unchanged from the current
level at an effective price of $6/tonne of carbon.
• Flexible Compliance to a Hard Cap - generators would reduce output of coal units at their
discretion throughout the year to achieve their portion of the dial down. The total coal
capacity would be available to the system to maintain reliability and meet peak loads.
• No Payment Required for Stranded Investment - achieving the 20% reduction would be
considered as compliance with the SGER regulation, thus avoiding any additional
compliance cost. This ‘funds’ the coal dial down portion of the proposal at no direct cost
to consumers. The costs would be borne by coal generators through reduced revenues.
• Emission Reduction Credits Available Below the Cap to Further Incent Reductions -
Emissions below the cap would create fungible emission reduction instruments, tradeable
within and outside the sector. In the modeling, these instruments were valued at
$30/tonne. Coal units would receive 1 tonne of credit for every tonne of reduction below
10the cap. This incentive would increase the level of GHG reductions when electricity
market prices are low.
• 8 – 10 Mt Reduction in Gross Coal Emissions Starting in 2016 - the application of a 20%
reduction cap on coal units will produce 8 to10 Mt per year of GHG reductions initially.
This is based on actual 2014 GHG emissions from the coal fleet of about 44 Mt. As coal
units start to retire beginning in the early 2020’s, overall coal fleet reductions will decline
more. The ‘dial’ can be adjusted to meet changing targets over time.
Renewables Dial Up
Renewables Dial Up fits alongside the coal dial down as a further emission reducing strategy.
The Dial Up approach ensures renewable energy resources are developed at a greater rate than
expected under a business as usual approach. The Dial Up ensures a real and deliverable target
on renewables.
Key Attributes
The policy details proposed below have been developed in such a way as to exhibit the following
attributes:
• Mandatory renewables targets.
• Renewables investment supported by firm contracts for either energy or renewable
attributes.
• Adjustable by government.
• Competitive procurement model to minimize costs.
• Space is created for the development of renewables in a cost effective way.
• Alberta’s limited capital is used as effectively by limiting stranded investment.
Description
A mandatory target is set for renewable energy as a proportion of total provincial load. For
example, an RPS could be set at:
15% of total load in 2020.
20% of total load in 2025.
25% of total load in 2030.
With additional increases in renewables generation over time post 2030.
A 25% RPS targets would put Alberta amongst the most ambitious jurisdictions in North
America. Alberta’s current renewable generation supplies 8% of energy demand and each one
percent increase in the renewables supply is equivalent to adding a 300 MW wind farm.
11Details
A government agency such as the AESO offers long-term contracts for either renewable
energy or the environmental attributes of the renewable energy.
The contracts are offered through an auction mechanism and volumes are selected to
meet transparent renewable targets, i.e. 15% of total provincial energy in 2020.
The targets could set ‘carve outs’ for specific technologies, e.g. 1% of total provincial
energy for solar in 2020.
Incumbent renewable generation would compete for the contracts and/or sell their
environmental attributes to remain viable and ensure equal treatment of new and existing
renewables.
Double counting for environmental attributes will not be allowed: existing renewables
would only get SGER offset credits or RPS credits not both.
All Alberta Load will bear the cost of RPS, including behind the fence load. This ensures
the cost is borne fairly across all customers classes.
Modeling Results
LEI modeled the proposed Dial Down Dial Up approach as articulated and found:
1. The approach achieves 95 MT of cumulative GHG reductions between 2016 and 2030
relative to Business as Usual emissions
2. Impacts to the electricity price are moderate due to the offsetting nature of the coal Dial
Down and renewables Dial Up
3. Out of market costs are relatively minor
4. Market design will need to be revisited at higher levels of renewables to ensure market
sustainability and system reliability.
GHG Reductions
The Dial Down Dial Up scenario achieves GHG emission reductions by reducing coal output
relative to the Business as Usual (BAU) case as well as increasing renewable generation. The
total impact of the solution guarantees net GHG emission reductions of 95 Mt (inclusive of
increased gas emissions) from 2016 through 2030. The diagram below shows that the Dial
Down Dial Up scenario achieves nearly 7 Mt of net emission reductions per year on average.
Greater guaranteed reductions can be achieved by altering the relative dials, and the incentive
mechanism is also expected to result in further reductions. In addition, as natural gas will not
replace coal as the Dial Up is implemented, the reductions will be sustained over the long-term.
12Price Impacts
The Dial Down Dial Up approach results in relatively minor impacts to the market price because
the coal Dial Down and renewables Dial Up work in opposite directions. Reducing coal output
increases the power price as cheap baseload electricity is removed from the market in some
hours, but the renewables Dial Up replaces this electricity with zero marginal cost energy placing
downward pressure on market prices.
13Cost of GHG Reductions
The costs to consumers are calculated based on the total cost of the electricity market. In order
to evaluate the options relative to GHG reduction targets, the cost to consumers is evaluated
relative to the GHG reductions achieved. The result illustrated in the figure highlights that the
Hybrid option has the lowest total cost.
Costs of GHG reductions include:
1. The cost of energy at the modeled electricity price
2. The cost of transmission
3. The cost of providing real-time reliability (system balancing)
4. The cost of out of market contracts for both renewables and natural gas generation that is
required but not supported by market (in RPS case and late years in the Hybrid Case)
14The NPV of incremental costs associated with the Dial Down Dial Up scenario is $6.8B, or
roughly 10% greater than the BAU case. This represents the cost of achieving GHG emissions
reduction of 95 MT in this timeframe as compared to the BAU case, which equates to a cost of
GHG in the range of $70/tonne, as compared to costs in excess of $180/tonne in all other cases
studied (see Modeling section for the detailed results). These costs per tonne represent total
incremental costs to Alberta power consumers relative to the BAU case and measure the overall
efficiency of various carbon reduction approaches. They are not the price of carbon that would
be comparable to a given carbon tax.
The Dial Down Dial Up approach is able to create emission reductions in a low cost manner
because:
Existing capacity is maintained on the system and is used to backstop reliability
requirements as well as respond to high priced market hours.
Renewables, and wind generation in particular, are relatively cost competitive with new
natural gas generation for energy but not energy plus capacity. The Dial Down Dial Up
approach adds this renewable energy and utilizes existing capacity to the greatest extent
possible to avoid incurring immediate capital costs for new capacity.
15Remaining Market Sustainability Questions
The key concern with the Dial Down Dial Up approach is the current market design may be
inadequate over time to attract investment due to the RPS generation lowering prices. Since
renewables will be paid fixed price contracts, customers are effectively removing the market risk
of investment for these assets, but the firm (natural gas) capacity that is still needed for system
reliability will face increased risks due to potentially lower prices.
As shown in the Dial Down Dial Up case, natural gas generation required for firm capacity must
be added to the market in later years through out of market means. The potential for this
intervention could mean natural gas investment may not be added in prior years, in effect adding
a larger risk premium to generation investment in Alberta.
This issue should be further studied if the government decides to move forward with an RPS
target paid through out of market contracts. Long term sustainability must be ensured, and the
current market design may not be compatible with GHG reduction targets achieved through RPS
targets. The type of analysis that would likely be required is two-fold. First, scenario analysis
should be conducted to clarify how sensitive the wholesale market is likely to be with an RPS.
This analysis would help clarify if and when market design changes are required.
Second, a deeper analysis of both UK and German experience is important. Both markets have
added significant amounts of renewable capacity. The UK has already added market supports,
including long term contracts, to its wholesale market as a result. German policymakers are in
the process of evaluating what is required in response to sustained low wholesale power prices
that are damaging the financial viability of incumbent thermal generators. Interviews with grid
operators and policymakers in both jurisdictions would provide additional insight for Alberta as
it evaluates its options.
16Investment Costs & Required Renewable Incentives
Uncertain cash flows from electricity market increases the development costs of new gas and
wind facilities. There is a large difference in project costs based on whether the projects are
merchant or contracted.
Return Requirements for Merchant and Contracted Projects
Overall levelized costs are meaningfully impacted by:
1) the debt and equity ratio and
2) the return requirements for project
Contracted Assets Merchant Asset
Return requirements of bond and equity Debt Equity Debt Equity
holders differ depending on whether assets Ratio 75.0% 25.0% 35.0% 65.0%
are contracted or merchant. Basically, the Required Return 4.5% 12.0% 8.0% 17.5%
more contracted an asset the more debt Weighted Avg.
Cost of Capital
6.38% 14.18%
that can be used and the increased
uncertainty to revenue associated with a merchant plant leads equity and bond holders to require
greater rates of return to compensate for this risk. Numbers take from presentation CIBC
provided to the Leach Panel in September.
Gas and Wind Project Cost Implications
The return required of a merchant plant can increase the cost of a new gas fired plant by
$20/MWh.
o A contracted plant has a levelized costs of approximately $56/MWh.
o A merchant plant has levelized cost of approximately $75/MWh.
Limited operational hours lead to a much larger difference of a new wind plant levelized
costs to achieve a return requirement. Levelized is more than double for merchant wind.
o Contracted wind has a levelized cost of approximately $70/MWh.
o Merchant wind has a levelized cost of approximately $150/MWh.
17Investment Concerns Concluding Remarks
Wind and other renewables require both financial incentives and long-term contracts to ensure
renewable development and to lower development costs.
18Independent Analysis of Policy Options
Summary of Analytical Work
TransAlta, working with LEI, has undertaken analysis of multiple components of a greenhouse
gas and renewable energy strategy related to Alberta’s electricity sector. In the following
sections we have provided views from analysis and experience on the following elements:
A case study review of the policy experience in various jurisdictions related to GHG and
renewable policies
Modeling of four sector-wide policy scenarios for Alberta’s electricity sector including
o A carbon tax scenario
o An accelerated coal retirement scenario
o A pure renewable portfolio standard scenario
o The proposed dial down coal – dial up renewables scenario
An assessment of the impacts of early coal retirement
A review of energy efficiency policies in various jurisdictions
A review of the Pembina Institute’s report “Power to Change”
Further, while not available for this submission, we are about to undertake a macro-economic
analysis of the Alberta economy and the effects of various environmental and energy policies on
the economy, including jobs, community impacts and tax base.
19Policy Guidance from Case Studies in Other Jurisdictions
A detailed report of the experience in various jurisdictions with greenhouse gas and renewables
policies is provided in Appendix 2.
It is instructive to examine the experiences of other jurisdictions in implementing policies.
While underlying conditions are often somewhat different, the fundamental workings (and
failures) of environmental policies implemented in the past 5 - 10 years are important.
The following material represents a compilation of global experience with a number of
environmental and energy policy frameworks, with particular assessment of their applicability to
Alberta.
Specifically, we examined:
California’s cap and trade design and experience to date
The UK’s carbon levy as an example of a carbon tax
The RPS experience in Texas
Feed in tariff programs in Germany and Ontario
A large scale energy efficiency program in California
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Modeling of Various GHG policy Options
In an effort to understand the potential impacts of various greenhouse gas and renewable policies, TransAlta and LEI have modeled
four separate policy scenarios and compared those against a business-as-usual baseline, all within an Alberta context. Those scenarios
are:
A cap and trade policy framework
A policy that would accelerate the retirement of coal units from the fuel mix
A renewable portfolio standard
A Dial Down Dial Up solution
For comparability each scenario was designed in such a way as to achieve emission reductions from the entire electricity sector from a
base of 58 Mt of GHG emissions in 2015 to a target of 35 Mt in 2030.
The attached analysis describes the resulting impacts on emissions and power prices, and identifies implementation challenges should
they be implemented in Alberta. We further provide a grade assessment of each scenario in terms of their expected impacts on
consumers, government and incumbent generators.
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Early Retirement of Coal in Other Jurisdictions
One policy approach under consideration is the accelerated retirement of coal-fired generation. We believe that it’s useful to examine
the experience some jurisdictions have had with coal phase out. The attached “case studies” describe experiences in Germany,
California, Ontario, and other U.S. States.
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Review of Energy Efficiency Policies
Alberta has not aggressively pursued energy efficiency policies as a means of reducing energy use and thus environmental impacts
from electricity generation. There are opportunities to adopt mature approaches from other jurisdictions, cognizant that the size of
opportunity may be mitigated by the unique Alberta characteristics of Alberta’s concentrated industrial load.
The following describes several efficiency programs in the U.S. and relates their penetration rates to the Alberta context.
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Review of Pembina Report “Power to Change”
Detailed report is provided in Appendix 3
In 2014, the Pembina Institute issued a report on the potential for large scale transformation to the Alberta electricity system to one
with a lower emissions profile and a much greater level of renewable energy penetration. The report was useful in generating
discussion about the benefits, challenges, costs and opportunities of such an ambition.
In order to add to this constructive conversation, TransAlta and LEI undertook a review of the report in an effort to identify
improvements and deepen the level of discussion. Based on this work we also identified that the transformation alluded to in the
report would face tougher challenges than originally thought, and is perhaps overly optimistic about its potential to both reduce
emissions and grow renewable generation.
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Macro-Economic Analysis – Work in Progress
Economic Contribution of Coal-Fired Generation
In 2014 TransAlta undertook a review of the economic contribution of the coal-fired generation
sector to the Alberta economy. The work was carried out by Dr. Robert Mansell who has
authored over 100 studies on energy and regulatory issues, as well as many other studies on
regional economics.
The work was based on specific data for TransAlta’s operations. We have extrapolated that
work to reflect an approximation of the impacts of the total Alberta coal fleet by prorating based
on MW capacity. The following table provides those estimates:
Alberta Coal Generation Fleet Economic Contribution
Direct, indirect and induced effects (2015 to 2020)
GDP add to the Alberta economy $10 billion
Labour income (wages) $4.4 billion
Employment 44,500 person-years
Total federal and provincial tax income $2.6 billion
Work in Progress
TransAlta and LEI are currently undertaking a more detailed modeling of the macro-economic
impacts associated with policy scenarios. We will be using REMI’s PI+ forecasting model to
assess the Province-wide economic impacts of climate change policies in Alberta. The PI+ model
is more precise than the more conventional analysis using Input/Output multipliers from
Statistics Canada.
What is the REMI PI+ model?
For assessment of industry development and local economic implications from investment
during construction and also over the economic life of a project, LEI has leveraged the well-
known macroeconomic and policy model, PI+, developed by Regional Economic Models, Inc.
(“REMI”) based on concepts of Input-Output, Econometric, New Economic Geography, and
Computable General Equilibrium. The model has a capability to predict the complex economic
relationships between different sectors of the economy and implications of additional spending
on employment and overall economic activity in a region, including the ripple effects associated
with indirect and induced benefits, from direct spending on labor and materials and services.
We will be using the 53-sector model for Alberta, Canada that has been specifically customized
for the Alberta economy. The model relies on historical data from StatsCan’s 2011 System of
National Accounts data, and is bolstered by Canada Department of Finance’s near-term (until
772021) growth forecasts, as well as, Organization for Economic Corporation and Development’s
(“OECD’s”) long-term forecasts beyond 2021.
Why the PI+ model?
The PI+ model is a very flexible and quick modeling tool that can project the implications of
various policy and structural changes in the economy. Although the PI+ model uses the same
underlying data that drives the conventional Input/Output models of national statistical agencies
(such as Statistics Canada), REMI’s dynamic model offers the ability to understand how policy
shocks or projects change the regional economy overtime. Unlike a static model that relies on a
single demographic snapshot of the labor force and capital stock as of a specific point in time in
the past, a dynamic model provides for changes in both labor force demographics and capital
stock corresponding to changes in economic labor migration and business response to the policy
shock being studied. This is particularly important for a province like Alberta where changing
economic factors, like commodity prices, can significantly influence both the types of jobs, and
business decisions pertaining to capital and operating expenditures.
The REMI PI+ model has the capability to work in tandem with POOLMod to model the
dynamic impacts of proposed climate policy changes taking into account the electricity market
impacts that LEI has produced. Outputs from LEI’s POOLMod analysis feed into the REMI PI+
model which it can then translate into GDP impacts, tax revenue considerations, and
employment trends (see Figure 1 below).
Figure 1. Using LEI’s POOLMod in tandem with REMI’s PI+ model
LEI’s forecasts of future Alberta Power Pool conditions
• Produces forecasts of energy prices, which consumers must pay
• New generation investments create downward pressure on market
prices, but there maybe offsetting “out-of-market” costs to consumers
(including associated transmission costs, investment subsidies, etc.)
• Economic (or ‘forced’) retirements of power plants may also create job
losses that need to be accounted for
REMI PI+ model
Estimates the macroeconomic impacts
Sales and income tax
Employment Economic activity
revenues
78Key inputs and assumptions
The outputs from the electricity market modeling that will be relied upon as inputs into the
REMI PI+ modeling include the following:
(1) forecast of Alberta Pool Prices under each scenario, and other non-market costs that will
impact retail costs of electricity, and
(2) new generation capacity and retirements, as well as, additional transmission investment
under each of the five scenarios.
LEI will further supplement the above metrics with assumptions on allocation of retail costs of
electricity by customer class (relying on AESO’s Long Term Outlook forecasts), composition of
O&M jobs by technology type (to reflect how plant closures and new entry will effect utility
sector employment, as well as employment of intermediary sectors (such as coal mining and
natural gas extraction). LEI will also need to develop metrics to reflect the impact of investment
on the economy (for example, the percentage of local spending from overall capital investment
and the relative breakdown of labor versus materials spending, as associated with the installation
of new power plants and transmission lines).
79Air Quality Considerations
A detailed presentation in Appendix 4
In the Spring of 2015, TransAlta funded research on a detailed review of data associated with air
quality in the urban Edmonton airshed. This work was in response to a series of claims that coal-
fired generation units 60 kilometers west of Edmonton was a major contributor to air quality
events being observed in Edmonton, and therefore closing those units as quickly as possible was
justified.
Dr. Warren Kindzierski, PhD, PEng, with the University of Alberta School of Public Health led
the study over a period of five months. Dr. Kindzierski is a recognized author and expert in air
quality and human health effects.
The results of this work are currently being captured in an academic study and report, and will
subsequently be subject to peer review. A preliminary description and results are highlighted
below and provided in more detail in Appendix 4.
The Study
The scientific objectives of study were as follows:
Understand characteristics and trends of air pollutants, including fine particulate matter
(PM2.5)
Identify sources of PM2.5 at the National Air Pollution Surveillance (NAPS) chemical
speciation monitoring site in Edmonton
Identify contribution from coal combustion sources
Investigate origins/causes of high PM2.5 levels in Edmonton during 2010
There are multiple sources (both urban and rural) that contribute to PM2.5 in Edmonton. This
study:
Examined air quality trends, and what type of sources and how much they contribute
to PM2.5 in Edmonton, including coal combustion emissions, using receptor
modeling and backward trajectory modeling
Used methods recommended by Environment Canada, US EPA and/or preferred
by research scientists across North America and Europe:
o US EPA Positive Matrix Factorization (PMF) model
o NOAA Hybrid Single Particle Lagrangian Integrated Trajectory (HYSPLIT) model
Used data from the one air monitoring station in Edmonton (McIntyre) that
collects specialized data that allows for source identification of PM2.5
Compared to earlier studies of this type for Edmonton, this study used the largest and
most current dataset – best understanding of current conditions
80Study Findings
Based on a five-year monitoring data set and cognizant of both short range and long range
sources, the study found the following composition of PM2.5 in the Edmonton airshed:
Taken in aggregate, the study found there was only a minor signal associated
with coal combustion emissions as a portion of secondary sulphate, and estimated
to be no more than 10% of the PM2.5 contribution.
Further, the study examined trends in Edmonton’s air quality and observed the
following trends:
Hourly concentrations of nitrogen dioxide (NO2), sulfur dioxide (SO2), total hydrocarbon
(THC) and carbon monoxide (CO) have steadily decreased since 1998.
Hourly concentrations of particulate matter (PM2.5) are unchanged since 1998.
Hourly concentrations of ozone (O3) show inconsistent change.
Chemical species present in PM2.5 unchanged or decreasing (for organic carbon,
elemental carbon, barium and lead) since measurements began in 2007.
These trends – which are scientifically statistically significant – do not at all
support a notion that Edmonton, at least, will have some of the poorest air
quality in Canada.
81Additionally, the study examined an annual breakdown of levels and categories of PM2.5 in
Edmonton to determine the validity of using 2010 data as an average for particulate matter
concentrations. The chart below provides an indication that 2010 was an anomalous year in
terms of PM2.5 concentrations for a variety of reasons. Using that data to compare to other
urban centers is not valid.
Overall, the study results contribute to a better understanding of the Edmonton airshed. The
future peer review of this work will provide more confidence, but it is evident that while coal
emissions may contribute a small portion to PM2.5 concentrations, it is not a major factor and
pre-emptively eliminating coal generation west of Edmonton will not resolve Edmonton air
issues.
82Appendices
Appendix 1 - Centralia Experience
Appendix 2 - Detailed Report on Policy Case Studies
Appendix 3 - Detailed Review of the Pembina Report “Power to Change”
Appendix 4 – Detailed Presentation of Edmonton Air Quality Study
Appendix 5 – London Economics Corporate Resume
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