Alberta is paying a hefty price to soothe investor fears as it ditches coal-fired power in a massive shakeup to its electrical grid.
The province's NDP government late on Thursday announced a deal to pay three major power producers $1.36-billion over 14 years as compensation for shutting down coal units years ahead of schedule. Funds will be paid using the province's levy on large carbon emitters.
It also said it settled a dispute with Capital Power Corp. and reached tentative deals with Altagas Ltd. and TransCanada Corp. over cancelled power-purchase agreements, heading off a potentially costly legal spat. A dispute with Calgary's city-owned utility, Enmax Corp., remains unresolved.
The moves lifted uncertainty that had weighed on shares of generators most exposed to the mandated phaseout of coal. On Friday, shares of TransAlta Corp. jumped 17.09 per cent, while Capital Power gained 9.58 per cent on the Toronto Stock Exchange.
It comes after a week of upheaval in Alberta's power market that saw the province introduce a cap on regulated electricity rates and lay out plans for a so-called capacity-market structure, which guarantees producers a return on power even if they are unable to sell it.
Premier Rachel Notley is seeking to wean the province from coal by 2030 and spur investment in renewable sources of electricity without alienating companies needed to complete the hugely expensive switch.
Cash-poor Alberta is eager to attract new investment as it grapples with fallout from the collapse in oil prices, including tens of thousands of layoffs and a budget deficit of nearly $11-billion this year. It aims to generate one third of its electricity from renewable power, with the rest from natural gas, necessitating some $30-billion worth of new capacity.
Industry executives had warned that uncertainty over its electricity-market policies would keep investment on the sidelines. Now, the worst of those fears appear to have subsided.
"It certainly is a step forward in terms of resolving long-standing issues relative to a big change in the market," Siegfried Kiefer, chief strategy officer at the Atco Ltd., said on the sidelines of the Bennett Jones LLP business forum in Lake Louise, Alta. Atco will receive $65.8-million over 14 years, or $4.7-million per year.
TransAlta will receive annual payments of $37.4-million starting next year and ending in 2030, totalling $524-million. The Calgary-based company said the new policy framework sets a clear path for investment in new hydro and wind development, as well as for new gas conversions.
Bank of Montreal analyst Ben Pham said benefits of switching coal plants to run on natural gas won't materialize for years, but he said the payments are positive for the company.
"Not only did the government make a rational decision, when combined with other actions this week (i.e., transition to a capacity market), we see this as improving investor confidence in the [Alberta] power market following a year of significant uncertainty and disruption," he said in a note titled Christmas Came Early.
TransAlta said construction of a pumped hydro project at its existing Brazeau facility in Drayton Valley, Alta., could start by 2021, pending receipt of a long-term contract.
The company is also committed to converting units at its Sundance and Keephills coal plants to gas-fired generation by 2023, it said.
Edmonton-based Capital Power said it would receive annual payments of $52.4-million starting next year for a total of $734-million over 14 years.
The company said it would pay $20-million before taxes to settle its dispute with the province over the early termination of power contracts.
Royal Bank of Canada analyst Robert Kwan said the size of government payouts is a surprise given its budget deficit. But he said the moves this week significantly improve clarity for investors.
"Further, the announcements leave us feeling that the NDP government has taken a balanced approach when it comes to the power industry and ratepayers/taxpayers," he said in a research note.
With a report from Kelly Cryderman in Lake Louise, Alta.