Canadian Energy: Tariff Challenges and Renewable Energy with Vittoria Bellissimo
Peter and Jackie start the podcast by discussing President-elect Donald Trump’s threat to impose a 25% tariff on all imports from Canada and Mexico and the potential impact on Canadian oil and gas markets and prices.
Next, Peter and Jackie welcome their guest, Vittoria Bellissimo, President and CEO of the Canadian Renewable Energy Association (CanREA). CanREA is a national industry association and the voice for Canada’s wind, solar, and energy storage solutions.
Here are some of the questions Jackie and Peter asked Vittoria: How would you describe the mood of renewable developers in Canada today? Tariffs on solar equipment could be added at the Canadian border; how will this impact the cost of developing solar and wind projects? Why has Canada recently imported more electricity from the United States? Does this mean Canada is already facing tighter electricity markets? Alberta is redesigning its electricity market, called the REM or Restructured Energy Market. Why is this change needed? What concerns do renewable generators have regarding the proposed changes for the Alberta market? Are you concerned about the potential electricity demand growth from AI data centres in Alberta and elsewhere?
Content referenced in this podcast:
- CanREA’s Clean Energy Procurement Calendar
- Dunsky report commissioned by CanREA, that defines the potential for onsite or behind-the-meter solar in Canada
- EIA note on how US exports of electricity to Canada have increased
- CanREA’s Go Solar Guide 2024, the go-to source for Canadians looking to install solar on their rooftops and homes
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Episode 263 transcript
Disclosure:
The information and opinions presented in this ARC Energy Ideas podcast are provided for informational purposes only and are subject to the disclaimer link in the show notes.
Announcer:
This is the ARC Energy Ideas podcast, with Peter Tertzakian and Jackie Forrest, exploring trends that influence the energy business.
Jackie Forrest:
Welcome to the Arc Energy Ideas podcast. I’m Jackie Forrest.
Peter Tertzakian:
And I’m Peter Tertzakian. Welcome back. Well, usually Jackie, you and I have a little bit of banter, but I have just been told there’s so much on our agenda today that we should just forfeit that. We actually have a special guest and as our audience knows by now, I always say special guests because every guest is special. But this is a double special guest because she’s coming back for the second time. But we will keep you waiting because I’m not going to introduce her until we first talk about the topic du jour, which is…
Jackie Forrest:
Tariffs. The potential for 25% tariffs on everything Canada sells to the United States that has… Actually, shortly after we recorded last week, the news broke, so last Monday, and it certainly consumed everyone in Canada’s time since then.
Peter Tertzakian:
As we record, it’s nothing new. A week has gone by. Our prime minister has gone down to Mar-a-Lago to visit with the President-elect. We have no idea what was said behind those closed hallowed doors in Florida, but we do know that the specter of tariffs looms large over everything from manufacturing to energy, which includes our oil and gas. Some people suggest that, “No, oil and gas is too big. It’s too much a part of energy security, too much a part of the economy, and therefore it’s likely to be exempted.” I have to tell you, I don’t subscribe to that view. I think everything’s on the table. I think everything’s a big negotiation and we should not take anything for granted.
So when we think about tariffs on oil and gas, let’s just maybe review what a tariff is. A tariff is paid by the importer on a product that is brought over the border. So notionally in this case, say for oil, a refiner will have to pay a premium, say 25% on a barrel of oil, and therefore the notion is that, it’s the refiner that will trickle all the way through the supply chain to the gas pump, and therefore the American consumer will have to pay. But there is another option, and the other option is that actually the producer has to eat it and that the refiner just pays the same as they would have otherwise without a tariff.
Jackie Forrest:
Yeah, that can happen too, and that really depends on how desperate the country is to get their product into the market. And I think in Canada’s case, because we don’t have a lot of other places for our oil and gas to go, we have the Transmountain pipeline that started up, but that’s just a small fraction of everything we sell, that we probably will have to take some discounts, and so maybe we’d be meeting in the middle. It depends on the scenario, but I think it will result in lower prices for a Western Canadian gas and oil. So wider discounts compared to the American benchmarks.
Peter Tertzakian:
So you’re suggesting that it’s the second scenario where the producer has to eat it. Although I would say that it’s not one or the other. I mean, there could be a distribution of both the buyer and the seller has to somehow absorb the cost. But one of the thing is that under normal circumstances in a global market for a substitutable or fungible commodity, that probably the seller, in other words, the Canadian side of the border, would have to absorb the cost. But in this case, many of the refineries do not have a substitute. They have no choice. So in that context, it’s quite likely that the refiner would have to pay. But you know much more about refinery flows than I do having worked in a refinery. So, what do you think?
Jackie Forrest:
Well, there’s also some other caveats here too. Are they going to tariff other suppliers coming in or just Canada and Mexico? Because that makes it worse but, yes. There’s areas like the Midwest and the Rocky Mountains region where because of the way the pipes are and because limited other options, they’re going to probably have to take Canadian crude oil and pay more because of these tariffs. However, there is a lot of incentive even in those markets to run a bit more domestic crude. These refineries have the ability to adjust their operations a bit. Maybe they run 10% more domestic crude oil than they would’ve otherwise. Well, that results in less demand for our product and oil prices at the margin. So if we see a drop of 10 or 15% in demand, the inventory starts backing up here in Western Canada and we’ll still get some discounts.
So yes, there’s certainly areas in North America where there’s limited alternatives to our product, but I still think we’ll see some discounting even in those cases. I do want to talk about natural gas as well. That’s similar too. If we go to the western markets, there are limited options to Canadian gas in California. I mean, they have Rocky’s gas, but there’s really not an ability to bring in a lot of extra gas. So that’s a market where maybe the discounts are less. The eastern market, we have much more competition because there’s a lot of pipes flowing every direction, but regardless, any result in a bit of less demand for our products probably results in some discounting.
Peter Tertzakian:
Yeah, I want to get back to the oil. The situation 10, 12 years ago was that both Canada and the United States used to import quite a bit of oil from offshore sources all the way from Norway to the Middle East to Venezuela and so on. But following the shale revolution, following the growth in the oil sands production, oil has become much more of a US-Canada thing. I mean, the Mexican production and exports to the US have dropped off as well. So the notion that tariffs would be placed on international oil as well as Canadian oil would be interesting to think about. But if they put 25% on the Canadian and not put anything on international, that could mean that there could be a resumption of flows from other parts of the world coming into North America. Isn’t that right?
Jackie Forrest:
Yeah, for sure, especially into the Gulf coast where there’s a lot of ability to take foreign crude. So you could see that would be a worst case for us because we do still send oil down to the Gulf coast, and those foreign suppliers will have the ability to take that market share away from us.
Peter Tertzakian:
But it strikes me that that would not be a palatable situation, particularly in the United States because all of a sudden after, as I said, 10, 12 years of trying to become energy-independent, continentally, energy-secure, all of a sudden the flows of oil may come back from other parts of the world and that energy security issue comes back, which was termed energy dependency as I remember.
Jackie Forrest:
Yeah, I mean this policy has the potential to change all the flows and how they go, like, economics dictate this. Even in the US, they export about 4 million barrels a day of crude oil. It’s like crude oil. We actually sell them about 4 million barrels a day of crude oil. So with the right price.
Peter Tertzakian:
It’s heavier oil.
Jackie Forrest:
It is heavy, but with the right price signal, I think, like I said, you could use rail cars to displace some of the heavy crude because the economics support that. So it’s really hard to really think through. I mean, there’s the other implications too like they export about 3 million barrels a day of refined products. Well, if they have to pay more for their crude oil because of all these tariffs and then sell their refined products into the global market where the crude is cheaper, it’s going to result in very low margins. So they probably will start running less crude and not export refined products. And so that itself will result in less demand for crude oil for Canadians. This is a very complex web of potential scenarios here, but I just want to finish it is, if it happens, very likely we’ll see a discount for Canadian crude oil.
Peter Tertzakian:
Or at least a sharing of the tariff.
Jackie Forrest:
A sharing. Maybe not us absorbing all of the tariff, but in different scenarios. I can’t see in a case where…
Peter Tertzakian:
I still think if there is any burden on a US refiner setting aside, some of these refineries are landlocked that if they have a choice between a Canadian heavy barrel and then they look and there’s no tariff say on Venezuelan, and I know their productions down as well, but just bear with me. So Venezuelan or heavy oil from any other part of the world say, “Well, why would I buy the 25% burdened oil? I’m going to go buy it from some other part of the world.”
Jackie Forrest:
Yeah, and it just wouldn’t really be very, we talk about energy security, energy independence, those are kind of key principles it seems, of the Trump administration. It goes in counter to that for sure.
Peter Tertzakian:
Yeah. So anyway, it’s complicated, but let’s move on to something that’s, well, arguably more complicated, and that is our domestic electricity market. So who do we have as our guest? Jackie, I’ll let you do the honors.
Jackie Forrest:
Well, we’re very excited as a second time to have Vittoria Bellissimo, President and CEO of the Canadian Renewable Energy Association. Welcome.
Vittoria Bellissimo:
Thank you for having me. I’m glad to be back for a second time.
Jackie Forrest:
All right, well, and for those that don’t know, I’m on the CanREA board. I’ve just got re-elected. Happy to be part of that as well. But I’ll let you take over describing a bit about CanREA.
Vittoria Bellissimo:
Sure. So CanREA, the Canadian Renewable Energy Association, is the voice for the wind energy, solar energy and energy storage solutions that will power Canada’s energy future. CanREA represents more than 350 companies active in these industries across the country, including manufacturers, installers, developers, service providers and supply chain partners. And through stakeholder advocacy and public engagement, CanREA works to create the conditions for a modern energy system in which low-cost reliable, flexible, and scalable solutions play a central role in transforming Canada’s energy banks.
Peter Tertzakian:
Wow. So Vittoria just characterize the mood in the membership since we last spoke because the mood, of course, the provincial government has slapped a moratorium suddenly on the industry. But it was also a time, I mean it was only a year ago or something like that, that there was still a lot of buoyancy in terms of the clean energy, renewable energy, and now we sort of have much of this pall over the space with the election of the Trump administration, a lot of uncertainty. We’ve got a sense of electric vehicle sales are slowing down. So has the mood changed in the whole renewable world?
Vittoria Bellissimo:
Well, I would just point out that we’re a national association and it’s not limited to Alberta and I would say the industry really is hard at work trying to make what is happening across the country successful. So CanREA launched its clean energy procurement calendar in mid-October. It’s a tool designed to track and consolidate procurement opportunities in wind, solar and energy storage across the country. We calculated that there are more than 10,000 megawatts of procurements currently either underway being procured or being planned, and they represent well over 20 billion worth of investments.
Peter Tertzakian:
So 10,000 is like 10 gigawatts.
Vittoria Bellissimo:
10 gigawatts, that’s right.
Peter Tertzakian:
That’s huge.
Jackie Forrest:
And I mean, Alberta thinks have not gone well, but the rest of the country compared to a couple of years ago, there’s more opportunity than ever. And it is very different than what, you talk about the US, but these are mostly ground corps that are procuring this electricity. So it looks very different in terms of risk profile, I would say.
Vittoria Bellissimo:
Yeah, we have provinces like Manitoba and Ontario set to launch formal processes in the next year, and this number really is set to grow. The newly elected British Columbia government has also stated a commitment to two-year procurement cycles. So repeated procurement cycles is really what we’re looking for. The front-of-the-meter business is looking really good. And then as Jackie knows and loves the behind-the-meter side of the business, so on-site generation and storage. Last year we worked with a company called Dunskey Energy to look at the future of Canada’s behind-the-meter growth and what we saw really was astounding. At a minimum, we anticipate that one in every 12 Canadian homes will have rooftop solar by 2050. Alberta is ahead of the game with this one with a megawatt of behind-the-meter solar being added every four days. It’s very sunny here.
Jackie Forrest:
It’s a leader. We’re talking about Alberta falling behind on the utility scale, but we’re leading this year on the residential and in small-scale renewals.
Vittoria Bellissimo:
Yeah, I mean comparing this to a few years ago, I will say that there are more opportunities in more provinces both in front of the meter and behind the meter. Looking back in 2022, 75% of all new build was in Alberta. In 2023, that was over 90%, but we’re now, we’re seeing activity all across the country, and I think that’s really good news for the Canadian electricity sector.
Peter Tertzakian:
The dynamic is really fascinating with provinces like Manitoba and BC, which have been dominantly hydro, and the assumption is there’s just almost an unlimited amount of hydro. But now this realization setting in that there’s only so many rivers you can dam up, it’s expensive to do so, and also there’s environmental consequences with hydro. And now we have the emergence of… More than the emergence of cheap renewable energy.
Vittoria Bellissimo:
Yeah, absolutely.
Peter Tertzakian:
Wind and solar. So that’s why we’re seeing this.
Jackie Forrest:
Well, and what’s nice about hydro, we will get to the reliability concerns, but if you have a large base of hydro, then you kind of have a natural storage system. So when the wind is blowing or the sun is shining, save your hydro and then when it’s not, you’ve got the hydro. I think the reliability issues in many of those provinces, at least with the amount of hydro they have today and the little bit of renewables, most of these provinces, this is, with the exception of Ontario, some of the first big renewable additions that they’re making, including in Quebec, right?
Vittoria Bellissimo:
Quebec’s been at it for a while, but we’re certainly seeing new action in British Columbia and in Manitoba with discussions of upcoming procurements. It is really interesting. When I took the job, I assumed that we would be working in the provinces that are trying to clean up their supply. So Alberta, Saskatchewan, Nova Scotia, New Brunswick more than other provinces. But what’s ended up happening is the provinces with large hydro grids really have started to see that there’s a huge advantage to having more renewable electricity on their grid. As Jackie said, you can hold your water. Quebec is always touted as the largest battery in North America. So lots of opportunity in the hydro grids.
Peter Tertzakian:
Yeah. And again, it’s been driven a lot by cheap solar and wind. In other words, the falling cost curves for both those. And the one reason for the decline in solar and wind is of course, the Chinese manufacturing juggernaut and the ability to import cheaper solar panels. So what do tariffs mean? I mean, Jackie and I talked about tariffs on oil and gas. What do tariffs mean for Chinese imports, foreign imports that are cheaper potentially than our own domestic manufacturers?
Jackie Forrest:
And I’ll just add, we were talking about import tariffs on things coming from Canada to the US, but the federal government has a process right now to consider tariffs on Chinese goods entering Canada as well. The conservative party of Canada has come out saying that they support tariffs on some of these Chinese goods, especially around power generation.
Peter Tertzakian:
Well, we’re a continental economy, so monkey see, monkey do. That’s what we have to do often to maintain some sense of parity. And then of course, it’s just the whole multipolar world where we seem to be de globalizing and trying to isolate China from a US perspective and we just have to follow along with that geopolitics or that realpolitik as they would say. So tariffs in US, tariffs here. What does it mean?
Vittoria Bellissimo:
Well, tariffs always make life more expensive and putting tariffs on the materials that Canada needs to meet its electrification, economic and climate goals is going to make things more expensive for everyone. Tariffs are also inconsistent with commitments to affordability for Canadians, according to the International Energy Agency’s special report on solar PV global supply chains, China controls roughly 95% of the upstream production of solar components. That gives them a de facto monopoly on solar production. China also has a relative lock on the production of battery energy storage systems. There are a number of facilities in the US that have been announced thanks to the Inflation Reduction Act, but they aren’t in production mode and with the future of the IRA in question, the alternative American supply chains that Canada’s solar and energy storage sectors are expecting might not materialize. So one bright spot that we’re starting to hear discussions that some of the announced electric vehicle battery facilities here in Canada might be looking to add energy storage specific production lines to their facilities.
If that does happen, then the Canadian energy storage sector could have a real domestic alternative, but we’re going to need to wait and see. We all know that tariffs increase the costs. With no alternatives available now, Canadian ratepayers will be the ones bearing the cost increases. So in provinces with ongoing procurements where the tender bids have been submitted or where contracts are awarded, these could have material impacts on project success. At CanREA, we have been advocating for a phased in approach. So for any tariffs on solar or battery energy storage systems, our proposed approach would require tariffs to be introduced and increased only if we see growth in Canadian manufacturing.
Peter Tertzakian:
I’m sorry, are you getting receptivity to that position?
Vittoria Bellissimo:
We’re having real discussions on that position right now.
Jackie Forrest:
I think one issue is like, okay, in the United States, if they put on tariffs, there’s a large, large market there, and I think some of these big international companies, yeah, they’ll come to the United States because there’s going to be a huge market. Canada, our market’s pretty small, so I’m kind of skeptical that it’ll result into a bunch of domestic growth, especially because by the way, if assuming the US Does keep the IRA for manufacturing, which they may do because although Trump is not a fan of the IRA, he is a fan of increasing domestic jobs and manufacturing. So it could be that it’s still better to set up manufacturing in the US, not in Canada. So anyway, I think it does result probably in us just paying more for energy.
Vittoria Bellissimo:
Yeah, I think we’ll see. But we do have an affordability crisis and we should be very concerned with affordability.
Jackie Forrest:
Another issue we have, we talked about why are these provinces looking at renewables, is we have a bit of a extreme demand growth compared to the history. Demand has been relatively flat in a lot of these provinces for quite a long time, very slow growth. But the outlook is really increasing and it seems that these electrical system operators across the country that keep putting out new reports where the demand expectations keep growing, whether it be for electric cars or industrial consumption of electricity going up, and now we have AI data centers. You’ve been following this for a while, Vittoria in your careers even before CanREA, like, are you surprised by these outlooks for demand?
Vittoria Bellissimo:
I don’t know about surprise, but I do think we need to be able to plan for shocks to the system we’re seeing as surge in demand for new electricity across the country and it’s not just coming from the electrification of cars and domestic heating. Demand growth is coming from new industry, from data centers, from population growth and the digitization of our economy. One of the things I said at our major conference is that we’ve now entered the age of electricity and electricity consumption is projected to rise significantly. It’s going to increase from 20% of final consumption today to 26% by 2035 in the most conservative of scenarios. So this really underscores the urgent need for more electricity supply and solutions. And I have a couple of examples from Ontario and Alberta if you’re interested.
Peter Tertzakian:
Yeah, I do, except it’s something, when you hear these exuberant numbers of anything, sometimes when the numbers are so big, you need to do a reality check because the pace, for example of transmission lines, distribution, local distribution, it can’t grow at the same pace as the demand. You could argue, certainly can argue that the growth of solar can keep up with that pace, especially something like rooftop solar where you can keep adding onto roofs relatively easily. But in the broader economy for electrification, I just don’t see how these numbers, if they’re starting to gain momentum, are sustainable without investment in the midstream infrastructure for electricity.
Vittoria Bellissimo:
Well, let’s break down the numbers first of all, and then we’ll talk about what that means on the wires side of the business. So I’ve got an example from Ontario. So according to the Ontario Independent Electricity System, Operator or IESO, the province’s demand for electricity is forecast to increase by 75% by 2050, and that’s the equivalent of adding four and a half cities the size of Toronto to the electricity grid. Overall, Ontario’s annual energy growth rate from 2026 to 2050, which is what they looked at, is forecast to be 2.2%. So that’s 2.2% growth per year.
Jackie Forrest:
It seems that we’re getting short on electricity. The growth is there. Concerns around if there’ll be enough generation. Now historically, Canada has exported a lot of electricity to the US more than we received from them, but I found a post from the EIA, which I will put in the show notes, that was countered to that narrative. They said since September of 2023, the trade has been much more balanced where Canada exports are down about 36% on a monthly average basis and Western Canada was a significant driver of this with big increases in importing electricity from the US no longer exporting electricity to the US. Is this a sign that we’re already kind of under strain in Canada? We don’t have this surplus of electricity that we used to, that we send to the US?
Vittoria Bellissimo:
Yeah, I mean I saw your quote and it is pretty interesting, right? So for the better part of two decades, as the EIA states, Canada has exported significantly more electricity to the United States than it imported and we saw that change in the fall of 2023. Canadian exports of electricity to the US have decreased in recent years, primarily due to lower hydroelectric generation caused by prolonged drought conditions in Canada. So reduced precipitation has led to lower water levels and reservoirs, and that is impacting the ability to generate hydroelectric power. So compound that with lower natural gas prices in the US, have made American electricity more competitive, which further reduces demand for Canadian exports.
Peter Tertzakian:
And electricity is completely substitutable, completely fungible like an electrons or electrons, unlike the previous discussion we have where not every barrel of oil is the same.
Jackie Forrest:
Let meet’s a bit of a canary in the coal mine here though. We’re already seeing signs that we’re getting short on electricity. Yes, hydro is maybe not as reliable as it has been in the past with these droughts and things like that, but the fact that we’re not exporting as much. And then meanwhile, prices like Quebec building large export lines south, are we really going to be able to export that amount of electricity when we look at the demand profile we have here in Canada?
Vittoria Bellissimo:
Yeah, I think, let’s look at BC for example. In 2022, BC saw record high electricity export revenues due to favorable market conditions and higher US wholesale prices. But in 2023, as we said, total electricity exports from BC to the US actually declined by 45% with exports to California alone dropping by 75%. These are significant fluctuations and I think everyone has to think about the effects of climate change and climate related events on their businesses. So that’s forecasts, contingency plans, all of it.
Jackie Forrest:
And maybe getting more renewables because that hydro may not be as reliable as a base load as it has in the past.
Peter Tertzakian:
Well, I also think that’s part of it. My gut feel tells me also the Americans have been on a very aggressive electrical power build themselves with renewables, with all sorts of sources of energy. And now the incoming Trump administration with potential relaxation of regulations, I think you’re going to probably see even more.
Jackie Forrest:
When they’re talking about permitting reform, we’ll see how successful they are. But that could in building many more transmission lines, which has been a big issue across North America, but in Canada as well.
Peter Tertzakian:
I just think electricity is becoming even more competitive than it already was. We have to think about ourselves because the hydro may not be what it used to be, and also it’s competitive in the US so we just need to think about the growth that we have to satisfy in our own provinces. I want to get back to this number of 75% growth in Ontario by 2050. So I just sort of did my back of the envelope math about the compounded growth rate. So it’s about two and a quarter percent per year. To me that’s just keeping up with average GDP growth and is inconsistent with a narrative about growing data centers and electric vehicles and so on, which is over and above what we’re used to, the status quo baseline. So how does this square? I don’t… I’m just always looking.
Jackie Forrest:
Well, 2.2 is high. I think the average in North America has been a half a percent growth for the last decade.
Peter Tertzakian:
Right, but the last decade I don’t think is representative in a sense that there has been quite a bit of gains in efficiency gains and that it’s just leveled off because of that. If you look before that and the big picture, typically electricity growth was similar to growth in the size of the economy, not surprisingly.
Jackie Forrest:
But it’s been a long time and I think a lot of these electric system operators are not used to that level of growth.
Vittoria Bellissimo:
Yeah, that’s true. This is growth that we haven’t seen in my electricity career, so it’s a big change. We’ve seen flat load for, as Jackie was saying, a decade. This is a big change. But I will say that we had some good discussions in Ontario and it doesn’t sound like their plan includes, I mean if you look at what that is contributing to that load growth, data centers aren’t first. Electrification, electric vehicles are the first driver.
Jackie Forrest:
They also have some industrial demand growth, like all these battery plants and things like that. We had Minister Todd Smith on I think about a year ago telling us about some of the industrial growth was a big driver and that was before we were talking about AI data centers.
Peter Tertzakian:
I’m just saying my gut feel tells me these numbers are wrong. It’s just gut feel.
Jackie Forrest:
Well, I kind of hope that they are because it’d be hard to grow at that rate.
Vittoria Bellissimo:
But wouldn’t you feel better if your gut feel told you that the system operators were prepared for these numbers to be right and for numbers bigger than these to be right?
Peter Tertzakian:
Yeah, I would feel good about that then I would not feel good about how we are going to have some sense of permitting reform and the ability to satisfy the construction of all the infrastructure.
Jackie Forrest:
We want to talk about Alberta before we go here because last time we had you on, Alberta had just put in this moratorium on renewables. The moratorium has now been lifted, however, there’s still plenty of uncertainty with the details. And then later in early 2024, we saw the Alberta electric system, Operator the ASO announce that they’re going to totally redesign the electricity market with implications and uncertainty for all kinds of generation. We did have Blake Schaeffer on in March to tell us a little bit more about that, but those were the early days. Lots has happened. There’s been a lot of consultation. But I want to start with the basics. How much generation do we have in Alberta from renewables, and do you think that this level of renewables can create these reliability issues? Are we getting into that point where it’s such a large part of the mix that we need to be changing the design?
Vittoria Bellissimo:
Okay, so let’s start with the numbers. According to the 2023 ISO annual statistics report, which was released in March of this year, renewable generation provided 16.5% of Alberta’s generation in 2023. That’s up from 7.3% in 2019 for contrast. Next year, I expect it to be higher. It’s closer to 25% right now. Do I think that this number of renewables could create reliability issues? Absolutely not. There are many jurisdictions with higher renewable penetration levels operating reliable power grids, Denmark, Germany, Portugal, Ireland, Spain to name a few. That’s Europe. Often with better interconnections. Last time I was on your podcast, I spoke about SPP, the Southwest Power Pool, where over 36% of 2023 electricity came from wind and their renewable penetration peak was over 90%. Another jurisdiction Albertans like to compare themselves to is Texas. As of 2023, the wind penetration level in ERCOT, the Electric Reliability Council of Texas, region of Texas was approximately 24.3%. Over the summer of 2023, wind and solar generated about 25% of all the electricity consumed in ERCOT.
Peter Tertzakian:
These are all big numbers and that’s sort of the total average penetration. Of course, there’s the ups and downs during the day. You already address the issue of grid reliability and so on. My question is, so if it’s all working, what is the deal with this restructuring of our electricity market, the market redesign? Why do we need it? Actually, what is going on? Jackie, what is the electricity market redesign and why do we need it?
Jackie Forrest:
Well, I think the concern is as we’re getting more and more renewables that the base load generators, like the fossil fuel generators, natural gas plants, they’re not running as much and so they’re not making as much money and we won’t be seeing as many of them being built, but yet we do need them. And so places like Texas, who interestingly enough, I didn’t realize that Vittoria are kind of at the similar level of renewables penetration to us, they’ve had to make some changes. So for instance, they’ve created some incentives to provide some money so that more natural gas generators are built. Our approach was much more, that would be like taking a small scalpel to the system. We’re kind of taking a sledgehammer to the system to solve the problem in my view, by making lots of changes and I’m a bit concerned personally about the level of changes and what it might mean for investment in the province. Of course, the design is not done, but there’s certainly a lot of concerns around it.
Vittoria Bellissimo:
So just to state that 25% versus 25%, those are their 2023 numbers. And I’m quoting our rolling average, so it’s not the same. They’re ahead of us.
Jackie Forrest:
Okay.
Vittoria Bellissimo:
Just in case you want to…
Jackie Forrest:
Okay. But anyway, we’re getting into that similar range and other jurisdictions, they’ve had to make some changes as they’ve gotten into that level. Although I think this is a quite wholesale change versus tweaks.
Vittoria Bellissimo:
This is a very large change to our market. So we talked about different market designs through this executive working group that the ISO set up last year. Everything from a capacity market where we would pay assets to be there well in advance of real time, and we would just contract with them for that capacity to an integrated resource plan where we actually try to coordinate everything from the generation to the wires business all the way through the system to a Crown corporation doing the whole thing for Alberta instead of having an open electricity market. And what we landed on was a version of the energy only market that we currently have, but it’s very different from the energy only market of today.
Peter Tertzakian:
So one of the things that happens is when we get a surge of wind, as we are apt to have happened in this part of Alberta or a surge of solar power at a time of day when things are relatively quiet, then you get too much electrical power generation and negative pricing. Can you explain that?
Vittoria Bellissimo:
So right now we don’t have negative pricing. It’s one of the proposals in the ISO’s restructured energy market. Right now our prices go from $0 all the way up to $1,000.
Peter Tertzakian:
But just for our audience, can you explain in markets where there is negative pricing, does that mean the consumer gets paid to use electricity?
Vittoria Bellissimo:
It does. In markets with negative pricing it means if you are generating in that hour, you pay to generate and if you are consuming in that hour and the settlement works, then you are paid to consume.
Peter Tertzakian:
And it doesn’t matter what kind of generator you are, whether it’s natural gas or wind or solar?
Vittoria Bellissimo:
Doesn’t matter. Nope.
Peter Tertzakian:
So this is also part of the problem. It basically affects the returns, the profitability of these generators.
Jackie Forrest:
Well, and I think the issue is for renewables, they can’t really choose when they generate the way a natural gas generator, they could just turn off if there’s negative pricing. So I think it’s maybe more problematic for renewables than some of the other types of generation.
Vittoria Bellissimo:
I mean, just from a negative pricing perspective, that’s the sum of it. We have a market right now where a whole bunch of renewables over six gigawatts have built and they built in an environment where prices don’t go below zero, and that’s how they finance their projects. So a major change with major added risk is a problem for the entities that financed these projects.
Peter Tertzakian:
So we’re trying to address this with this market redesign. When is this market redesign expected?
Vittoria Bellissimo:
That’s a really good question. So it’s faster than you think it is. Alberta is in some fairly in-depth consultations right now. The ISO will be publishing its first high-level design documents or a term sheet by mid-December and that’s based on six weeks of stakeholder sessions over the last 12 weeks. And after feedback, additional high-level design work is expected in the new year and the rules will be drafted and approved with implementation plan for 2027.
Jackie Forrest:
And a lot of people feel that this process is very fast for the amount of change and Peter, you only talked about one aspect. There’s other aspects too, like this mandatory day-ahead market where they’re saying that every generator must say what they’re going to be able to generate a day before including renewables. And correct me if I’m wrong Vittoria, but I don’t think there’s another market out there that has this mandatory component to the day-ahead market, and there’s a lot of concerns for renewables.
Peter Tertzakian:
So let’s clarify that again. Today’s Monday, as a generator, I have to say what I’m going to generate tomorrow?
Vittoria Bellissimo:
Yes, that’s correct.
Jackie Forrest:
And great if you’re a natural gas generator, that’s a bit easier to do. But how do you know exactly if the wind will show up and be the duration and the volume of wind that you expect?
Peter Tertzakian:
What if I get it wrong, is there a penalty?
Vittoria Bellissimo:
Okay, so that’s a very good question. Why don’t we just break down some of the major components of what this restructured energy market looks like and then I’ll tell you what I think is terrible, but I do want to set the scene by considering this. Projects that have built in Alberta to date have been financed under the current market and the current transmission framework. Major changes that add risk and add costs and do not provide additional value for that are very problematic for existing projects. So we don’t want to see existing capital burn to the ground. It’s not a good message from Alberta because it will not be limited to the electricity sector. Alberta needs to attract capital in all sectors of the economy, and we need to honor our commitments in order to do so. Let me tell you a little bit about the restructured energy market and then we can go from there.
The overall objectives of this REM are reliability, affordability, reasonable implementation, and de carbonization. Discussions are ongoing, but it does include a day ahead market. So that means that you have to put in bids and offers a day in advance of real time to try to provide more certainty to the system operator on what assets will in fact be on the system. It includes changes to the price cap and price floor. So right now, as I said, we run 0 to 999.99, but going forward, they’re going to lower the energy price cap to a lower level, drop the floor to negative pricing, but actually raise overall price cap, not the offer cap, but the price cap to $3,000 to try to ensure that when we hit scarcity conditions and everyone is out of power, when we’re out of power, our neighbors are out of power, we can still attract power at the top.
We’re not scaring the few megawatts that there are in the system away. There’s also new market power mitigation, and that is basically calculations to ensure that no one can run the market and that there’s sufficient competition and when generators have earned well enough money, there’s a limit to that. And then there’s major changes to market clearing and congestion and congestion is a really, really big issue in Alberta because right now we have a zero congestion system, which means, and you can think about this like traffic. It means right now we have decided we will build roads where all the cars can get where they’re going and no one has to sit in traffic and no one is denied from getting where they’re going. But we’re looking at changing to an optimal transmission policy, which means that we won’t be building roads for everybody. And all those megawatt hours that we promised we’d get to market, we’re not doing it anymore. And I have a lot more I could tell you about this, but at a high level, the Market Surveillance Administrator reports on this and we’re not really offering zero congestion right now.
Jackie Forrest:
Yeah. In fact, this summer some of the solar projects were being curtailed like 30% because there wasn’t enough roads for them to get the electrons on, and yet they set up their contracts thinking that they would never have this issue.
Peter Tertzakian:
So from CanREA’s perspective is congestion, that issue you just highlighted, the biggest issue?
Vittoria Bellissimo:
Congestion and the issues around resolving it or compensating for it are the biggest issues in this market.
Peter Tertzakian:
Okay. So Jackie, you take the position of the natural gas generators, the non-CanREA, what would you say?
Jackie Forrest:
Well, when it comes to congestion, I think that is a problem for them too. Maybe not as bad today, but in the future, you could have a power plant somewhere and someone just builds beside you and suddenly now the road isn’t big enough for both of you and suddenly you’re generating 30% less power. So I think that’s a concern across the province. It’s worse for renewables today, but I think it’s a problem for everyone.
Peter Tertzakian:
Okay.
Vittoria Bellissimo:
I would agree with Jackie there.
Peter Tertzakian:
Yeah. Okay. So let’s just say we got the ISO, this market redesign, so that it’s optimized that, okay, you’re not going to please everyone, but you please most of the generators and the consumers and the transmission people. Let’s just say we got, overlying all that and looming is this clean electricity regulation from the federal government. So what does that do to everything?
Vittoria Bellissimo:
Honestly, it doesn’t do much right now. I think the way that the REM is being designed, it creates some additional uncertainty. But the REM is essentially imagining a world where there is no clean electricity regulation. So we’ll see what happens, but the way it’s being designed right now, it’s not really impacting the discussions.
Jackie Forrest:
I think what it ultimately would do, Peter though, is it would require natural gas generators to put carbon capture storage on. So all things the same, it would just mean that Albertans pay higher power prices because that incremental power from base load natural gas has got to be more expensive once you put carbon capture storage on it.
Peter Tertzakian:
But as you know, natural gas generators are not up to the CCS because of all sorts of, basically, cost issues that relate to the physics of trying to separate a flue gas that is very dilute of CO₂, right? And it’s a real problem. So basically that means that we’re not going to build a lot more natural gas, which is what the natural gas generators would say.
Jackie Forrest:
Well, I guess if it goes into law, you’re going to be forced into it. You have to absorb that cost, which means that you have to get a higher power price to compensate you. I think the issue today is there’s uncertainty. Is it going to be required or not? And no one’s going to invest in it if it’s not, but it’s basically saying there’s a legislative requirement. In a world where that’s in place, I think they would make the investments and it would mean that it’s more expensive when we’re running natural gas. I don’t know if Vittoria if… Yeah.
Vittoria Bellissimo:
I mean the way the CER was negotiated, there are also a whole bunch of benefits that can accrue to a jurisdiction that implements the federal government’s policy. So it’s carrots and sticks. I think as Alberta, we should take all the carrots we can get our hands on.
Peter Tertzakian:
It’s just that the…
Jackie Forrest:
What were the carrots though that they would help fund some of that, right?
Vittoria Bellissimo:
Yeah.
Peter Tertzakian:
Well, carrots and sticks creates a lot of polarization because the people who are on the wrong end of the stick would argue somewhat differently, but it’s very complicated. So let’s leave that aside. I think we would be remiss if we did not talk about AI data centers here in Alberta because there’s a lot of buzz and talk. And again, in my opinion, fantastical numbers that make me suspicious of fantastical numbers. What’s going on with data centers here and is it even realistic to build any, given the market redesign chaos that’s being described and then on top of that, the CER and so on.
Vittoria Bellissimo:
Alberta has about 6.3 gigawatts of data centers in the load connection queue interested in connecting to our power system. There are pros and cons. I think one of the real pros that people need to talk about more are we have really high transmission costs in Alberta in the neighborhood of $40 a megawatt hour. If you were to add a gigawatt of data centers to that, that would actually reduce the transmission costs for all customers by $5 a megawatt hour. If you added two gigawatts, that would reduce the transmission costs to all customers by $9 a megawatt hour and that’s an aspect of the market that people don’t talk about as much as they should.
Data centers are really interesting. They are not what everyone thinks they are. They require an enormous amount of redundancy. So you’ll have backup generation on site. Batteries, often 15 minute batteries to make sure that if there’s a problem on the grid, you can shift to your backup generation seamlessly. And then they have grid power. So it’s a different level of reliability from your average customer. It’s five-nines of reliability. It’s redundancy all throughout the system, and it’s a lot of electricity. If we did get that 6 plus gigawatts on a 12 and a half gigawatt system.
Peter Tertzakian:
Yeah, well, some jurisdictions are saying to the data center developers, “Sorry. No, can do. You can’t plug into the grid.” So then that’s…
Vittoria Bellissimo:
Lots of jurisdictions are.
Peter Tertzakian:
So that’s forcing the data centers to go to distributed power generation. In other words, their own power generators.
Jackie Forrest:
And Alberta is promoting that as well here too. If you want to be here and come very quickly, then that’s what they’re saying you should do.
Vittoria Bellissimo:
Yeah, they’re calling it bring your own generation, right? And a very valid tactic, I think we just need to be very considerate in how we plan this. If we have to spend a lot of money to connect these new data centers, that could be problematic. But if we can get them to locate in areas where the grid has ample capabilities and we can get them to build bigger batteries than they need, so that can add reliability to the grid. There’s some real opportunities and innovation that we just need to consider thoughtfully.
Peter Tertzakian:
I just have to say I sense some sort of disconnects. On one hand, we get into the summer months or actually even in the winter with the extremes of both seasons and people talk about potential brownouts and so on and so forth and here we are talking about plugging more into the grid to bring down costs. I don’t get it.
Vittoria Bellissimo:
I think some of the things we’re talking about are inconsistent. We’re talking about major changes to the power market and major changes to transmission policy at a time when the load has never looked like it would grow more. What we need to be doing is sending the right price signals and ensuring that everyone carries their fair freight on transmission costs.
Peter Tertzakian:
I like that. I like that. The age of inconsistency, that’s what I’m going to call it. The age… Is because there’s just so much inconsistency in the numbers in many dimensions.
Jackie Forrest:
Like we’re pulling back on one thing saying, “Oh wait, reliability is an issue, but let’s get more demand.”
Vittoria Bellissimo:
But also we’ve said we never needed more electricity than we do right now, and we’re doing it in a way that is being overly punitive to the technologies that can build the fastest and provide the most cost-effective electricity on our system.
Jackie Forrest:
Well, yeah and our renewables investments gone from 4 billion a year annually, I think in, was that 2023? To very little. I would expect next year in terms of amount of people spending money on renewable projects here.
Vittoria Bellissimo:
I think the rate of growth has certainly dropped off and I am very concerned with existing assets. I think we’ve been describing it as death by a thousand cuts, but there are changes that are being made that will add punitive costs and punitive risks to existing assets without giving them any opportunity to generate additional revenue. And we’ve got other things hanging in the balance. So the government has said that ancillary services will be charged to generators differently. We don’t know what constitutes an ancillary service anymore. Are these new capacity products that are in the day ahead market, are they going to be considered ancillary services? Are we going to charge them to only certain types of generators? That doesn’t happen anywhere else in the world. Why would we suddenly decide that we’re going to be the overly punitive jurisdiction at the same time when we’re trying to attract all these new data centers and all this new electricity? It is inconsistent and it’s problematic for invested capital in Alberta.
Jackie Forrest:
And I want to add one other thing. We talked about transmission’s cost being high here, and every time I bring up transmission, I hear from our listeners about how high they are here. But there is an idea that today in Alberta, the consumer pays for transmission. You see it on your bill Peter, and so do any industrial users, but that’s going to shift that the generators have to start paying. And so a concern is you built your project thinking that transmission wasn’t something you had to pay for. You did all your economics based on that, and now suddenly, you’re going to be paying maybe all transmission partial, we don’t know. But it is really material in terms of the returns on your investment.
Vittoria Bellissimo:
And it is supposed to be forward-looking, right? So right now when Alberta, Alberta consumers pay for transmission, I was an Alberta consumer representative in my past life. So I spent 14 years in regulatory proceedings trying to save customers money on their transmission costs and they are too high. But I would point out that customers really care about the delivered cost of electricity. So that’s transmission plus distribution plus generation plus local access fees all in. And what we should be doing is thinking about how we get the most value for our transmission. If we’re concerned about transmission costs exclusively, we might miss out on opportunities to build transmission that would deploy more low cost renewable generation and ultimately save customers money in the long run. So we need to be a lot more thoughtful about those costs.
Peter Tertzakian:
Yeah, I think so. It’s just a lot more thoughtful about everything from a holistic perspective. I mean, we’re trying to coordinate power lines, different kinds of generation markets, consumers growing demand, different types of demand. Some require nine-nines of reliability, others like your electric vehicle and your dryer don’t. And so I come to a comment that I had from someone who was behind the scenes and in the know of what was going on with electricity markets and the comment to me at a dinner party was, “As a consumer, go buy a backup generator.” In other words, I’m concerned about us as individual consumers here going forward because it’s somewhat chaotic behind the light switch.
So everything that goes on behind the light switch, I don’t know. I mean, I think what we can conclude from this conversation, and thanks so much for joining us, that it is extremely complicated. It is a time of huge changes in terms of the composition of demand, the composition of supply, and everything that connects supply and demand in between. And we’ll just continue to monitor this and see where it goes. But for your type of supply renewables, it’s very exciting. I mean, the low-cost, fast adoption, and it’s just how it all fits into the big picture remains to be seen.
Jackie Forrest:
Well, I think it’s exciting here in the country, maybe not so much in Alberta.
Vittoria Bellissimo:
Yeah, I mean I think it’s parts of it are exciting in Alberta still. The behind-the-meter scene certainly is. I mean in response to your dinner party friend, I think the Alberta grid is very reliable. I live in Calgary and Max provides me with very reliable distribution service. The market itself is very reliable. But that being said, I will end on a shameless plug if I’m allowed to do so.
Peter Tertzakian:
Sure. That’s your compensation for being on the podcast.
Vittoria Bellissimo:
CanREA has a Go Solar guide, and you should check it out if you want to put solar on your roof. And we’re looking at expanding to include energy storage. So if that’s what you want to do, we’ve got you covered. Calgary, I looked it up, has 333 days of sunshine a year. It’s Canada’s sunniest major city. So check out our website, learn how to.
Peter Tertzakian:
It’s windy too.
Vittoria Bellissimo:
It’s sunny and windy. You’ve got some of the best solar and wind regimes in all of North America. These are our resources. These are Alberta resources, and we should be turning them into success and rate payer value. And I think we can do that.
Jackie Forrest:
We will put a link to that in the show notes to the Go Solar guide. Both Peter and I have solar, but Peter was smart enough to put the batteries. I questioned how smart he was because there wasn’t really much of a return on investment for batteries here for the consumer.
Peter Tertzakian:
It’s return on security. Well, anyway, a fascinating discussion as always, Vittoria. Vittoria, Bellissimo, CEO of CanREA, Canadian Renewable Energy Association. Thanks for joining us and I’m sure we’ll have you back.
Vittoria Bellissimo:
Thank you. Happy to be here.
Jackie Forrest:
Thank you. I hope we have you back when we talk about how things have improved. But for now, we want to thank our listeners for joining the podcast. If you like this podcast, please rate us on the app that you listen to and tell someone else about us.
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