Electricity Demand, AI, and Market Reform: A Conversation with John Kousinioris, President and CEO TransAlta
This week, our guest is John Kousinioris, President and CEO of TransAlta, one of Canada’s largest power generators. TransAlta owns, operates, and develops a diverse fleet of electrical power generation assets in Canada, the US, and Western Australia, producing electricity from renewable sources and thermal generation.
Here are some of the questions Jackie and Peter asked John: What are the reasons behind TransAlta’s merger with TransAlta Renewables? What are your expectations for electricity load growth in North America, and how will AI data centers impact demand? Does TransAlta have plans for new investments to meet data center demand? Are there risks to electric system reliability due to fast data center growth? Are there supply chain bottlenecks for new generation projects, and do tariffs compound the issue? What are your perspectives on Alberta’s plan to redesign its electricity market? Do you see merit in building an east-west electricity grid in Canada?
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Episode 282 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:
I’m Peter Tertzakian. Welcome back. Well, we have to timestamp again this podcast. It is April 28th, 11:45 AM Mountain. It is election day, so we don’t know obviously the results. It’s a very exciting and consequential day and we will talk about the election next time, when we convene, Jackie and I, we’ll run through it. You’re going to find out before we finish this podcast, right?
Jackie Forrest:
Right. By the time you hear this, the results will probably be out because we’ll release this on Tuesday. We will be talking about it once the dust has settled next Tuesday podcast.
But today, I wanted to talk a bit about the power markets and there’s a few updates. Remember when we had Duane Reid-Carlson on the podcast, Peter, on March 25th? We explained the negative feedback from stakeholders on Alberta’s proposed changes to the electricity market. There was some real concerns there.
Peter Tertzakian:
Yeah.
Jackie Forrest:
I have some good news to report. As far as I know, the AESO has announced they are going to make some changes to the design. They’re going to push the back date back a little bit, in terms of when they’re going to finalize it. However, they are still planning to bypass the Alberta Utilities Commission in reviewing the design. But still, positive that there have been some changes proposed.
Also, one other piece of news that’s related. On April 10th, Bill 52, Energy and Utilities Statues Amendment Act. This bill allows the AESO to make changes directly to the electricity markets without a regulator.
Peter Tertzakian:
Okay. Well, we can talk more about that. In fact, we can talk more about electrical power. Why don’t we? I’m delighted to introduce our guest, who is none other than the President and CEO of TransAlta. John Kousinioris, President and CEO.
Welcome, John.
John Kousinioris:
Thanks so much, Peter and Jackie, for having me.
Jackie Forrest:
Yeah. Lots to talk about in power markets across Canada and the US. But first, let’s start about TransAlta. I think almost every Albertan knows your brand name, it’s on a lot of things in this province. Just tell us a bit about the company. I just noticed you’re over 100-years-old, so that’s unusual.
John Kousinioris:
We are. I’ll apologize a little bit in advance here for my voice, I’ve been struggling a little bit with it.
Our story is a company is really largely the story of the province in terms of development. We began with our Horseshoe facility, which is a hydroelectric facility on The Bow just west of the city of Calgary in 1911. Actually, before the Stampede began, we just beat the Stampede in terms of timing. We’re a 114-year-old company, began initially as Calgary Power. Over the years, have diversified into all different types of generation and have grown as the province of Alberta has grown.
Our evolution, especially over the last 20 years or so, has been pretty significant. I would say, Jackie, not just in terms of the change in generation mix that we have, but also in terms of our environmental footprint. I often reflect and it’s amazing, if you go back to 2005, 2010, our company was probably responsible for about 5% of Canadian emissions, CO2 emissions in aggregate. A pretty significant footprint. Roll forward to us today for a bunch of reasons, largely due to the evolution of coal generation towards gas, that footprint is down about 70% from what it used to be. We often muse about this, but our company’s actually contributed about 10% of Canada’s Paris commitments, in terms of a decarbonization target. That’s been interesting to do while ensuring that we’re contributing to affordability and reliability of power in the province. It’s a great history.
When I think back to the early foundations of the company, people like R. B. Bennett, and Lord Beaverbrook, and even A. E. Cross, names that I think if you’re a history buff, especially somebody that knows this part of the world, are pretty big names. Characters and individuals that were really foundational to where we are today. It’s really, really great.
Peter Tertzakian:
Yeah. Well, Jackie, when you first said 100-years-old, I thought you meant John was 100-years-old.
John Kousinioris:
That’s how I feel. That’s how I feel.
Peter Tertzakian:
But, no, it’s an amazing history.
Why don’t we just rewind back to 2013? When TransAlta had originally spun out the renewables business, but in 2023, you reacquired it. Why did you decide to reverse the decision to bring in the renewables into the power business, into your power business?
John Kousinioris:
Yeah, I actually joined the company in December 2012, so it was actually the first major thing that I worked on, Peter, in 2013. At the time, TransAlta had a number of contracted assets. It wasn’t just renewables. People often forget about TransAlta Renewables was probably about 40 to 45 percent natural gas fire generation, but it was contracted generation. These were assets, they were probably somewhere in the range of just under 30% of the EBITDA let’s say of the company, highly valuable, highly reliable. We had very predictable cashflows.
The parent company heavily into coal fire generation. We just commissioned a coal plant in 2011 expected it to run well into the 2060s. Probably carrying a bit more debt at the time, a higher dividend. It was a way to actually try to surface value on assets that were hidden. And also, to set the stage to de-lever essentially the parent company.
Peter, to your point, roll forward 10 years and a lot of those things were actually done. We were essentially well on the way to … Well, we had actually stopped essentially coal fire generation in Canada. In terms of growth, the strategies of the two companies had begun to converge. We were looking at renewables and gas for both the parent company and for TransAlta Renewables. The parent company had de-levered pretty significantly. We had readjusted our dividend rate. You actually had a complexity in our capital structure with converging strategies with a yield co that had a growth imperative, but also a high payout ratio in terms of what its dividend was.
Given the scale and size of the company, it made sense to put the two together and just simplify who we were. And essentially bring the family back together again, which is what we did at that point in time.
Peter Tertzakian:
Yeah, because also, you got brand confusion and all those sorts of things under the same corporate name.
John Kousinioris:
We did. For a company of our scale and size, I would say, Peter, it made us more complex for people in the capital markets to actually assess. It’s one thing if you’re a $50 billion market cap company, people will do the work. But if you’re not that, it’s just harder, just being honest about it. Simplicity I think had value.
Jackie Forrest:
Greater market cap. Now your footprint is beyond Alberta. Maybe for those that don’t know, tell us a little bit about where you have generation assets and other types of businesses.
John Kousinioris:
It is. We’ve got 88 facilities and they’re scattered in three different countries. Canada, the United States, and Australia. In Canada, we’re in Alberta, British Columbia, Ontario, Quebec, New Brunswick. In the US, Washington State, Wyoming, Michigan, Pennsylvania, I’m just giving you a flavor, New Hampshire, Massachusetts, North Carolina, Minnesota. Then in Australia, we’re in Western Australia where we’ve been operating for I think it’s approaching 25 years now in that jurisdiction.
Quite a mix of generation, I would say. We have hydro, gas fired generation, wind and solar generation, so quite a mix of facilities. About 35 wind facilities, 25 or so hydro facilities, and the balance would be natural gas fired generation scattered in the country. Quite a bit of diversity.
Jackie Forrest:
Like you said, you have 88 generation facilities. How big is Alberta in part of that? Is it still the majority?
John Kousinioris:
Alberta is, in terms of the installed capacity, around 58%, so just under 60% of the total installed capacity. And about 70% of that would be merchants. Our contracted business is largely outside of Alberta. Our more merchant-exposed business would be in the province of Alberta. Rather than looking at the actual megawatts, we tend to think in terms of where does our EBITDA come from. Alberta would be just less than half of the EBITDA of the company. Then the rest of the world, if I can use that expression even though it’s Canada, would be the rest. It’s probably that rest of the world, if I can call it, that’s actually growing more rapidly than certainly the intra-Alberta businesses.
Jackie Forrest:
Right. We’ll talk a bit about Alberta as well.
Peter Tertzakian:
All the buzz last year was about AI, and data centers, and the growth. That was only displaced by tariff chaos, which we’re still somewhat experiencing. But the AI story certainly hasn’t gone away. Jackie and I on the podcast talk extensively about the fantastical numbers behind the electricity load growth in data centers. Three, four months have gone by since the whole Trump election and the tariff chaos, as I call it. Where are we at in terms of the whole data load growth expectations, both here in Canada and in the United States, and more broadly?
John Kousinioris:
It’s a super fascinating question, Peter. Look, I’ll digress for 10 seconds. What a lot of people don’t realize is if you go back about 20 years ago, we were actually, because of efficiency and whatnot, actually seeing load per capita, or the amount of consumption that people were using on an individualized basis actually decline over time, only to see that level up. And now, move into a place where you’re seeing higher growth.
I would say traditionally, certainly in the Canadian context and in Alberta for example, one, one-and-a-half percent a year growth wouldn’t have been a bad number in terms of a longterm average. What we’re thinking of now … Look, we do a lot of fundamental forecasting internally in our company. It’s up quite a bit, so we’re thinking two, three now, and that excludes data centers. Just in terms of efficiency measures, general economic growth, population growth, and depending on the jurisdiction you can see that nudge to four. In fact, I think load growth last year, so 2024 globally, was 4.4%. A pretty big number. That wasn’t a North American number, but it’s a pretty big number to deal with.
Then that would be excluding data centers. If we put data centers into the mix … And I agree with you, Peter, there’s been a lot of fantastical, I think is the only way to describe it, numbers that you hear from people. You could see anywhere, if you look at forecasting and let’s just take them at face value, you could see data centers going from effectively a very small component of load today to something in the 10 to 15 percent rage by 2030 timeframes if people are correct. That would be not just in Canada, but in the United States.
Just to give you context of what that means. We’ve seen forecasts of load growth for data centers alone anywhere between 40 gigawatts to 100 gigawatts by a 2029, 2030 timeframe. Imagine building 50 to 100 large-scale nuclear facilities. Think of a gigawatt as a really large nuke. I don’t know how you do it. We can talk about the supply chain too during the call, because I’m just being a realist, I’m not sure how you do that. But even if you cut it in half or cut it by two-thirds, it’s still a huge number and a number that is going to take a lot of work. Both from industry, customers, and frankly regulators to be able to meet the need for it. It’s that grim.
Peter Tertzakian:
Yeah. If we say a nuke is, okay, a gigawatt.
John Kousinioris:
Call it a gig. Call it a gig.
Peter Tertzakian:
If you need 100 gigawatts, it’s 100 nuclear plants. The average natural gas fired power plant is typically, what, a third of a gig, right?
John Kousinioris:
Sure.
Peter Tertzakian:
It’s 3, 400 megawatts?
John Kousinioris:
Call it 400 megawatts, just to make it simple.
Peter Tertzakian:
The equivalent number would be then 300 equivalent natural gas fired power plants, which is just huge.
John Kousinioris:
Let alone setting up the wires to move the power around effectively from the way that you need it done. It’s easy to put out the numbers, you know what I mean, Peter?
Peter Tertzakian:
Yeah.
John Kousinioris:
When you break it down to what it actually means, it’s staggering.
Jackie Forrest:
Yeah. Well, here, just for example, in Alberta there’s something like 12 gigawatts of projects in the AESO load queue, which is the equivalent of our average consumption for the year if they were all running.
John Kousinioris:
It’s peak, actually.
Jackie Forrest:
Yeah, peak.
John Kousinioris:
That’s peak.
Jackie Forrest:
Yeah.
John Kousinioris:
Yeah.
Jackie Forrest:
I know that’s not all true. Now I know TransAlta has some projects as well in that.
John Kousinioris:
We do.
Jackie Forrest:
Maybe you could talk a bit about those. But also, as an Albertan, we’ll get into the Alberta power market, I’m getting concerned about are the right incentives going to be there with this new design for people to invest. Meanwhile, we have maybe some of this generation being moved over to serving data centers. What does that mean for the reliability of power in the province?
John Kousinioris:
Yeah, we could probably spend I think probably three hours on this one alone. I’m going to try to break it down. Look, we can just chat it through.
It is a tremendous opportunity for companies like ours and the province, we’re focused on our Keephills facility in particular as being a center where we would have data centers come in. When you think of natural gas, speed to power is critically important. There’s existing infrastructure in Alberta that is under-utilized now, and that includes a number of our facilities that maybe 10 years ago would have been running call it 80% of the time, and now we’re running call it 30% of the time. The ability to repurpose some of that to meet incremental load that comes in I think is probably a first place that we should be looking at when you think about reliability going forward.
But Alberta’s blessed with good temperatures, a good workforce. We’re long power right now, generally speaking. We’re blessed with plentiful natural gas supplies that are, from a North American perspective, very well priced. And we have a government that is supportive, generally speaking, of moving it forward. There’s a lot of work that’s being done. I know sometimes there’s some patience with our investors of, “Why can’t you do it in a week or so?” It does take a lot of time to get it done. But I would say the broader environment in the province of Alberta is a very good prospective one for data centers, when you think of it going forward.
But we do need to do it thoughtfully. 12 gigawatts, I don’t know how we do it. Peter, just going back to the conversations we were having on the build required, not sure how you do that. I’m not sure it’s all real, candidly, because it doesn’t take much to put an application and get in the queue. I think they’ll come. Then I think there is an amount that I think you can bring in using existing generation that maintains reliability of the system. The AESO is doing that work now, we’re looking for them to confirm that next month actually, in May.
Our view is it’s probably some number less than two gigawatts that you can bring in and manage. Think of it as one-and-a-half to two, given transmission and reliability constraints. Then thereafter, you’re going to need to be thoughtful about overall reliability on the system. To get the kind of reliability that a lot of these data centers are going to need, I think they will be looking to grid interconnection, so you’ll have generation that will be onsite to supply them that tier four 99.999 that some of them may need. Having the ability to backstop 5%, 10%, whatever your needs are, off the grid is important, so being thoughtful about that. Being thoughtful about what it means to pricing in the province, and reliability is going to take a little bit of work for sure.
Peter Tertzakian:
Right. Just to elaborate on that, a lot of these data centers are proposing to have a dedicated, say natural gas fired power plant.
John Kousinioris:
Right.
Peter Tertzakian:
That is not connected to the big transmission lines, in other words the grid. But that your power from TransAlta would be fed into these data centers as backup and at times, to provide that 99.999% reliability that they need over and above their dedicated power plant.
John Kousinioris:
That is right. When I think of our proposal and the way we’re thinking of it, Peter, our facility would be able to go both ways. We’d be able to supply chain the data center, and if for whatever reason there was excess, our ability to excess generate power beyond their needs, we could put it onto the grid to supply things that way. But I think you’ve described it very well.
Jackie Forrest:
Okay. Another constraint to this whole thing will be at some point, not just here in Alberta, in every jurisdiction, you’re going to need some new generation to serve all of this load.
John Kousinioris:
You will.
Jackie Forrest:
We understand that it’s very hard to get natural gas generation equipment because there’s long lead times and they’re sold out. On top of that, I think tariffs are probably complicating the whole situation. If you import equipment from China, it got a lot more expensive. If you’re in Canada and you’re bringing in some goods from the US, they suddenly have tariffs potentially on them. How are tariffs impacting that? The situation was bad before, but are tariffs making it worse?
John Kousinioris:
On the tariff piece, I think there’s really two pieces there. We actually do export power into the US, so there was initially a concern about tariffs just impacting power flows between the two countries. That doesn’t appear to be a major issue, it being more of a service than an item, a good. Right now, I think that’s less of an issue.
Your point on the supply chain is exactly right. If we’re building a wind farm, I just think of the wind farms that we just built in Oklahoma for example, we had components that were coming into the US there that were made in the US, in Mexico, in Belgium, in Denmark. In the past, having blades coming from China or other parts of Europe weren’t uncommon. Gas fire generation, we would be typically, for example GE, looking at US supply for that. Steel can come from both sides of the border. We do get a lot steel here, produced here in Canada. But then, there’s breakers, and transformers, and fuses, all of those kinds of things.
There is a lot of uncertainty right now. It makes it very hard to plan. It makes it very, very hard to price. I would say it’s compounding a tight supply chain to begin with. I’ll give you a sense of what that looks like. You used to be able to get a transformer, say in 50 weeks. You may now need 120.
Jackie Forrest:
Wow.
John Kousinioris:
The price of the transformer has gone up 60 to 80 percent. If you need a high voltage transformer, you won’t get it in 120, you may need 200 to get it. It could take four years for you to get the transformer, a 500 kV. Copper prices are up. Electrical steel prices are up pretty dramatically. You used to be able to reserve your slot from a manufacturing perspective, including for turbines. Hard to do that now. They want firm commitments, you’re going to have to actually make a financial commitment. You may need to prepay 30% of the price of that today to make sure that you’ll be able to get the hardware that you need, call ti two to four years from now, to be able to get something done. Then you add to that the vagaries from a tariff perspective, it’s hard. It is super hard.
Peter, going back to the discussion on data centers, imagine building out those kind of … Very difficult to do. It’s just a practical matter.
Peter Tertzakian:
Yeah.
John Kousinioris:
Very, very challenging to do today because everything is elongated. It’s hard for the supply chain to respond.
Peter Tertzakian:
Yeah.
John Kousinioris:
Just being straight up about it.
Peter Tertzakian:
Yeah. Even steel prices for transmission towers, and all that stuff.
John Kousinioris:
All of it is up. If I go back five years ago, we would often talk about a million-and-a-half dollars a megawatt, rough price, Canadian. It didn’t matter what the generation type was. Honestly, whether it was solar, or gas, or wind, broadly the same. 100 megawatts would cost you call it 150 million. It wouldn’t surprise me if that’s 300 million today. That one-and-a-half in a relatively short period of time has gone to three million a meg. Depending on what you’re doing, it can easily nudge up well beyond that. We’ve seen some projects being proposed that are more in the four range.
The power prices you need to basically justify a return of a non-capital and justify doing that project, they’re higher. It’s harder to get that.
Peter Tertzakian:
Yeah, yeah.
John Kousinioris:
I’m not even talking about transmit. I just wanted to give you a flavor of what that … Now, they might come down as we get through this supply chain issue that we’ve got. But if you assume the load growing the way that we’re talking about it growing, I think we’re in this for quite some time in terms of tightness.
Jackie Forrest:
Well, you talked about you have to make decisions early, but with all these tariffs-
John Kousinioris:
Hard to do.
Jackie Forrest:
… that may or may not be there, how can you make decisions?
John Kousinioris:
Very difficult to do.
Jackie Forrest:
Because you’re like, “Maybe I wait six months and there isn’t a tariff.” It puts everything on hold, doesn’t it? Yeah.
John Kousinioris:
It’s hard for our customers too, because they’re trying to figure out what they’re pricing is going to be as well. It’s challenging, no question.
Peter Tertzakian:
Yeah, I think there’s going to be a data center reality check coming here at some point. Because these things compete with the ability of people to turn the lights on, or turn the stove on, or the hairdryer, or whatever. Having even talked about electric cars, because they’re still growing in the background.
John Kousinioris:
They are.
Peter Tertzakian:
There’s just a sense of unrealism.
Let’s migrate to Canada here, or bring it home to Canada, and talk specifically about the opportunities here. What are you seeing in the different provinces and what’s underway? There’s some nuclear in Ontario.
John Kousinioris:
Yeah.
Peter Tertzakian:
There’s renewables in Quebec here or there.
John Kousinioris:
Yeah.
Peter Tertzakian:
What’s going on?
John Kousinioris:
It’s interesting. When you look at Canada, you can go west to east. You look at BC, they’re going to be short power. You look at Saskatchewan, they’re going to be short. Manitoba’s going to be short. Ontario’s short. Quebec’s going to be short. Look, you look at Manitoba and even Ontario and Quebec, BC, jurisdictions, Crown corps generally, or significant Crown corps in the markets, with a lot of hydro, just blessed with all these great resources. There is a sense that some of their needs from a supply perspective are going to be and are being met by calls for power, contracted, arrangements through RFPs and whatnot going forward. We are seeing growth across the country in pockets and in areas where traditionally the Crown corporation would have done it by itself just given with the capital requirements are. There are opportunities.
We are both jurisdictionally I would say and technologically agnostic. What we care about is returns. How competitive are processes? We actually don’t have a lot of contractual arrangements with government entities. Most of our customers, it’s either the wholesale market or it’s really industry. Commercial and industrial players that we serve, so it’s a little bit different. Our team looks at these opportunities and we consider whether it makes sense for us to participate in them or not. But I don’t see us right now, just meaning for our company, focused a lot on meeting the Canadian RFPs that we’re seeing. We’re more focused on the Western US and some of the opportunities that we’re seeing in Western Australia. In part because our near-term growth opportunities which were in Alberta, we’ve paused because some of the uncertainty around the market redesign. It’s just very hard to be building in this market right now, pending a bit more clarity in terms of how things are going to go.
We are focused a little bit more outside of our borders. Look, the US is a huge market. The opportunity set is significant, and candidly significantly bigger than ours as a country. There are opportunities for sure and I think we’re going to see more of them over time as things get tighter.
Jackie Forrest:
I want to come back to your thoughts on Alberta.
John Kousinioris:
Sure.
Jackie Forrest:
But just before we leave this Crown corp procurements, because they seem like they’re risk-free in that they’re backed by the government versus a corporation, but they’re quite competitive. I know a lot of them have binding prices. When you look at the uncertainty right now, we just talked about it, what are the price of this equipment really going to be?
John Kousinioris:
Yeah.
Jackie Forrest:
Are there going to be tariffs on it?
John Kousinioris:
Yeah.
Jackie Forrest:
We’re going to I guess find out with the election, but there’s concerns around ITCs.
John Kousinioris:
Yeah.
Jackie Forrest:
Now, CBC did clarify on their platform, which by the day did come out after our podcast last week, that they will keep the ITCs. But there was uncertainty around carbon price, is it going to be in our out?
John Kousinioris:
Yeah.
Jackie Forrest:
You can win these bids and then find out-
John Kousinioris:
Coal and electricity regulations, all of it.
Jackie Forrest:
… all your assumptions are wrong, right?
John Kousinioris:
Yeah.
Jackie Forrest:
Yeah.
John Kousinioris:
In fact, we saw it when we saw wind procurement here in the province of Alberta. There was a number of parties that won, but they didn’t actually end up building the projects. They just bid them at prices that were unrealistic and you were unable to get them done. They’re challenging processes, for sure. There are supply chain risks. There’s timeline risks, too. A lot of them have relatively aggressive timeframes to get things done, and permitted, and actually constructed in what is a relatively turbulent environment. Look, they can be very good counterparties and I think you can do well with them, but eyes wide open, there can be challenges as well.
Going in and renegotiating a contract with a government entity if things have gone sideways, I suspect is harder than doing it with maybe a private sector. There’s actually been evidence of that, that it’s just hard.
Jackie Forrest:
Right, yeah. And more uncertainty than ever-
John Kousinioris:
For sure.
Jackie Forrest:
… in terms of these bidding processes.
John Kousinioris:
Yeah.
Peter Tertzakian:
Jackie, first of all, I want to issue you a warning from the jargon police here. ITC, that’s investment tax credit. And specifically, the investment tax credits for decarbonization, things like CCS, carbon capture and sequestration. Indeed, we have to see what the new federal government’s view is going to be on these ITCs because they’re highly consequential.
Jackie Forrest:
Yeah. Also, for clean generation. But it does actually look like the Conservatives are going to keep it, and of course the Liberals as well. I think that one’s a little less risky. Like John brought up, there’s other policies, too.
Peter Tertzakian:
Right.
Jackie Forrest:
Like the clean electricity reg. Yeah, it can affect your costs.
Peter Tertzakian:
I think it’ll depend upon what sort of budget is brought down. But anyway, that’s post-election talk.
Let’s bring it home to Alberta, John. Tell us what’s happening here, talk about the redesign changes the way transmission is charged, all that kind of stuff. Because we are the only deregulated province in the country, all of the other provinces have basically state-owned utilities, like BC Hydro, Ontario Hydro, Hydro Quebec, et cetera, et cetera.
John Kousinioris:
Sask Power, and the rest. Yeah, for sure. I would say our jurisdiction has gone through a remarkable transformation. We went from a period not very long ago, Peter, roll back eight years ago maybe, where we had think of it as 17,000 megawatts of installed capacity to deal with an 11,000 megawatt peaking load. Roll forward to today, it’s more like 25,000 megawatts of installed capacity to deal with a 12,000 megawatt load.
Effectively, because we were the only deregulated market in Canada, if for whatever reason, ESG obligations that companies establish … If you’re, pick a Canadian big bank and you wanted to notionally say, “I’m going to decarbonize my branch system in the province of Ontario,” you would procure to have your wind farm built in Alberta essentially to notionally power that load. Those electrons weren’t migrating to Ontario, by the way, there’s no way to get them there. The build happened here largely. We had a very vibrant … Look, we build wind farms, too. It was a very vibrant marketplace and a lot of things were built.
Now, the build out that occurred in the province had nothing to do with fundamental supply and demand within the province. It was this was the jurisdiction that you built things because it was pretty much the only jurisdiction where you could in a similar sort of way.
Roll forward to today. Look, I think the government is trying to … It’s not just our government, you see it all over the world. People are struggling with, “How do I balance affordability, reliability, and responsible decarbonization in a way that makes sense?” We often talk about a three-legged stool. If one of the legs is broken, the whole thing tips. You got to do it right. Over the last number of years, there was a lot of discussion around decarbonization, not a lot on reliability, and a bit on affordability. Reliability matters.
What’s been interesting is, as the intermittency from the renewable build out has occurred, our systems in many cases are becoming less reliable. It’s becoming more challenging to actually make sure that the lights stay on because, in any given hour, you might see multiple thousands of megawatts of change in supply and you need the system to respond to that. Today, I know I woke up this morning only to see that the grid was down in Spain and Portugal. I’m just like, “Oh my God.” These two countries have big blackouts, national blackouts, which is staggering to see what they’re dealing with.
I think the idea was let’s look at the system we have today and try to address a bunch of different issues. One of which was what is the impact that renewables are having on reliability in the marketplace? How are they, for lack of a better way of expressing it, displacing maybe natural gas fired generation? And making it hard to be economic going forward.
I think what compounds things is a sense that certainly in Alberta, but other jurisdictions are grappling with this. If you just have a spot price for your power, you expect everything to be paid out of that. For example, there is a ton of value in fast-start capability. There is a ton of value in being able to load follow. There’s a ton of value in ancillary services. There’s a ton of value in inertia. All of these constituent components have value. Not all generation can meet all of these things. Natural gas fired generation is particularly good at meeting all of these attributes. Look, we’re one of the country’s largest wind generators, wind is not. It just isn’t in terms of doing all of that. Yet, they’re all basically receiving the same price, if you see what I’m saying.
It is challenging. We’re at a $38 a megawatt I think is what our average price is so far Canadian in Alberta this year and that is challenging. That is not a price that certainly incents new generation in a province like ours. And is a price that at times will be challenging to keep gas in the market to ensure reliability. I think the government’s trying to address that. I think we tend to like simplicity in the province. A lot of the commentary was “it’s too complicated,” and whatnot. Fair enough. But we are going to have to address reliability and make sure that all of the various elements are getting paid appropriately.
One of the things we observe is, over time, the electrons are becoming less valuable and it’s all of the ancillary elements that keep the system working and the lights on that are becoming more valuable. The question becomes how do you ensure that value is recognized and compensated for to make sure that our system works? Not an easy thing to do and not an easy thing to do in a way that is simple. I can’t point to a single jurisdiction in the world, and we look at them. We look at everything from Ireland to Singapore, from Germany to PJM, from the CAISO to ISO New England, everywhere to see every jurisdiction has challenges and every jurisdiction has limitations in terms of doing what it needs to do. But they’re all fussing with the same kinds of issues.
Jackie Forrest:
Right. Well, it sounds like you’re optimistic. There needs to be change. But you did say that you’re not investing in Alberta right now.
John Kousinioris:
We’re not.
Jackie Forrest:
Yeah.
John Kousinioris:
We’re one of the companies that do think the market does need to evolve in an appropriate way. Whether what was on the table is the right thing or there are better ways to do it is a different discussion all together. I’m not sure a system that was developed 25 years ago … We at times were enamored with the status quo, but I’m not sure it was going to get us to where we needed to get to in the future.
For us, we had probably about 600, $650 million of growth projects, our latest stage growth projects, wind farm, peaking gas. We had a very large battery project tied to our hydro west of Calgary. We did put that all on pause in I think it was mid-2023 when some of the market redesign was done. It’s just too uncertain for us. I was going to say risky, but it’s not so much the risk. We need to understand the risk. Do you see what I’m saying? Landing the construct of the make redesign is important at least for our company to understand where will it actually settle.
Then at least for us, I want to see what is the fidelity of the pricing? Is it investible or not? Does it make sense for us to make the kind of investments that we need to make in the province, given the new construct? It’s hard to predict that today, we still have work to do. In fact, the AESO has pivoted a little bit from what it was proposing to do to something that’s a bit more streamlined. We had a large modeling team that was working on the design that was on the table. We’ve had to pivot now over the course of the last couple of weeks to reimagine what that looks like for our unit. It’s more getting an element of certainty, frankly,
Jackie Forrest:
Right.
John Kousinioris:
… in order for us to be confident on the investments. Remember-
Peter Tertzakian:
Yeah.
John Kousinioris:
… our capital competes with other jurisdictions, too. If there’s other jurisdictions that are more certain, it’s just easier to put it there.
Peter Tertzakian:
I just want to ask about, well, as an independent corporation, TransAlta, it’s all about competition, competition for capital, investability, listening to price signals. The price signal right now as you said is $3.80 a megawatt hour or 3.8 cents a kilowatt-hour, which is not really very much because in many jurisdictions it could be five times that easily.
John Kousinioris:
Yeah.
Peter Tertzakian:
We have very cheap power here. In fact, it’s so cheap, in the near-term there’s no incentive for TransAlta to build new power. Yet in the longer term view, you look at it, from our prior discussion you said you’ve got key components that take two to four years to procure, like gas turbines or transformers, and things like that. By the time you get to four years out and you go, “Oh my God, the price has gone up five times, we’ve got to build,” and you get the right price signals. Now you got to wait four more years potentially, because of all those data center stuff that’s still probably not going away.
This is one of the problems with the deregulated system compared to the state-owned, because the state-owned can think longterm. Whereas the deregulated has other benefits, in terms of innovation, and so on. But the price signals are not sometimes strong enough to invest, there’s other structural problems. I know I’m going on and on here, but I want to understand this problem because I guess at the end of the day, the grid redesign has to try and accommodate the fact that we are not state-owned, but has to overlay a structure such that it incents longterm thinking. Is that what we’re trying to do here?
John Kousinioris:
At least from a TransAlta perspective, my short answer would be that is what we should be trying to do, Peter, just to address your last point I think.
You’re exactly right. If I were to look at, let’s just use your 400 megawatt example for a gas plant, Peter. Let’s say I want to build that in the province if Alberta. I’ve got pricing right now that is call it $38 Canadian a megawatt hour, and our expectations are that data centers aside coming in and maybe tightening our supply and demand fundamentals, we’re in a protracted period of weaker pricing. That is, pick your number, $25 US. It’s probably a bit artificially that high because there’s a carbon price component to it as well.
If I need 50, 60, $70 US to $120 US in terms of a levelized cost of building something new, I can’t do it. Then you factor that in in a merchant market where I have instability, both in terms of regulatory intervention and how things evolve because I’m going to need 15 to 20 years to get my return of a non-capital on that investment. It is really hard to do.
Going back to that 400 megawatt power plant, let’s say it costs me $3 million a megawatt. I need 1.2 billion for the plant. Now I’ve got the clean electricity regulation, so I’m worried about carbon emissions and whether the plant’s going to be able to run in the late 2040s or the 2050s. Something we always muse about is we’ve been burned as a company. One of our lessons are you tend to think that the regulatory environment is static and it doesn’t, it changes on you over time. It could change either way, but even if it stays, carbon capture is two billion more on that maybe, maybe more.
For a company like ours given our size to make a, pick your number, call it a $3 billion investment with something that has contained carbon in a merchant market in a relatively small jurisdiction like Alberta in the grand scheme of things is hard. At least, from our company. Your capital is then competing against contracted opportunities in other jurisdictions, whether it’s in Western Australia or in the United States. It’s a challenge. It’s a real challenge, just being straight up about it.
Jackie Forrest:
You talked about the potential for regulation change.
John Kousinioris:
It has.
Jackie Forrest:
Am I wrong, that the change the Alberta government just made, that makes it even more of a risk for you because it’s easier for them to make change?
John Kousinioris:
I’m not sure. Look, we spent a billion-and-a-half dollars, it was TransAlta and Capital Power, to build Keephills 3, it was commissioned in 2011. That was the plant that we were expecting to run I think it was to 2063. That plant is no longer on coal. It’s on natural gas. Will it get to 2040? I’m just being straight up about it. We had a previous government that passed legislation that resulted in coal fire generation having to be shut down by 2030, for example. We have current market redesign and that’s all happened in the space of a decade basically, all of those kinds of changes. I’m not even including things like the clean electricity regulation, and carbon pricing that is being mandated from a federal government perspective.
It’s trite to say it, but I pray for certainty. Almost like leave the rules alone for a while, do you know what I mean?
Peter Tertzakian:
Yeah.
John Kousinioris:
Just so that I have a sense of what to do, but we’re buffeted I would say.
Peter Tertzakian:
I think the word is not certainty, I think the word is stability.
John Kousinioris:
Stability is a better word, you’re right.
Peter Tertzakian:
There’s always uncertainty, it’s just managing uncertainty.
John Kousinioris:
That’s right.
Peter Tertzakian:
But if there’s no stability, then you can’t even handicap uncertainty.
John Kousinioris:
What do you model, you know what I mean, Peter?
Peter Tertzakian:
Yeah.
John Kousinioris:
And is it real?
Peter Tertzakian:
Yeah.
John Kousinioris:
In terms of where we are. Add to that a supply chain that is super challenged.
Jackie Forrest:
Well, John, this has been a great conversation. We’re running out of time. We’ve got more to ask you, but one question that’s on my mind because it’s been a big discussion in the election is this idea of an east-the-west transmission line. We want to trade electricity across our country, just like every other good. We’d have all these inter-provincial barriers. What are your thoughts on the likelihood of that? Is that a good thing or a bad thing? Especially when you consider our make-up of, what are we, 12 different electricity jurisdictions.
John Kousinioris:
Look, I wish we were talking about building more pipelines, candidly, across the country more than transmission lines. It’s a laudable thought. I think it is hard to do. I’ll tell you why and you’ve touched on it.
How does Alberta trade with Saskatchewan for example, from a power perspective, when they don’t even have a price? I have a price. BC doesn’t have a price. Manitoba doesn’t really … They’ve got Crown corps and we don’t. The seams issues between the jurisdictions are not insignificant in terms of seeing it through. I think it does require an evolution in the markets to see it through. It works well in countries that have a unified construct, we don’t. Very hard to deal with that.
Secondly, I think it’s super expensive. Building transmission from, I don’t know, Quebec through the Canadian Shield, through are Prairies, over the Rockies, we’re talking billions of dollars. And we’re talking jurisdictions that are all largely expected to be short. It’s not like we’ve got a glut of power in one jurisdiction that you can move to deal with the issues of the other one. What happens if it’s really cold in BC and Alberta, Alberta needs the power, so does BC, is BC going to actually move the power to make sure that Alberta’s needs are met? I don’t know how you deal with those kinds of issues.
Given the cost, I think it might be cheaper to just deal with the power needs of each jurisdiction within the jurisdiction, if you see what I’m saying, rather than doing a big grid that goes across the country. Just from a cost perspective, we’re talking billions of dollars. Billions!
Peter Tertzakian:
Yeah. And match the energy source to the region.
John Kousinioris:
To the supply in the region, that’s critically important.
Peter Tertzakian:
Yeah. If you got a lot of hydro, hydro makes sense.
John Kousinioris:
Totally.
Peter Tertzakian:
If you got a lot of natural gas, natural gas makes sense. Just match what makes the most sense for each region.
John Kousinioris:
That’s one of the reasons we have, and I’m going to digress for just 30 seconds, the clean electricity regulation which we talked about a little bit obliquely. Its lens is a national lens. To just touch on what Peter said, you can’t do that. You got to look at in Alberta, without natural gas, we are in serious trouble literally.
I was in investor meetings in London probably about two-and-a-half years ago. I remember … Here I am, defending Alberta. “Why don’t you guys have more renewables?” Blah, blah, blah. It was minus-30 back home. Literally, I showed them actually the AESO page. I said, “We have thousands of megawatts of wind, hydro, solar.” We’re water-poor in Alberta. Let’s be honest, we own all the hydro basically in Alberta, but it’s not going to save the province. We had three megawatts of wind that day. If it’s minus-30, there’s no wind. If it’s minus-30 and it’s night, there is no solar. Same thing if it’s plus-35, there is no wind. If we didn’t have natural gas and it’s minus-30, what are we doing here in the province?
To Peter’s point, I think you need to look at each region’s natural advantages. And when we’re thinking of decarbonization, we can’t forget about reliability and affordability. Building 10,000 megawatts of nukes in Alberta, who’s going to build that? Who’s going to pay for that? We got to look at local advantage, frankly.
Jackie Forrest:
Well, the clean electricity reg though would let you put CCS on those natural gas plants.
John Kousinioris:
Who’s going to pay? The CCS, at least based on what we know today. First of all, I am not sure because I can’t point to a single circumstance in the world today where the kind of capture rate I would need to capture on the CCS is slam dunk. The cost of the CCS is more than the power plant.
Jackie Forrest:
It’s going to definitely increase the electricity price.
John Kousinioris:
Who’s going to pay for that?
Jackie Forrest:
Yeah.
John Kousinioris:
What does it mean about the competitiveness, which we don’t talk about enough in this country, about our industries? Especially when I know we’re having a little bit of turbulence in our marriage right now with the US. The US is critical to US and we need to make sure that when we power our industry, that it is competitive with what the circumstances are there. That’s just a personal view. If we’re pricing things, whether it’s through carbon policy or whatever the industrial needs are, we will be impacting our industry. I think we need to be very thoughtful and careful about what that means in the broader global context. I don’t think we talk about that enough.
Jackie Forrest:
Right. By our math, if you want CCS on a power plant, you’re talking about electrons that are twice as expensive, maybe more.
John Kousinioris:
At least.
Jackie Forrest:
If they don’t have that, then industry probably will go there.
John Kousinioris:
I will need a certainty of revenue stream, just going back to your earlier comment, Peter, to have the confidence to be able to make that investment to get that through. What’s the construct that lets me do that?
Peter Tertzakian:
Well, John, we’ve talked about so much. It’s fascinating. We talked about electricity demand trends, tariffs, equipment shortages. We talked about this country, provincial, regional issues. It’s just been a great conversation. We hope to have you back as these things develop. The only thing we didn’t talk about was politics, but Jackie and I will take it on next week after the federal election.
Once again, John Kousinioris, President and CEO of TransAlta, thanks so much for joining us.
John Kousinioris:
Jackie, Peter, thanks so much. It was a real pleasure.
Jackie Forrest:
Thanks to our listeners. If you enjoyed this podcast, please rate us on the app that you listen to and tell someone else about us.
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