Off Coal: A Conversation with Avik Dey of Capital Power
This week, on our Calgary Stampede podcast edition, our guest is Avik Dey, President and Chief Executive Officer of Capital Power. Capital Power is a publicly traded North American power producer headquartered in Edmonton, Alberta. Capital Power owns renewable and thermal power generation facilities, totaling over 9 GW of power generation capacity across 32 facilities.
Here are some of the questions Peter and Jackie asked Avik: Is it possible to deliver clean, reliable, and affordable electricity? Does Capital Power currently generate any electricity from coal? Do you expect small modular reactors (SMRs) to be built in Alberta in the future? Texas generates a greater share of its electricity from renewables than Alberta, yet Alberta is hitting the brakes on renewable development – how is Texas managing the increase in renewables, and what can Alberta learn? Are you concerned by the potential for rapid growth in electricity demand to fuel AI data centers in Alberta? Why did Capital Power recently cancel its proposed $2.4 billion Carbon Capture and Storage (CCS) Genesee project in Alberta? Considering the draft Clean Electricity Regulations, would you still invest in new natural gas generation in Canada? Any comments on Quebec’s plan to build and operate large-scale renewable projects in the province versus procuring the power from independent power producers?
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Episode 248 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. So, Jackie, I may take the opportunity to say “Yahoo”. It’s Stampede Week, and I think it’s appropriate to maybe review some of the energy related events that we’re hitching our horse to, or at least our oil and gas economy is hitching our horse to over the last couple of weeks, the LNG announcement?
Jackie Forrest:
Yeah. Well first of all, there’s not always so much positive news, so we want to definitely highlight it. We had a couple FIDs over the last couple of weeks as we finished up June. An FID from Shell, saying that they’re going to go forward with a 650,000 ton per year CCS project on their refinery in Scotford. So that will add to already significantly, by my count, about 4 million tons per year that we’re storing in the province, through CCS or enhanced oil recovery. I guess it’s in Saskatchewan as well, in Western Canada.
Peter Tertzakian:
So, FID, Final Investment Decision, that basically is the ultimate green light. The money’s going to be allocated, the board of directors has approved it, and the shovels start going in the ground.
Jackie Forrest:
Yeah, that people are going to get jobs, and all the economic benefits that are going to come to the Edmonton area, and beyond. The EPC’s in Calgary, and equipment suppliers probably from all places in the world. So, we do also have two other sites under construction for CCS. Air Liquide is working on the blue hydrogen, that’s related to the Imperial renewable fuels project, and then the Dow ethylene cracker. But I think this is great news in that there’s still folks in Edmonton that aren’t working.
We had a real build out of capacity with the oil sands, so it’s good to see there’ll be some work. I wanted to mention that Shell’s doing the CCS project, but the storage part is with a partnership with ATCO, so they’re involved in that as well. Now I do want to say, this one might be unique now. I think things that have helped it is we just had the investment tax credits.
We talked about that last episode, they passed at the end of June, so I think that was helpful. But I also think this one’s unique in that it’s on a refinery, and refineries have the advantage of getting the carbon price, which we’ve talked about is maybe not enough, and it’s uncertain. But they can add to that the benefits from the Clean Fuel Regs. So, there’s also a carbon trading market around reducing emissions from refined products.
So, I think that the revenue situation for this one might be better than some of the other projects that don’t have that advantage. And then the second one, FID, another Final Investment Decision for Cedar LNG, so that’s 0.4 BCF per day, LNG export project in Kitimat. We talked about that with Ellis Ross when he came on the show.
Peter Tertzakian:
Right, right.
Jackie Forrest:
It’s a joint venture with the Haisla First Nation and Pemina, 3.4 billion dollars. We actually didn’t have an estimate of the value of the Shell Project. And so, when you add that to LNG Canada and the Woodfiber project, that means that by the end of the decade, we’ll have about two and a half BCF per day of LNG leaving our west shores to international markets.
Peter Tertzakian:
Wow. So good pieces of news. That’s like two chuckwagons over the finish line. But we’re in Calgary, today here, we’re going to go to Edmonton. And we’ve got a special guest. I’ll introduce him, Avik Dey, President and Chief Executive Officer of Capital Power. We’re going to talk about power generation, obviously, talk about CCS, talk about all sorts of things. So welcome, Avik
Avik Dey:
Thank you, Peter, and great to be with you both.
Jackie Forrest:
Well Avik, we’ve known you from before, but we’d like you to tell our listeners about Capital Power, and when you became CEO, and how that’s been going.
Avik Dey:
It would be my pleasure, Jackie. I’ve joined the company a little over a year ago, so May of 2023. So, I’ve been in the role just over 14 months. And Capital Power is one of the largest independent power producers in North America, specifically focused on natural gas. So, you talked about all the great things that are happening in Western Canada, about getting egress for our reliable, efficient, and safe natural gas to outside our borders.
But we are one of the primary users of it, inside our borders, both here in Alberta, as well as south of the border in the US. And our focus over the last 15 years has been providing power generation from natural gas renewables, as well as battery storage, to customers all across North America.
Peter Tertzakian:
And historically, you’ve had coal. And I think we’ve had an announcement that we’re done with coal, is that right?
Avik Dey:
We have. It’s a monumental time for not just our company, but for the province. It’s amazing what’s been accomplished over the last decade. Over 12 years ago, we would’ve been a majority coal. And today we are zero.
And you know what’s really interesting about that, Peter, is that as we’ve undergone energy transition, from really late two thousands, starting around 2008, 2009, you had to pick a track. You were either good or bad, clean or dirty, renewable or fossil focused. And when you had to pick a lane, what it meant was retiring or divesting of traditional assets and investing in clean and long-term assets.
And what I’m particularly proud about Capital Power, is over that course of time that we’ve transitioned from being coal-fired generation focused, to expanding our remit across natural gas, renewables, battery storage, we’ve actually tripled our capacity over that same period of time. We’ve delivered 12.5% shareholders returns over that period of time. We’ve grown, adjusted funds flow for investors and dividends, at high signal digits also.
So that ability to grow while decarbonizing and converting is something that’s been a cornerstone of what we’ve done as a company.
Peter Tertzakian:
Yeah, that’s a huge shift in your primary source composition over a very short period of time. What is your current mix of power generation primary source?
Avik Dey:
So, we’re 9,300 megawatts, 50% in Canada, 50% in the US. Many of your listeners may not know that we have a broad footprint outside of Alberta. Alberta’s about a third of our overall fleet. And then when you think about fuel type, the fuel type is, as of today, 85% natural gas and 15% renewables.
Jackie Forrest:
Yeah, I didn’t know that, Avik. As I was preparing for this, I didn’t know how big your footprint was. Not only in the US, 50%, that’s, I think, a surprise for people, but actually, you have assets in other parts of Canada that are pretty significant as well.
Avik Dey:
Absolutely. Our two core markets in Canada are Alberta and Ontario. So, as I said, Alberta is about a third of our total fleet. Ontario is about 15% of our total fleet.
Peter Tertzakian:
Capital Power is, talk about the shareholder. Is it completely owned by the city of Edmonton? Or what is the composition of ownership?
Avik Dey:
I’m glad you asked that, Peter, because it’s funny, I often joke, we’re the largest company that many have not heard of. We are actually a hundred percent public. Our ticker is CPX. We were owned by EPCOR, as part of our history, but we were spun off in 2009. All the generating assets of EPCOR were spun off. So, we’ve been a public company since that day. And today, all of our shareholding is public, so EPCOR doesn’t own any residual interest in the company.
Jackie Forrest:
Okay. Well let’s talk about some of the big questions, and there’s lots of them around the energy transition. I find it interesting that you transitioned away from coal and tripled your power, because actually, that’s what we’re asking the entire world to do, is to become a lot cleaner, and at the same time, maybe double or even more the amount of generation as we electrify everything.
So, when you think about the energy transition, it’s already creating some pressure points, and it seems like it’s going to be putting increasing pressure on, as we see demand is really starting to grow now. Been quite flat in North America, but most projections are we could be seeing growth in the range of 2% per year, which is a big difference from, I think, the half percent we’ve seen before.
So, when you think about meeting the goals that have been set forward, is that we need to supply cleaner, more affordable, and reliable electricity, at the same time that we’re growing at a rate we haven’t in decades. Do you think it’s possible we can do all three?
Avik Dey:
So, I think one of the cornerstones of us collectively as mankind committing to a net-zero world, is that there’s a recognition inherent in that, that there isn’t a silver bullet to find that solution. It’s going to take all of us doing everything to enable a decarbonized world. And for some that may be certain measures that allow for partial decarbonization, and for others that’ll be full decarbonization, based on what the electricity supply stack looks like.
But collectively, we can move towards it if you facilitate a market for the exchange of carbon credits and offsets. Historically, if you look at those three pillars of reliability, affordability, and clean, historically you had to pick two. You couldn’t be all three.
So, if you picked reliable and affordable, that would mean traditional thermal, coal or gas. If you picked reliable and clean, that would be nuclear hydro, and or geothermal. And if you picked affordable and clean, it would be renewable. And the North Star for us all now is how do you solve for all three? And so that path for us means looking at things like abated natural gas, small modular reactors, or other ways we cannot just provide clean electricity, but firm our grid so you meet the needs of reliability and affordability as well.
So, I think there’s a path for us to get there, but it’s a bespoke conversation on each and every electricity market, and this is where the foundational stakeholder groups of policymakers, investors, and industry need to come together and coalesce on how do we best do that.
Peter Tertzakian:
Yeah, actually there’s a fourth dimension that people don’t talk about, or just take it for granted. You mentioned the cheap, clean, and secure, but the fourth dimension really is safe. It has to be safe.
Avik Dey:
Great point.
Peter Tertzakian:
And we just sort of take that for granted in our society. But when we think about the possibilities of alternatives to what we’re accustomed to, and specifically when it comes to nuclear, because it’s been around for many decades, but there’s a lot of fear about safety when it comes to technologies like that. And I know you’re pursuing nuclear with Ontario Power Generation’s small modular reactors. Can you talk about Capital Power and what you’re thinking about in the nuclear realm?
Avik Dey:
We’re really excited about our partnership with OPG. For those that don’t know, OPG is Ontario Power Generation. It’s one of the global leaders in safe, efficient, effective operations of nuclear power anywhere in the world. They’ve been producing nuclear power in Ontario for more than 50 years. And as the province explores finding reliable, affordable, and clean forms of electricity, we forged this partnership with OPG to explore just that.
And I think more important than us trying to identify a site, a location, an economic model for a small modular reactor, it’s actually starting the journey for all of us around, what does a nuclear industry look like in Alberta? What is the regulatory framework required to facilitate a nuclear industry? How do we think about the technology? Is it safe, is it effective? Is it economic? And then ultimately, what is the infrastructure required to support that industry? So, this partnership with us and OPG is to explore all of those together, but also in partnership with government and communities to say, “Is nuclear a solution that’s viable for the province to deliver our future electricity needs?”
Peter Tertzakian:
Is that question rhetorical, or have you answered it yet?
Avik Dey:
No, we haven’t. We’re just starting the journey. I think to your point around NIMBY and safety, I think the evidence is very clear that nuclear is safe. The fail safes around protecting against a nuclear meltdown, that technology and how the engineering of these facilities at a large scale have largely been in place 30 years. So, when we look at the nuclear accidents that have happened, those are on first- or second-generation nuclear energy.
And I think what many Canadians don’t also understand is some of the most advanced technology around nuclear and safety standards around nuclear, and the efficient operations, construction design of these facilities, much of that has been incubated right here in Canada. We’re a leader in the sector overall. And so, the fail-safe says you go from a large-scale nuclear facility or a small modular reactor. We’re not talking about a black box technology that was incubated in someone’s garage. What we’re really talking about is re-engineering the design and construction of nuclear and making it modular so that we can make it more economic. And I think that’s the holy grail on nuclear, is can we collectively design, manufacture, facilitate a supply chain that will lead to us being able to modularize and put smaller units in place economically in an efficient timeframe such that we can get it to market? It’s about the economics and timing more than it is viability of the technology.
Jackie Forrest:
So, Avik, I want to hit on that economic point because we don’t know the cost. OPG is going to put four SMRs in Ontario, but there are other technologies being pushed forward in North America. And we don’t have any numbers on the Ontario one, but we do on some of those others. And it wouldn’t seem that some of these early projects are going to be more expensive than traditional nuclear when you look at what they’re having to pay for the amount of capacity they’re getting. Are you concerned that that economic hurdle isn’t understood yet? Can this be economic?
Avik Dey:
I’m absolutely concerned, but I think what we’ve also observed is these technology curves. We historically look at Moore’s law as a predicator of how quickly technology advances. I’ve often said, I don’t know that I would apply Moore’s law to the physical environment of how do you put stuff together more quickly.
But the bottom line is OPG has signed up for serial number 1. And what we don’t know is do we reach those efficiencies at serial number 10, 20 or 30? But by the time you start assembling the train that can start producing these units, I think the cost structure will come down quickly once we establish the process.
So, I think it’s important for us as Albertans in particular, as we look at the industry, we’re, today, at a point in time where unit number one is going to come out. It’ll COD hopefully in first quarter or 2029 but how units 5, 10, 15 cascade and how quickly after that, we need to start doing the work now if we want to first have a nuclear industry and then secondly, FID the first SMR. And when that timeline comes to us where those costs are coming down rapidly, hopefully that converges at the same time we’re ready to FID a project. But as we contemplated entering this partnership with OPG, what we felt the most important thing was is we needed to get on the train now. We needed to start the journey today.
Peter Tertzakian:
Let’s talk about Texas because you’ve got operations down there. Texas and Alberta are often seen as kindred spirits because of the oil and gas industry. Both have very advanced and large oil and gas production, but both also have a lot of growth in wind and solar. Texas is producing over 30% of its electricity from renewables. Here in Alberta, the amount of electricity generated from renewables, from wind and solar is about 20%. Yet we’ve had some policies recently that have attempted to put the brakes on development in Alberta. I guess the last question is, Texas figured out how to bring large quantities of renewables into that grid and Alberta has not, so we had to put the brakes on it? Or what do you think is going on?
Avik Dey:
So, there’s a couple things in play. It’s one that’ll resonate with your policy wonks who are deep in electricity policy. So, allow me to nerd out for a moment. But in Texas, we are kindred spirits in our adoption and belief in a free market. So, both are fundamentally open markets for electricity. But in Texas, they do have things like nodal pricing, which sends price signals at specific locations. We do not. So how that incents and motivates particular kinds of generation, in particular renewables that have zero variable cost, is different.
Peter Tertzakian:
So let me pick up on that just for our listeners, because the difference between Texas and Alberta, though both are free market electricity trading, Alberta trades as a pool of electricity, whereas in Texas the trading is done at individual nodes, individual wind farms, solar farms, and so on. Whereas here, it’s all aggregated into one big pool, and we trade out of the pool. Is that the distinction?
Avik Dey:
Exactly correct. And I think that also speaks to the relative size of our market. Although Alberta is an islanded market, we’ve got, on an average day, 10,000 megawatts an hour of demand. And we have a significant commercial and industrial capacity. 60 to 70% of that demand is going to non-consumer-based demand sources. So, Texas being a larger market, it has a significant C&I market as well. But the levers they can pull to accommodate different commercial arrangements is different than ours.
And there’s two other factors that I think would drive where they are versus we are. They have negative pricing in their market, which incents curtailments.
Peter Tertzakian:
That’s pay to take it away? If you want to take it away, you have to pay as a solar farm or whatever?
Avik Dey:
Exactly. And then the one that’s probably most controversial is the higher price cap, which allows for intermittent resources or reliable resources, actually more appropriately said, like gas-fired generation to benefit and pay for the capital and operating costs of those assets when the renewables don’t show up.
Peter Tertzakian:
So, can you then take those differences and circumstances between Alberta and Texas and then draw a line for us to the moratoriums that we had followed by the lifting of the moratorium with conditions? How does that follow?
Jackie Forrest:
And also, the market changes that have been proposed-
Peter Tertzakian:
And the market changes.
Jackie Forrest:
… by the Alberta government.
Peter Tertzakian:
Yeah.
Jackie Forrest:
And some of them you’ve hit on, right? They’re talking about negative pricing, a higher maximum price.
Avik Dey:
Yeah. So, I think we have to break it into a couple different buckets. When you look at the renewables… so, let’s split the renewable pause from the market structure consideration. The renewable pause, I think, had two underlying causes for the introduction of the pause. One was around siting and NIMBY issues overall as a concern of the constituency in the province and what impact that would have on land use and land value. And I think that was a very local personal issue for voters.
And then the second one is a much broader electricity market issue, which is the cost and burden of transmission and distribution costs related to that generation capacity. And that’s a complex issue. But the easiest way to think about it is when we design the electricity system in Alberta, our power plants were large utility scale plants. There wasn’t many of them. And when you built one, it was very expensive, and it took a long time to build. And the only reason you built it was to provide electricity to the constituents in that market. So, the system was designed such that if a generator was to build a power plant, then the system overall, or the market overall, would pay for that connection to the overall transmission and distribution system. And when I say the market would pay for it all, I’m actually talking about the consumer, the taxpayer. So, when we look at our utility bill, and this is, by the way, prevalent across North America, most of us where we’ve seen heavy renewable penetration, we look at our utility bill and more than half of that cost is accounted for by the rate base, the cumulative aggregate cost to maintain the grid, not the actual power that we’re using. And the nuance that exists on renewables is that cost of transmission, whether I’m producing electricity 20% of the time, 50% of the time, 100% of the time, it’s the same connection cost.
Peter Tertzakian:
The wires stay up all the time, 100% of the time.
Avik Dey:
Yeah.
Peter Tertzakian:
Yeah.
Avik Dey:
So, where we’ve had this immense proliferation of renewables, and just simple math, if I only produce power a third of the time, my cost per megawatt or kilowatt is three times what it would be for dispatchable generation. And that’s the nuance that’s at play. So, the renewable pause was about first identifying where and how much we should have and where it should be located in terms of new renewable development. And the second aspect was we need to take a pause to understand what role and what burden renewables should have. And that’s still an open question that the government is addressing right now in terms of how that wires cost, as you stated, gets split amongst all generation forces.
Jackie Forrest:
Avik, I know it’s still a lot of uncertainty, but how do you look at the opportunity to invest in Alberta in renewables or baseload natural gas compared to the other places you’re investing? Are you not investing in Alberta because of all the uncertainty?
Avik Dey:
We are focusing heavily our investment dollars towards the US market, in particular for growth, but it’s not because we see Alberta’s unattractive. We’ve just completed, are in the midst of completing our biggest capital project ever at Genesee repowering. So, we’re the second-largest generator in the province. Pro forma, this $1.5 billion capital project, will be the largest generator at Genesee in the province. It provides 6% of the power of the province. And in our positioning in Alberta and Ontario, we’re very comfortable with. So, our capital allocation is more focused on growth, expansion, and diversification than it is coring up in our key market in Alberta and Ontario. But it’s not because we’re not focused on it, it’s because we’ve got to manage our capital appropriately.
Jackie Forrest:
Right. Well, and there’s a lot of forecast, with your additions and some of the other gas generation coming on, there’s more than enough power in Alberta?
Avik Dey:
That’s a great point actually. Right? High prices, solid tight prices for the province. We and others have introduced two gigawatts of new supply into Alberta. That’s all firm, reliable, and affordable power.
Jackie Forrest:
Right. Well, and most people think there’ll be several years here where we have an excess of generation, and we won’t be back to that January of 2024 in the dark, worrying about how much power we’re using in the cold. But data centers are starting to grow, and it’s not just here in Alberta, it’s everywhere, probably in many of the other markets. There’s starting to be more concerns about the potential for demand to grow faster than what people think.
And in fact, if you look at the AESO applications, and that’s the electricity system operator, they have a queue of about two gigawatts of new demand that could come from data centers just in Alberta. And you’re hearing in some US markets, the queue is like 90 gigawatts. Now, not all of that is real maybe. But are you concerned that we can’t take the pedal off investing in Alberta in new supply because demand may be higher than what we expect?
Avik Dey:
I think Alberta’s the last place we should be concerned about bringing in new load because this market has shown incredible resilience, fortitude, dynamicism, and entrepreneurial attitude to be able to incorporate new load, new rules in volatile and ambiguous markets. That is what defines our economy. So, I think the data center business is an amazing opportunity for the province to coalesce. I don’t think a single company is going to find a silver bullet and deliver this. I don’t think Capital Power’s going to be the one that unlocks this for everybody.
I think it’s going to be a made in Alberta solution that brings the industry to the province because there’s multiple parts to this conversation. It’s not just about one commercial customer bringing in a 100, 300, 1,000-megawatt data center, the opportunity is so much larger than that. But to be able to bring that opportunity to the province, we actually need to step back and say, “How do you create an industry that facilitates it?” It’s not different than the conversation we just had on nuclear because there’s multiple factors that will impact the ability to bring in that much load.
The opportunity for us on the data center side isn’t just erecting a data center and then attracting a hyperscaler to go move their hardware in and process it. The opportunity is to build an industry here that attracts talent, other industries, and facilitates the scaling of that industry here to leverage long-term natural gas as a feedstock, hopefully, ultimately leveraging our capabilities in CCS to provide a reliable, affordable, and clean electricity because we’re abating it. But the conditions here are better than most places because we have a regulatory framework that allows you to go do commercial things.
Peter Tertzakian:
Obviously, the expansion’s not going to be done by coal. We talked about SMRs and nuclear, and that’s under scrutiny, subject to a lot of different things. So, the immediate response to load demand is natural gas, as you just pointed out. Natural gas has emissions, so let’s talk a little bit about that because you’ve also recently announced that you’re not going forward with a $2.4 billion carbon capture project in Alberta. What’s going on there in terms of CCS and the costs and the status?
Avik Dey:
Peter, three of us have known each other for a long time. I started my own journey on CCS more than a decade ago when I invested in the Alberta Carbon Trunk Line, so I’ve been a keen observer and participant in this market and technology as it’s evolved, and I’ve been so impressed. I’ve been at Capital Power for a year. The work that we’ve done to validate the application of an amine-based solution, post combustion to a gas-fired power generating facility, I think is industry leading. I think we’ve done more work than anyone in North America on that front, other than the two facilities that have already been up and running. And I think we’ve validated the fact that we think we can get the right amount of efficiency and sweep out of these facilities. I think we can technically build the solution.
And where we failed was, we failed to come up and devise a commercial way to underwrite a 25- or 30-year investment. Now, this is a $2.5 billion investment that would’ve put three and a half MT per year in the ground. Pro forma, we would’ve been the largest abated gas facility on the planet. But the economics didn’t work, and the economics didn’t work because we don’t have a long-term price on carbon. The economics didn’t work because it’s an expensive piece of kit. The economics didn’t work because we didn’t have a long term enough and big enough CCFD, which we can talk about as well. And the economics didn’t work because we didn’t have line of sight on strong enough dispatch for the entire duration of that investment. So, it wasn’t any one thing, but it was the cumulative effect of all of those that didn’t allow us to underwrite an economic project.
Peter Tertzakian:
Yeah, it is very complicated in terms of figuring out the financial viability of projects like this, but I want to key in on the one thing that you said, and that is the price of carbon wasn’t attractive enough. The price of carbon, the headline price of carbon is supposed to rise to 170 bucks a ton by 2030. Yet you’re saying that you don’t have confidence effectively in the price of carbon going forward to justify building this $2.4 billion project. So, where’s the disconnect? Are you feeling that you can’t generate enough carbon credits by doing this of sufficient value? In other words, not at $170 a ton, but it doesn’t make any sense?
Avik Dey:
Well, we have to put $2.4 billion up front today, and we have a cliff on carbon price at 170 on 2030. So, what the CCFD and what was proposed by the federal government in budget ’23 was to introduce this carbon contract for differences. And the intent with that was to provide the insurance policy or backstop.
Peter Tertzakian:
A guaranteed price, a guaranteed price of carbon.
Avik Dey:
Yeah. So, for us, we don’t know what carbon tax will be. So, we had visibility between now and 2030. Had we FID’d the project in summer of 2023 when we had originally intended, we would’ve been up and running 2027, so we would’ve ’27, ’28, ’29, ’30, but we didn’t know what the price was going to be after that. And to underwrite the project, we would’ve needed that visibility because what underpins the economics of this is offsetting our carbon tax. There wasn’t a revenue generating source behind it.
Jackie Forrest:
Right, and there’s significant operating costs. We had Rachel Walsh on for BMO who talked about the fact that the operating costs are significant, and in the absence of a carbon price, you can’t continue to run the asset as well, right?
Avik Dey:
Yeah. And yeah, one of the interesting things, if you were to look at the physics and chemistry and engineering of carbon capture on a gas-fired power plant, I think the part that gets lost in a lot of it, a big burden of the operating cost is the fact that I need 15 to 20% more power to go capture the emissions from my other power source, and that’s a big part of the operating cost structure.
Peter Tertzakian:
Yeah.
Jackie Forrest:
So you’re saying that the policies in place today, even with the investment tax credit that was just announced at the end of June, because of this carbon price, it’s hard to move forward. Meanwhile though, the federal government is moving forward with the Canadian Electricity Regulations, a draft came out last summer and it’s basically saying you need to have carbon capture and storage on natural gas plants once they’re 20 years old. So, if you can’t really afford to do it, what is your view in terms of new natural gas investment in Canada considering that situation?
Avik Dey:
Well, it’s not possible with the Clean Electricity Regs, but that was the intent of the Clean Electricity Regs is to prevent new gas fire generation being built. I think we came out very publicly when the CER was announced that we supported the structure of it, but that it was absolutely unmanageable without custom solutions for specific jurisdictions who weren’t endowed with reliable, affordable, and clean base load, i.e. for the jurisdictions that have hydro, it works. For the jurisdictions that didn’t have fossil and chose to pursue nuclear for base load 50 years ago, it works and even for some of those, it doesn’t, like Ontario.
But for everyone else where we have 50 to 70% of our generation capacity delivering base load that relies on thermal, the CER framework does not work. You cannot have a one-size-fits-all solution. And so, the CER needs to be amended to accommodate places like Alberta, Saskatchewan, and even Ontario to a certain extent, and-
Peter Tertzakian:
Nova Scotia.
Avik Dey:
Maritimes to accommodate their existing fuel stock. So, things like the emission performance standard, the end of prescribed life, all of those need to account and align for the specific situation of each jurisdiction. Otherwise, it’s not workable.
Jackie Forrest:
Right. Well, and at a time when the country is growing demand, not just here in Alberta, and that actually, although we do expect renewables to grow in many parts of this country, there’s probably going to be some gas generation added as well in other parts of the country. So, it may not affect them as much, but it may affect new investment that they need in the short term.
Avik Dey:
But I do think, I would say, we do support the framework. The intent of putting the Clean Electricity Regs in and pushing for a framework for how we will manage decarbonization over time, I think makes sense. But you have to account and have allowances for each province’s specific requirements.
Jackie Forrest:
Yeah, not a one-size-fits-all approach.
Avik Dey:
Yeah.
Peter Tertzakian:
So, okay. It’s unworkable, yet earlier, we spoke about the demand pull from data centers, there’s electric vehicles and everything else, and in provinces like Alberta, Saskatchewan in particular, that do not have a lot of other options for demand growth, for electrification, broadly speaking, where is this chapter on the CER going to end? How is the story going to end? Because I agree with you, it’s unworkable.
Avik Dey:
I think we’re going to have to have those provisions amended. We’re going to need to extend the end of prescribed life. We’ve proposed 30 years. The emission performance standard is going to significantly have to go up, probably triple to what it was first slated as, to give each of the provinces the ability to define their own glide path towards net zero and have the appropriate accommodation. But I think that the next question on that is, well great, you just brought in a thousand megawatts for a data center demand. Can you go build a new gas fired power generation facility for that data center? The answer’s no. Not until we have clarification on the CER. So, the opportunity for us on data centers today is contracting out existing capacity where we have it, not to go build new gas plants.
Peter Tertzakian:
So, what do you say to those who say, why are you pursuing natural gas? Why don’t you go renewables plus batteries, grid-scale battery, why don’t you go hydrogen, green hydrogen, all that kind of stuff?
Avik Dey:
A number of reasons. Let’s pick one off after the other. Hydrogen, too expensive. Batteries, doesn’t work. We’ve lived under this universe that we all believed the renewables plus long-duration batteries would somehow solve the gap between thermal and reliability for renewables. The truth is, from an efficiency standpoint, from meeting a latency requirement for reliability and voltage stability on grids, the only thing that gets there right now is four-hour duration. So, then the question becomes, well, can’t you just stack batteries? Well, what we’ve shown is if you were to take a 400-megawatt gas plant and say, “What’s the equivalent you need from renewables?” You would need nine to 10 times the renewables to meet the same supply source for that gas plant because you would have to have enough redundancy for the renewable to support enough batteries. It would cost you 10 times the capital relative to that gas plant, and it would have a thousand times the physical footprint for that one gas plant.
And so, as we start looking at these grids over time, you have to look at it from a holistic perspective and say, “In our work, as we’ve worked across North America, generally you need somewhere between 50 to 70% of the grid being supported by dispatchable reliable electricity.” Whatever the feedstock is, it’s got to be always available. The rest can be a combination of renewable/intermittent batteries, other sources. But table stakes is 50 to 70 depending on your jurisdiction, depending on your peaked trough on load, has got to be base load and that doesn’t change jurisdiction to jurisdiction.
Jackie Forrest:
All right. We’re running out of time. These are great questions. I have one more prickly question for you. So, we just talked about how Alberta, it’s a bit challenging in terms of renewable investment right now because of the uncertainty, but there are opportunities opening up across the country, BC, Ontario, Quebec. But just recently, Quebec announced that they are looking to grow renewables, but they actually want to build them themselves, not go to an independent power producer like Capital Power or others to build those projects and operate and run them. What do you think about that decision and what are the advantages, do you think, of an independent power company getting the procurements versus the Crown Corp building the projects?
Avik Dey:
Efficiency costs and independence are the advantages to having it in the hands of an independent power producer. I think the question becomes, if it’s left in the hands of a Crown Corp, because that’s ultimately coming at the cost to taxpayers and consumers. So, the ability to do it in rate base is one that happens in many different markets. So, the ownership of that generation by a Crown corp is one that can work if you have that market structure for it.
But if you look at Alberta where we have independent power producers, the market solved the market deficiencies, and it solved it efficiently. We had high prices, companies like ourselves built two gigawatt of new supply and we’re now in an oversupplied market with a lower cost of generation for consumers. And so that free market mechanism is one that we think works well. In some markets, you need to have other market forces come in and policy imperatives to facilitate an efficient electricity market and that exists as well. But I think generally, the market should be dictating and driving outcomes.
Peter Tertzakian:
Yeah.
Avik Dey:
We are not currently an active player in Quebec, but I think that would be my perspective on it.
Jackie Forrest:
Mm-hmm. Well, it doesn’t look like you will be if they go forward with this proposal.
Peter Tertzakian:
Yeah. Well, Avik, as you said, we’ve known you for a long time and it’s always a fascinating conversation. Thank you so much for taking time out of your busy day. We’ve taken enough of that time. And Jackie, I think we have Stampede parties to get to. So once again, thank you very much, Avik Dey, President and CEO of Capital Power up in Edmonton.
Avik Dey:
Thank you, both, and thank you for doing what you do. This is an important forum to have these conversations, so appreciate it.
Jackie Forrest:
Thank you, Avik. And 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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