The investment landscape in Alberta is being transformed as the imperative of energy transition calls for a more diverse energy mix. With an attractive environment for renewable projects, it is estimated that the clean technology sector in Alberta could contribute $61 billion to the Canadian gross domestic product by 20501. In this article we examine the current state of play of investment in the province's growing clean technology sector.
Alberta's advantages
A number of factors play into Alberta being an appealing destination for clean technology projects and investment. To start, the province has the right set of natural resources for renewables to thrive: it is very sunny and very windy. Alberta also boasts the lowest corporate tax rate in the country2 and an overall regulatory environment that is attractive to project proponents and their investors, allowing project development of all kinds to get underway sooner and with less regulatory burden. Although the recent moratorium on renewable projects in the province has tempered the investment environment temporarily, the province's longstanding value for commercial efficiency is unlikely to change. The deregulated market in Alberta helps expedite a range of activities in this ecosystem that can take much longer in other regions, including everything from grid hookups to facility development approval. In this Torys Quarterly, we also reflect on the recent Impact Assessment Act decision from the Supreme Court of Canada and its implications for project proponents.
Another attractive feature of the province is that Alberta's energy sector is itself a source of investment opportunity in clean technology. The province's oil and gas sectors are reading the writing on the wall regarding increases in carbon pricing—and among their efforts in mitigating the adverse effects of rising carbon pricing is acquiring credits, including through opportunities available in the province.
Getting deals through
Amid this environment, developers, proponents and sponsors of wind and solar projects who run the gamut of investors, such as institutional investors, strategics, oil and gas companies (who are typically looking for options without taking development risk) and investment arms of banks, are acquiring options and land rights in some fashion to site their renewable project, connect it to the grid, and sell it to renewable companies, as well as private equity, pension fund and other institutional investors. These buyers are often coming in from outside the province, and in some cases, outside the country. Some of Alberta's local oil and gas exploration companies are getting in on the opportunity as well, signing power purchase agreements (PPAs) for the offtake on these types of projects (for more on PPAs, watch our video "Renewable energy and virtual PPAs"). Since in many cases these investors are seeking green credits, the PPA is often a contract for differences where the offtaker (i) acquires the renewable attributes (green credits) associated with production, (ii) does not physically acquire offtake from a given project, and (iii) financially settles the transaction based on the difference between the pool price and an agreed upon strike price.
For sellers, we are seeing some sponsors/developers exiting early development stage projects in a fashion designed to maximize their return—with payments being associated with certain milestones; for example, once the project can proceed to construction or as certain thresholds in megawatts are achieved.
Transacting parties are coming up with creative approaches to getting deals done. Some strategies include staging the purchase price payable to a seller with milestones (for instance, based on when regulatory approvals come through) and having an option to require the seller to buy the project back if certain events don't materialize.
Creative financing
While the recent moratorium has had, and likely will continue to have, a relative (short-term) chilling effect on the financing of renewable projects that have not yet received their regulatory approval, we are seeing more and more lenders express an interest in financing these projects in Alberta. In the past there has been a stigma attached to Alberta's deregulated power market in lending circles as a result of "merchant risk" resulting in unstable cash flows. But corporate PPAs have lessened that stigma.
Further, in some cases we are seeing projects that leverage more than one PPA. Bigger projects require multiple PPA holders, and multiple credit risks along the way. Calculating loan sizing for these larger projects comes with additional challenges. More streams of revenue mean there are more ways to potentially increase the size of your loan, based on the creditworthiness of the various PPA counterparties and the size of their respective PPA offtake commitments, leaving any uncontracted power as merchant risk. We expect to see more of this type of multi-PPA financing as larger projects get underway, with a multitude of parties throwing their hats into the ring and taking offtake arrangements.
Conclusion
Alberta's growing clean energy sector is cultivating fertile ground for investors to source high-value opportunities, whether through direct investment in renewables and clean technology or through the purchase of credits. As demand for these assets increases, and as projects increase both in size and number, we expect to see an evolving approach to how deals and financings are executed.
Footnotes
1. Government of Canada invests in Alberta's clean technology industry, Energy Transition Hub. January 19, 2022, Government of Canada, available at: https://www.canada.ca/en/prairies-economic-development/news/2022/01/government-of-canada-invests-in-albertas-clean-technology-industry-energy-transition-hub.html
2. Government of Alberta Tax Overview, available at: https://www.alberta.ca/taxes-levies-overview#:~:text=Corporate%20income%20tax%20rates,the%20lowest%20among%20Canadian
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