Vittoria Bellissimo IECA Annual Canadian Conference May 27, 2014 A CONSUMER S PERSPECTIVE ON ALBERTA S ELECTRICITY MARKET

Vittoria Bellissimo IECA Annual Canadian Conference May 27, 2014 A CONSUMER S PERSPECTIVE ON ALBERTA S ELECTRICITY MARKET

PRESENTATION OVERVIEW About IPCAA Market supply and demand outlook Delivered costs and consequences of Alberta s transmission build Risk profiles of industrial consumers Comparisons to Ontario s electricity industry Questions? 1

ABOUT IPCAA IPCAA was formed in 1983 as a membership-based society representing Alberta s large industrial electricity consumers. Our members are involved in key Alberta industries, including Oil & Gas, Pipelines, Petrochemicals, Agriculture and Steel. Our mission is to take a leadership role in ensuring that a competitive marketplace exists for electrical services. 2

CONSUMPTION BY SECTOR 13% 3% Industrial (without Oilsands) Oilsands 20% 46% Commercial Residential Farm 18% 3

KEY CONCERNS Alberta industries compete in international markets. The rising cost of transmission is eroding our competitiveness. Oil production and transportation is being limited by slow and costly customer connections to the electricity grid. Reliable electricity supply is paramount. 4

DELIVERED COST OF POWER 2011 RESIDENTIAL INDUSTRIAL 15% 10% 20% 15% 60% 80% Energy Distribution Transmission Local Access Fee 5

ALBERTA ELECTRICITY PRODUCTION 2013 Energy Production by Asset Type Other, 1.2% Wind, 5.1% Hydro, 3.3% Peaker, 1.6% Imports, 4.2% Gas, 4.4% Cogen, 16.5% Coal, 63.7% 6

ALBERTA INSTALLED CAPACITY 2013 Installed Generation Capacity Other, 3% Wind, 7% Peaker, 5% Hydro, 6% Gas, 7% Coal, 43% Cogen, 29% 7

SIGNIFICANT COGEN GROWTH Oil sands projects build generators for steam and sell power to the grid (cogen) There has been significant growth in cogeneration capacity 8

COGENERATION PRODUCTION 9

$ / MWh WIND REVENUE Wind Generation Revenue vs. Average Pool Price $90 $80 Avg. PP $76.22 $80.19 $70 $60 $50 $40 Wind Revenue $50.88 $38.08 $50.28 $64.32 $37.78 $54.97 $30 $20 $10 $- 2010 2011 2012 2013 10

WIND DISCOUNT Wind Generation Discount Relative to Pool Price 45% 40% 41% 35% 30% 25% 25% 34% 31% 20% 15% 10% 5% 0% 2010 2011 2012 2013 11

VALUE CURVE 2012 & 2013 60% Percent of Value by 5% Increment of Hours 55% 50% 45% 40% 35% 30% 25% 20% 2012 2013 15% 10% 5% 0% 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 12

POLARIZED PRICES 13

HIGH PRICED HOURS 20.0% % of Hours Greater than $100/MWh to $900/MWh in Increments 18.0% 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% $100 $200 $300 $400 $500 $600 $700 $800 $900 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 14

Value VALUE AND PRICE CURVE 2013 AESO Alberta Value at 5% Intervals For 2013 $3,300,000,000 $1,100 $3,000,000,000 $2,700,000,000 Value AESO Avg Price $1,000 $900 $2,400,000,000 $2,100,000,000 $1,800,000,000 $1,500,000,000 $800 $700 $600 $500 AESO $/MWh $1,200,000,000 $400 $900,000,000 $300 $600,000,000 $200 $300,000,000 $100 $0 100 95 90 85 80 75 70 65 60 55 50 45 40 35 30 25 20 15 10 5 $0 % Hours 15

STATE OF THE MARKET Market Surveillance Administrator Report, released in December 2012 Considered Structure, Conduct, and Performance of Alberta s wholesale electricity market Findings: The Alberta wholesale electricity market is effectively competitive. Wholesale price volatility and price polarity are expected outcomes. There is no need for substantive change to the policy framework. 16

PROJECT FINANCING IN ALBERTA Limited long-term contracting available. Alberta market is less attractive than other jurisdictions for developers using project ( non-recourse ) financing. This is less of an issue for companies with access to balance sheet financing. Companies with access to balance sheet financing already own or control a significant portion of the Alberta electricity market. [MSA Report on Investment] 17

TRANSMISSION COSTS Industrial consumers pay for the majority of transmission costs. What happens when they build behind the fence generation to avoid transmission costs? 16% 4% Industrial 19% 61% Commercial Residential Farm 18

TRANSMISSION COSTS Roles in the Current Regulatory Framework: Identifies need to build new transmission lines / upgrades Mandated to build an uncongested transmission system Mandate does not incent review of rates Utilities plan out design and execution of projects Utilities earn a regulated rate of return Current regulatory regime does not incent cost savings Upon project completion, AUC proceedings examine whether costs are prudent ($$ already spent) Utilities justify why their expenditures are prudent Interveners challenge why utility expenditures are not prudent Most consumers are ineligible for intervener funding 19

TRANSMISSION IN RECENT HISTORY 2008: Provincial Energy Strategy 2009: Bill 50 (Electric Statutes Amendment Act) 2013: Introduces Critical Transmission Infrastructure (CTI) 2011: Critical Transmission Review Committee AESO Competitive Process Application Filed with AUC 2012: Bill 8 (Electric Utilities Amendment Act) Removes Cabinet s ability to designate CTI AESO Competitive Process Approved by AUC Transmission Regulation Reverse Onus on Prudence Change Government Initiates Transmission Cost Management Policy Development 20

$ / MWh AVERAGE TRANSMISSION COST $70 $60 AESO FORECAST $50 $40 $30 $20 $10 Large Industrial Small Industrial Residential $0 21

Average Costs ($/MWh) LARGE INDUSTRIAL TRANSMISSION COSTS $45 $40 $35 $30 Large Industrial Consumer [60 MW, 80% LF, 85% CF] AESO FORECAST Operating Reserves $25 $20 Wires Other Than LTP $15 $10 $5 LTP Projects $0 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 22

Sensitivity of Transmission Rate [$/MWh] Project Costs +/-20%, Pool Price +/-10%, Load Growth +/-1%, Inflation +/-1% 23

CUSTOMER CONNECTIONS Customers are concerned with the cost and amount of time it takes to connect to the grid Average duration of transmission connections from application to energization takes 35 months for greenfield projects, 26 months for brownfield projects [AESO Q3 2013 connection report] Impacts to oil & gas and pipeline industries: Even the smallest power requirement is putting project delivery at significant risk Project delays deter investors Project delays impede revenue and ultimately lead to lost Royalties for Albertans 24

CONSUMER RISK PROFILES 1. Industrial A. Oilsands upgrading electricity >10% of total operating costs B. Chemicals electricity up to 70% of production cost C. Fabricated metal and machinery electricity = 30% of production cost D. Forestry electricity = 30-50% of manufacturing cost for mechanical pulp and newsprint operation 2. Commercial 3. Residential 25

IMPACT ON CONSUMERS Electricity cost sensitive loads will seek lower cost options: Out-of-Alberta investments and/or processing; On-site generation Loads with thermal requirements (SAGD oilsands) will build on-site generation Residual ratepayers will have to cover increased cost Impact on industry diversification 26

ONTARIO ELECTRICITY PRICING Wholesale Price + Global Adjustment = Commodity Price The GA is calculated based on the difference between the Hourly Ontario Electricity Price (HOEP) and: Regulated rates to Ontario Power Generation nuclear and baseload hydroelectric generating stations; Contracts with the Ontario Power Authority (OPA) such as new gas-fired facilities, renewable facilities, and nuclear refurbishments; and Contracted rates administered by the Ontario Electricity Financial Corporation paid to existing generators. It also includes the cost of delivering conservation programs in the province and the payments made to participants under contracts with the OPA for demand response programs. 27

OPA CONTRACTS At the end of 2013, the OPA was managing about 22,448 MW of electricity supply under contract: 8,240 MW of renewable wind, solar and bio-energy 2,390 MW of renewable hydroelectric 8,818 MW of natural gas, combined heat and power, and energy from waste 3,000 MW of nuclear capacity [2013 OPA Annual Report] 28

ONTARIO GLOBAL ADJUSTMENT 29

2013 ONTARIO ELECTRICITY PRICING $100 $90 $80 GA ($/MWh) HOEP ($/MWh) $70 $60 $50 $40 $30 $20 $10 $- 30

January February March April May June July August September October November December $ / MWh 2013 COMMODITY PRICE COMPARISON $160 $140 $120 Ontario Alberta $100 $80 $60 $40 $20 $- 31

QUESTIONS? Please feel free to contact us: Vittoria Bellissimo, Executive Director (403) 966 2700 Vittoria.Bellissimo@IPCAA.ca Jake Cheng, Policy and Regulatory Consultant (587) 700-6388 Jake.CT.Cheng@IPCAA.ca 32