It’s Official: Coal Just Became Uneconomic in Canada

Marijuana wasn’t the only green thing being celebrated on April 20.

In a somewhat unexpected move, the Calgary-based electricity company TransAlta announced it will accelerate the phase-out of eight coal-fired power units — representing almost 3,000 megawatts of generating capacity — with six of those to be converted to gas-fired generation between 2021 and 2023.

The remaining two will be closed on Jan. 1, 2018.

“It makes complete economic sense that they did that,” says Binnu Jeyakumar, electricity program director at the Pembina Institute, pointing to expiring power purchase agreements (PPAs) and an increasing inability for coal to compete with natural gas and renewables.

While calculations vary, it’s estimated that the conversion of the six coal plants to simple cycle gas operations — a process that will cost around $300 million in total — will cut emissions by between 30 and 40 per cent per megawatt hour of electricity produced.

Expiring Power Purchase Agreements Will Make Coal Plants Uneconomical

In late 2015, the Alberta government announced a mandatory phase-out of coal-fired power plants by 2030.

While 12 of 18 plants were set to be shuttered under regulations introduced by the previous federal government, the move by Alberta’s NDP meant that plants that would have otherwise been open until well beyond 2030 — in one case, until 2061 — would be required to close.

That certainly didn’t pertain to TransAlta’s Sundance Units 1 and 2. In fact, the PPAs for the two units will expire on December 31, 2017.

That means the company will be completely exposed to market prices, which Jeyakumar says will make them uneconomical.

It’s Official: Coal Just Became Uneconomic in Canada https://t.co/alCFj69MiQ #coal #ableg #cdnpoli #climate #renewables pic.twitter.com/jI3S3m7RCv

— DeSmog Canada (@DeSmogCanada) April 27, 2017

While the two units could have technically stayed open until 2019 under federal regulations, TransAlta decided to simply shut down the plants due to oversupply in the marketplace. In fact, TransAlta wanted to permanently close the plants back in 2011 when they were offline for maintenance, but TransCanada, the PPA owner, forced them to bring them back online.

However, Sundance 2 will now be “mothballed” — that is, kept operational while not producing electricity — with the hope of extending its life to 2021 if it can receive approval from the federal government.

“We’ll lose the emissions from that,” explains Blake Shaffer, doctoral student at the University of Calgary with an expertise in energy economics. “But we’ll also lose the supply, which is somewhat healthy in our current environment: we’re well over-supplied right now.”

It likely seems a bit counterintuitive. But as a publicly traded company, TransAlta’s primary obligation is to create maximum value for its shareholders (which the company is currently trying to defend includes a 60 per cent increase to CEO Dawn Farrell’s compensation in 2016).

That means not pouring money into operations that aren’t netting adequate profits, such as Sundance Units 1 and 2 after the PPAs expire.

Conversion to Gas Will Reduce Emissions by About 30 Per Cent

It’s quite a different story for the six other plants that are being converted to natural gas.

Jeyakumar says it will cost between $30 and $50 million to convert each unit. In other words, TransAlta still sees a lot of potential in gas, at least in the short-term: the company has indicated its intention to extend the “useful life” of the plants until the mid-2030s.

However, while it’ll pay off for the company, it’s only a slight improvement on the emissions front.

The conversion to gas isn’t a rebuilding of a “combined cycle” gas turbine plant — the modern kind of gas plant, which has an emissions factor of around 375 to 400 kilograms of carbon dioxide equivalent per megawatt hour. Instead, the type of gas plant that TransAlta is converting its coal plants to is a far less efficient “single cycle” or “dirty gas” plant, with an emissions intensity of between 600 and 700 kilograms of carbon dioxide equivalent per megawatt hour.

That’s compared to a coal-fired power plant, which emits around 1,000 kilograms of carbon dioxide equivalent per megawatt hour.

“They’re less efficient, the marginal cost is going to be higher and every unit of power produced has more emissions,” Shaffer says. “It’s still a benefit compared to coal, and very useful for our grid.”

Shaffer says that with the carbon price of $50/tonne, which will be nationally mandated by 2022, TransAlta will be saving around $20 per megawatt hour. He says TransAlta will have examined the cost to repurpose the plants and the higher marginal cost of having to purchase gas rather than the readily available cheap coal they have access to.

“They must be making that comparison and deciding that saving that carbon cost is worth the additional fuel cost as well as the upfront conversion capital cost,” he says. “As long as we view that carbon tax as reflective of the social costs of carbon, it’s the right thing to be happening.”

Potential for Greater Emissions Savings in Renewables and Energy Efficiency

But Jeyakumar isn’t convinced that it’s all good.

For one, there’s a big question mark around fugitive emissions associated with the production and transport of natural gas, which TransAlta will need up to 700 million cubic feet of per day to operate the new plants at peak levels.

But there are also uncertainties about whether building new natural gas generating capacity is necessary given that wind and solar are starting to become competitive with natural gas. There’s also huge potential for emissions reductions via energy efficiency programs that may be underutilized.

“One of the things that we should be really looking at seriously is the role of energy efficiency,” Jeyakumar says. “If you have a good enough energy efficiency program, you could replace multiple coal plants.”

Jeyakumar adds that an accelerated phase-out gives less opportunity for labour groups and communities to plan for the closures and next steps beyond that.

On the bright side, the relatively low cost of conversion to gas plants will mean that TransAlta will be able to write off the plants earlier: Jeyakumar says she would like to see the plants come offline in the next 10 years and make room for zero-emissions technologies.

That ultimately depends on future market conditions, increases to the price on carbon and the affordability of renewable sources such as solar, wind and geothermal. TransAlta is currently attempting to secure a long-term contract for a controversial pumped hydro project near Drayton Valley.

Both Shaffer and Jeyakumar agree that TransAlta’s announcement is likely a sign of things to come.

“The trend is very clear down south of the border,” Jeyakumar says. “Even in Tennessee, which is coal country too, there are a lot of plants shutting down there purely for economic reasons. They’re unable to compete with natural gas and renewables that are entering the market. We’ll definitely see that trend continuing.”